Growth is the name of the game when running a real estate brokerage. Owners have a few avenues to grow their business—organic recruiting, training to increase per-agent productivity, and expanding beyond brokerage into ancillary services are a few popular examples. One of the more efficient ways to grow is through mergers and acquisitions (M&A).
Most broker/owners dedicate time in their week to recruiting agents. While essential, it should not come at the expense of an M&A strategy. The cost of recruiting one agent at a time could be detrimental to the ability to dedicate resources to pursuing M&A opportunities that could yield agent growth of tens or even hundreds of agents in one transaction.
Ripe for Consolidation
Our industry is ripe for consolidation. There are approximately 89,000 real estate brokerages in the United States. The average owner is about 60 years old, many of whom have no succession plan. Margin pressures have increased dramatically over the last five years, and the cost of operating a brokerage has become a burden for many owners. The time and cost investment to stay current with the basic needs of a brokerage—marketing, recruiting, training, technology, data, and risk management are pricing people out of the desire to continue to own and operate. The importance of economies of scale has never been more apparent.
It’s also important to look at how COVID-19 might impact our industry. So far, the market has rebounded nicely and the Paycheck Protection Program and the Economic Injury Disaster Loan Advance sustained many brokerages through the initial tough times. But, as we move forward, a period of consolidation seems inevitable.
If you’ve thought about an M&A, make no mistake, it requires effort and there are many factors to consider. Here are three I think are the most important:
ROI: Are the terms and valuation acceptable to generate the right types of returns?
Culture: This is critical for success. How similar (or dissimilar are the organizations)? Are there synergies that can make the transaction even more cost effective?
Teamwork: Do you have the right support team in place to manage through all the details involved?
Does the Deal Make Sense Financially?
Let’s look at the math behind M&A opportunities. A brokerage generating $2M GCI and netting 5% annually earns profits of $100K. Assuming a 3X multiple, the valuation of the brokerage would be $300K. If you’re looking at M&A as a strategy, consider the potential return on investment, assuming steady-state volume post-closing. Dividing annual profits of $100K by acquisition costs of $300K yields a 33% return on investment. How many other places can a brokerage owner find a potential 33% annual return on investment?
How Aligned Are You From a Cultural Standpoint?
These deals are often complex, and we stress the importance of having a cultural fit on both sides for the working relationships to be optimal. Just as our brokers aligned with our brands because of shared philosophies and values, companies that come together should have similar mindsets to enhance synergies. These values may include community involvement, a spirit of collaboration, a family atmosphere, or a shared belief in the importance of training, to name a few.
Do You Have the Right Team in Place?
Having a strong support team is critical to success–attorneys and accountants with substantial M&A transaction experience can help troubleshoot. Executing flawlessly on the transition and announcement to agents is imperative. Having a team behind you with knowledge of real estate brokerage M&A transactions can be a tremendous help.
As COO of Realogy Expansion Brands, I’m fortunate to have a team of experts behind me. We train our franchise sales teams to be well-versed in the art of brokerage M&A. We deploy them to identify opportunities for our franchisees, and they coach them through the process. Our franchisee networks also often lend advice to one another to help each other be more successful. Our operations teams have led hundreds of transitions, developing experience critical to executing the process flawlessly.
Managing through a merger or acquisition will always present its challenges. But with the right planning, team, and attitude, it can be one of the most beneficial things you can do to grow your business.
Rich DeNicola is the Chief Operating Officer for Realogy Expansion Brands (Better Homes and Gardens® Real Estate and ERA® Real Estate)