Brokerage Life Cycle: What’s Your Next Step?
Every company in existence reaches a crossroads at some point in their life cycle. If you are in business long enough, these events become almost commonplace. However, when it comes to the growth of a company, many owners seem to be almost immobilized when it comes to making these decisions. Change can be nerve-racking, but it is a necessary component to success. In my nearly 2 decades in the real estate industry, I have seen companies pivot toward monstrous success, spiral to failure, or simply wither away due to inaction. Now, more than ever, these volatile times call for owners to take a step back and evaluate what’s next. There are several paths available, but which path is the best choice?
Path 1: Do Nothing
The status quo isn’t necessarily a bad thing. For some people, stability is totally fine. I have talked to many brokerage owners that are content to stay the exact same size and make the same amount of money year in and year out. There is just one problem; the world isn’t standing still. Even if the market never shifted, which it always does, things wind down. Machinery breaks and buildings need maintenance. Agents retire, get married, or move away, leaving a big hole where there once was production and profitability. It’s like the story in Through the Looking Glass, where Alice had to run at full speed to paradoxically stay in the same place. There is NO SUCH THING as status quo in real estate. Doing nothing will inevitably lead to the demise of a company, given enough time. It’s not something I recommend.
Path 2: Grow the Company
This one actually makes me laugh a little. I have lost track of how many times I asked a brokerage owner what they intended to do in order to recover from a drop in market share or profitability. They respond, “I guess I need to grow the company.” I’ll spare you from what I would be thinking internally. Several questions would then come to the surface.
- What kind of growth… head count, average sales price, units, geographic footprint?
- If the solution is so simple, why have you never done it before?
- What are you willing to do differently NOW that you haven’t done already?
- Do you even have the tools needed to compete in this landscape?
- Do you have the personnel and talent needed to sustain growth?
Those are just a few of the questions a brokerage owner must answer when coming to terms with the growth dilemma. Let’s explore a few avenues and see what they look like.
Growth Through Recruiting
I will be the first to tell you that recruiting (and retention) should be the #1 priority of every brokerage. However, it’s not something you “just do.” Recruiting a solid agent roster is like building a house; it needs a solid foundation. As the VP of Operation for a 6-office company, my task is to continually evaluate and improve our processes including items such as technology, lead generation, onboarding, personnel, training, transaction flow, accounting, marketing, etc. If those areas are not where they need to be, your house will fall. Are YOU prepared to really go after producing agents with your current tool set? If you can honestly answer yes, good for you! Go out there and get some amazing agents!
Growth Through Expansion
The geographic footprint of your brokerage can send a message. That message can be one of strength and dominance or it can be one of weakness and desperation. It all depends on your reputation and culture. Having multiple locations isn’t always a good thing. Brick and mortar operations cost money, and brokerages aren’t exactly known for their giant profit margins. Some companies have several locations and it appears as though they are just there to have a sign. Other companies are strategic in their placement and have offices where they can increase their market share and grow even more. One piece of advice I would give is if you want to go into a new market, look for a company to acquire.
Growth Through Acquisition
There is a subtle difference between a merger and an acquisition. However, they are generally referred to jointly as “M&A.” When you buy another company, there can be some amazing benefits. You gain instant market share, you have a ready-made roster of producing agents, and you get an established location with which the public is already familiar. However, unlike a retail purchase, the inventory of a brokerage has “legs.” All the agents can simply walk out the door and leave you with nothing. Done correctly, an acquisition can create instant opportunity. The problem is that many buyers and sellers don’t know where to begin.
Growth Through Merger
Most “mergers” are usually just acquisitions. However, from a PR perspective, it sounds more favorable to the seller. A true merger generally involves a shared ownership of the newly formed organization. It can be a great way to create a succession plan where the “purchased” company owner will eventually take over the leadership of the original company. That is just one iteration of a merger. Another common purpose is when the target company is in a new market and local leadership is needed. Mergers aren’t for everyone. Most owners don’t want to share their ownership, but they should be in your arsenal, just in case.
Path 3: Plan Your Exit
If you aren’t willing or able to grow the company, maybe it’s time to move on to the next chapter. Many brokerage owners have built their companies from the ground up over the course of decades. However, passing it on to someone else has either never crossed their minds or else they have no idea where to even begin. If an exit strategy is something you want to consider, here are a few bits of advice:
- Set a Timeframe – Selling a company isn’t something that just happens overnight. Most buyers will expect at least a 2-3 year earn out period to help ensure a stable transition. If you want or need a faster resolution, expect to take a reduced price. Planning ahead now can help to maximize your value.
- Get a Feel for the Value – Company valuation can be a complicated process. Do some research or talk to an expert (not just your CPA). Even if you have a rough estimate of the projected value, you can begin to have conversations and even adjust to an increase in the final price.
- Embrace Opportunities – There is no shortage of buyers looking to grow in this market. I should know, as that is literally my job! When opportunity knocks, you should be willing to at least have a conversation. A true entrepreneur should never keep the door closed to a bona fide chance to maximize the value of their investment. One caveat would be to ensure confidentiality agreements are in place before divulging sensitive information.
- Be Creative – Selling a company you’ve taken decades to build might require some imaginative thinking. There are MANY ways you can structure the deal. Be open to possibilities that can still get you to your goal.
This list is far from being exhaustive when it comes to the life cycle of your company. However, after almost 20 years in the business, this represents about 90% of the typical issues that owners face when considering their next move. Most brokers want to entrust their companies to someone who will ensure the legacy of their company will continue. That requires getting to know the buyers. I’ll leave you with one final piece of advice. Be open to having conversations. You never know what could be.
