BrokerageIndustry Voices

4 Errors Real Estate Brokers Make When They Sell The Firm

Challenges and common errors brokerage firms make when they sell their firms.

I’ve been an advisor on more than 800 sales or purchases of residential brokerage firms, agent teams and related businesses, such as mortgage, title insurance, escrow and property management. From these experiences over the last 34 years, I’ve seen it all. Here are some common challenges brokerage firm sellers have when getting ready to sell.

They fail to prepare personally for the time when they won’t be the commander-in-chief

For most realty firm owners, being in the center of their agents and staff is both exhilarating and taxing. The people and relationships are highly important to owners. Owning your own firm requires a high degree of personal involvement and responsibility.

When an owner sells the business and, in most cases, no longer has the same level of authority they did before selling, there can be a significant disruption in their emotional approach to their former company. Essentially, once one sells their company, they can no longer fix their people’s problems any longer.

The second most common mistake owners make in this area is that they haven’t planned for their retirement from the company. They’ve not developed interests outside of their company to replace being at the center of so many people’s lives. Often they can’t replace the sense that they were useful and relied upon at their brokerage with new areas where they can still feel that way. 

They have an unrealistic value of the brand name and good will of their business. 

The market for realty firms and their related businesses is fairly well developed. Through 34 years of work in valuing realty firms and related businesses, we’ve found that the range of values is predictable most of the time. The use of multiples, for instance, is well established in determining value.

Owners often overvalue their firms based on their views of the strength of their brand name, their goodwill in their communities, and  the strength of their brand name with their agents. It’s not that these things don’t have any value—they certainly do—but many owners struggle with understanding these aspects aren’t the most valuable part.

In most of the acquisitions of the last 25 years, the purchaser changed the name of the acquired firm yet did not suffer any higher agent loss than did purchasers who didn’t change the brand name. The history of acquisitions in the residential realty industry shows clearly that while brand name is important, it’s the continuation of leadership that is a better predictor of the future health of the firm than whether a brand is retained.

And as far as goodwill, most of the goodwill a realty firm built is based on the conduct and practices of its agents and staff and not on an intangible belief that the brand name itself has particular meaning to people in the community.

They aren’t prepared for the complexity of the negotiation of a sale or purchase and the due diligence that is required. 

The sale of a realty business is not like the sale of a house. Depending on the size of a firm and how many related businesses it may have, the negotiation of a Purchase and Sale Agreement is often complex, time consuming and exhausting. Even once a Letter of Intent to purchase is agreed upon, the due diligence process strains even the most organized leadership team. It involves company financial and legal counsel, and other operating executives. The sheer detail of the work, while an owner is also trying to run the business, can be overwhelming.

Often in the process, owners will think that all of this diligence is overkill and get frustrated. We call it deal fatigue. It happens all the time.

What owners should do is to prepare ahead of time. Put a deal team together of negotiators, legal counsel, tax and accounting professionals. Locate and organize all of the documentation that purchasers will want. REAL Trends Consulting can provide these lists. This preparation is an effective way to minimize this fatigue.

They don’t prepare to let go.

Many owners have trouble grasping that when they sell their firm they’re giving up significant, if not total, control over their firm. Even when they’re retained as senior officers or advisors, former owners are often challenged to understand that it is not their company anymore. New owners have the right (and the risk) to change personnel, operations, branding, services and more based on their beliefs about what will help the firm continue to grow.

It’s terribly hard to let go. In the harshest manner, owners often need to understand that they signed the deal, took the money, and their advice may or may not be heeded or desired. For most owners, it’s a bittersweet time. While most of our clients say they are ready to let go, many don’t know what that really means until after a closing has happened.

Steve Murray is founder to REAL Trends Consulting and a senior advisor with HousingWire.