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Much of what we think about in terms of growing a team or brokerage relates to the individual agent — identifying the top producers in a market, recruiting them and retaining them. Even at the highest levels of the industry, brokerage companies frequently tout their tech stacks, signing bonuses and other perks as they relate to each specific agent.
Creating scale, however, can be faster and more efficient when you’re recruiting an entire team or brokerage instead. That’s where George Slusser and Victor Lund come in.
Slusser is a renowned industry M&A (mergers and acquisitions) expert, while Lund is a top consultant to brokerages, franchises and networking organizations. Together with their colleagues at WAV Group, they work with real estate leaders to identify opportunities and work through the logistics of joining together their sometimes disparate styles and interests.
Because of the sensitivity involved in this type of transaction, Lund prefers the term merger rather than acquisition. “People don’t want to be acquired,” he said.
What makes a successful M&A transaction?
In their new book, Acquiring More Profit, Slusser and Lund discuss the elements that lead to a successful merger of separate real estate companies. Cultural compatibility is at the top of that list, and it doesn’t necessarily require the two parties to start off as friends.
“Transactions are done with competitors every day,” said Lund. He reframes the notion of competition as collaboration, however, since many real estate competitors work together frequently to get transactions to the closing table.
“You’re collaborating constantly, and through that collaboration, you understand where the alignments are. You know who’s good and who you have a lot of abrasion with,” he said.
With proper due diligence and compatible cultures, Slusser says that a mass exodus of agents doesn’t typically happen. He notes that a successful merger retains 90 percent to 95 percent of gross commission income. “Agents typically don’t want to leave. They trust the seller and, if the companies are aligned, they want to stay.”
Slusser puts bad merger outcomes down to bad diligence, bad planning and a lack of cultural alignment.
There are two main tactics that brokerages use when they merge. In one scenario, the owner of the company being acquired will stay on and help with transition and retention in exchange for an earn-out. In the other, there may be a straight cash acquisition, though this is less common.
According to Slusser, the decision to merge is a market decision for most companies, especially if they’re struggling. “Economies of scale means most of the marginal revenue will drop to the bottom line. Two losing companies put together can become profitable.”
How teams can begin to scale their businesses
For team leaders who are looking to scale, or brokerages with big teams in-house, the picture is somewhat different.
Generally speaking, Lund said, “In today’s brokerage world, teams are not profit centers for the brokerage.” Because successful teams cap out early, all of the commission they generate goes back to the team.
“Teams add value through ancillary services, so for companies that don’t have those ancillary businesses, teams inflate sales volume without generating additional revenue.”
Lund and Slusser have discussed creating a teams edition for their book since the needs of teams are so different. They cite Side as one model that creates a joint venture that can allow a team to operate independently as a brokerage under the team name. In that context, a team can create value for themselves and look at themselves as a company and an asset.
Why recruiting mega-agents may not be the answer
While many brokerage firms focus on acquiring mega-agents, Slusser says that those flashy acquisitions may be loss leaders. The real money, in that case, is made through ancillary services, just as it is with a team.
For big-name individual agents looking for an exit strategy, selling a book of business doesn’t offer the same value proposition that it used to.
Real estate is “such a relationship business,” Slusser said. “When you’re buying a real estate company, buyers are looking for the sustainability of the income stream. If [a mega-agent] stops producing, the business is gone.”
To be a viable M&A option, no more than 10 percent of GCI should come from an individual. Otherwise, there’s too much risk on the shoulders of one or two people.
“There are around 108,000 real estate brokerages in America today,” Lund said. “Largely speaking, around 80 percent of those brokerage firms have an owner who is one of the top producers, and they’re out there selling real estate. There’s very little difference between a brokerage with 25 agents or fewer and a team with 25 agents or fewer.”
According to Lund and Slusser, when a small brokerage and its producing broker-owner rolls into a larger firm, the broker almost inevitably makes more money because “they’re going to make so much on their personal production once they no longer have the day-to-day operational logistics to attend to.”
The importance of professional rep and ‘deal doctoring’
That’s why it’s so important for the seller of the acquired firm to be able to trust the buyer to run their company better than they can.
Fostering that kind of trust comes down to two factors: The reputation of the brokerage’s agents in their local professional community and the ability of the participants to “deal-doctor” as needed, Lund said.
“If a brokerage is more than a year old, co-brokers and co-agents know their reputation. It’s a small business, and how the agents conduct their business is paramount.”
One of the biggest factors that predicts a successful merger is a talent for and dedication to compliance. When a broker is good at compliance? Friendly, easy deals are the result, Lund said. When they’re not? Messy paperwork can derail the deal.
Some of the compliance cracks show up in situations where a broker is managing hundreds of agents without sufficient oversight. In that case, their cooperating brokers end up doing a lot of the paperwork to get transactions to the closing table. That not only affects the broker’s professional reputation; it also means that the compliance records needed for the merger may not be available.
Once a potential merger has been identified, he continued, there are many specifics that need to be worked out for the deal to move forward. At that point, the agent and broker begin the deal-doctoring process, which requires a lot of communication.
Once there’s a potential match that looks like a win-win for both parties, the process of due diligence, along with cultural and business alignment, begins. A merger is going to operate somewhat like a joint venture for at least the first two or three years, in many cases, so developing trust upfront and throughout the process of putting together the purchase agreement is essential.
The most important part of M&A? Know how to keep a secret
The third and most important phase of the merger process is keeping the transaction confidential, Slusser and Lund agreed. “No one can know until the day it’s announced to the agents. If they think it’s coming, they are incredibly recruitable.”
Their book includes a checklist of everything that must be done — quietly — before Day One, when the merger is announced. This includes changes to everything: MLS and association registrations, listing agreements, pending transactions, signage, websites, business cards and IDX agreements.
It’s essential to be able to tell agents that “they’re not going to miss a beat in their business because you’ve prepared everything. Listing agreements, what to say to customers: It’s that one thing you forget that hurts.”
In terms of determining who is a good target for M&A, there are two categories: core and challenger regions. A core region is where the brokerage currently has 20 percent market share or higher. A challenger region has less, so the acquiring brokerage is trying to acquire market share.
“When you get to 20 percent, you become a superpower in the market,” Lund said.
Another option is to look at lookalike markets outside the brokerage’s current footprint. For example, Howard Hanna acquired Allen Tate in the Carolinas, in part because it was a lookalike market for them. Here too, alignment played a big factor.
Similarly, HomeServices of America, which has strong real estate plus strong ancillary services in commercial, new homes and property management, looked for companies that had all of those factors when acquiring Ebby Halliday and Long & Foster.
‘It’s simple math’
Even a company that is struggling can look for alignment in its market. “If you’re losing money, you want to look at your neighbors who are losing money and have those conversations. The cost of having an office is $20,000 a month. If you look at your margin per transaction, it’s easy to do the math to see how much volume is just covering the cost of operations,” Lund said.
“If I’m losing $10,000 a month, I need to find someone else losing $10,000, zero out their operating costs, and then neither of us is losing money. You can see the transaction volume of another broker because it’s reported in the MLS. You know the cost of operating per square foot in your area. It’s simple math.”
While a broker or owner who’s thinking about M&A can call on the expertise of WAV, Lund says that the book contains the knowledge and experience of Slusser, who is “one of the most senior executives in M&A transactions in the history of the industry,” as well as Lund himself.
“With the implementation guide, you can value your business on your own. You can get to the number and every stage of building a strategy. With 108,000 brokerages in America, and 2000 M&A transactions a year at most, there are 104,000 brokers who did not do an M&A last year,” he said.