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Solving the Broker Profitability Dilemma – Master Franchising

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By Jose I. Perez Jr.

RISMEDIA, Feb. 28, 2008-There’s no question that real estate franchises are very popular these days, and for good reason. The National Association of Realtors 2006 Profile of Real Estate Firms showed that 88% of real estate firms with franchise affiliations reported that their affiliation improved name recognition in the market, 83% reported a beneficial impact on their ability to acquire listings, and 72% reported that their franchise affiliation contributed to an increase in profits.

Despite the advantages franchised real estate offices have over non-franchised offices, many unaffiliated brokers remain hesitant to affiliate with a franchise because they want to retain their independence and control over where and/or how to operate their real estate business. The alternative, in sharp contrast to the traditional, single-unit franchise model, is master franchising. This method offers fewer restrictions and gives more control to the broker/owner. Master franchisees have more freedom than a typical franchisee because they own and control a large, exclusive territory, such as an entire metropolitan area, state or region.

One of the most appealing advantages of master franchising is lower overhead compared to a traditional real estate brokerage. Typically, most master franchise operations require fewer employees and less office space than the traditional real estate brokerage operation. In fact, master franchise operators who also own traditional brokerage offices often find they can utilize existing staff for both entities.

The payoff can also be rewarding. Although the opportunity to share 5% or more in royalties from gross revenues on a roster of sub-franchisees with the franchisor is enticing, most master franchisees have found that the ultimate payout is in the exit strategy. A successful master franchise operation can bring much higher multiples than a traditional brokerage due to the long-term agreements (often up to 10 years) it holds with its franchisees. Neither independent contractor agreements nor listing agreements hold the same value.

Many national brands such as CENTURY 21, ERA, Exit Realty, Keller Williams, Re/Max, and Realty Executives originally sold rights to larger territories, states and regions as opposed to selling individual units one at a time. The benefit to the brand is that it can expand nationally much faster, however, it does so at a cost, loss of control.

In the examples above, many of the original master franchise owners eventually benefited as their brands grew into national companies. For example, in the mid-1990′s, as HFS was entering the real estate business by acquiring CENTURY 21 and ERA from their parent companies, any remaining master franchisees were also eventually bought out for significant multiples.

With profitability being squeezed at every turn in today’s real estate brokerage environment, the brokerages that will survive have already been looking at alternatives to just brokerage. Many have started mortgage and title businesses or looking at technology and productivity enhancements to improve their bottom line. Master franchising is one more potential option brokers can consider as they look to deal with the ever changing real estate brokerage landscape.

Jose I. Perez, Jr. is the president of PCMS Consulting, a full-service consulting organization.

For more information, e-mail jperez@pcmsconsulting.com.

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