Previously, we discussed what a broker should consider when selling a brokerage. As promised, here is our take from the buyer’s point of view. Buying another brokerage is a great way to recruit agents all at once instead of piecemeal. However, there are many pitfalls as a buyer if you aren’t careful.
Here are a few things to consider when you buy a real estate company
- Why do you want to buy another real estate company? Too often, I see brokers expanding for the sake of expanding and many times the results are disastrous.
- Have your considered the culture of the real estate company you want to buy? If you are a high-end boutique company trying to buy a discount brokerage on the other side of town with half your average sales price, that could be a problem. Although that might sound like an extreme example, I have seen it happen and it’s not pretty. Culture is one of the most important things that are necessary for a successful merger or acquisition.
- Does your target have similar compensation plans? Like culture, if the two companies have radically different compensation plans you are asking for trouble. Let’s say you are a traditional broker with a relatively good company dollar of 25 percent and you are trying to buy a competitor that is very loose with his compensation including offering desk fees to some of his agents and has a 10 percent company dollar. How are you going to get his agents to take less commission or, conversely, what if you have to grandfather a few people and your agents start asking for the same deal?
- Are there potential synergies between the two companies? The best reason to buy another real estate company is to acquire profit. What if you could also increase that profit because you could close offices and/or reduce staff? This should be one of the big things you look for when you are creating a target list… how much financial synergy could there be?
As I said previously, selling a real estate business can be a very emotional time for a broker/owner.
As a buyer, you really need to take this to heart and treat your targets with respect. Acknowledge their efforts over the years and how important they are. The more sensitive you are in this regard the better your chances to complete the sale, especially if there are multiple potential buyers. I would also add that if someone does not need to sell, they are probably looking for reasons not to do so. Don’t give them one!
On the financial side there are a few things to consider when you buy a real estate company.
- Are you comfortable with your ability to value the business you are trying to acquire? Do you understand the process?
- Are you able to commit a certain amount of cash as a down payment? Unless someone is really desperate, they are not going to sell without getting some kind of guaranteed payment up front. Are you familiar with how real estate brokerage acquisitions are structured?
- As for the balance of the purchase price, have you considered how you might pay that? Many times you can tie it to the company’s existing production so you are covered going forward in case mass agents leave. That said, especially in a seller’s market, your target may want you to guarantee some or all of that balance. Will you be willing to do that if necessary?
- Finally, are you comfortable making financial sense of whatever structure is agreed to? In other words, does the deal at least break even even with what you have to pay the seller over time? If not, you might want to reconsider the structure.
Helping someone acquire another brokerage is similar to what you do when helping someone make the decision to buy a home. You help your buyer get find the right home, help them look for the future potential of that home both — house price as well as livability, and you would help them navigate the mortgage process. We help our clients figure out who to buy, why to buy, and how to make it work so everyone wins!
For more information, visit www.pcmsconsulting.com.