All real estate teams have value, just how much is dependent on myriad factors. At worst, team owners who hang it up can expect a referral fee from whomever they refer their past clients to and leads to, and this can apply to individual agents, as well. But how can a team have value beyond a referral fee?
At RTC Consulting, we perform numerous team valuations, and team type is the first determining factor in understanding value. Teams can usually be categorized as either Convenience, Personality or Business teams.
The three types of teams
Convenience and Personality teams mostly rely on leads directly generated from the personal database or sphere of Influence (SOI) of the team leader. This leader is typically a top agent and rainmaker who generates so much business from repeat, referral and sphere marketing that he or she needs help in servicing these clients and customers.
Business teams generate the majority of their leads from a marketing system (online, direct mail or other) that is independent of the leader’s sphere of influence (SOI).
In general, business teams are going to have more market value than convenience and personality teams. That’s because business team leads are more transferrable than SOI leads. If a business team is structured correctly, the leads generated by its system can be closed regardless of who owns them, assuming there’s a talented listing agent in the fold. Sphere leads are much more difficult to transfer.
Convenience and personality teams do have market value
Since most teams are convenience and personality teams, we are frequently asked whether these types of teams have any market value. The answer is, yes, but getting to yes is not always easy and requires intentionality from the team leader.
That’s because the business of teams that largely rely on SOI leads tend to live and die by the rainmaker. When the rainmaker calls it quits, the business usually significantly declines. Even when the rainmaker has an agent or group of agents that they plan to refer to, there’s usually a significant transfer loss when the rainmaker is no longer personally involved in the transaction. For this reason, the value of the business of that team is minimal, and rarely will somebody pay above and beyond a referral fee.
Owners who do not position their teams to function without them being active should not count on any kind of windfall from selling their business. Owners who do; however, plan ahead and figure out a way for their team to function without them can establish transferability in the business they’ve built, and thus market value.
How to successfully create value
The biggest single piece of advice we give to teams is the lower the value the team leader is to the team, the higher the value of the business. As mentioned, this takes intentionality, and here are two ways we’ve seen teams successfully create value.
- Soft Transfer. Teams that skillfully structure a soft transfer of their book of business to the purchaser can create an element of transferability, and thus could have market value. In this scenario, the seller remains actively involved in post-transaction sales activity over an extended period of time.
This transfer must be outlined in detail and agreed upon prior to the close of a transaction. There are many different components and options as to how the seller is compensated while active, as well how the purchase price is paid out over time. We’ve seen this type of transaction work on many different levels. - Owner Disengagement. Teams where the owner is largely inactive in direct listing and selling activities can create an element of transferability, and thus could have market value. This is essentially a soft transfer, but it has largely already occurred prior to a transaction.
We’ve come across a number of convenience/personality teams where the rainmaker has either completely disengaged from sales activities or is only minimally involved and has done so long enough to where the business has demonstrated financial and operational autonomy.
Quite often, it’s a listing agent already within the team that is the purchaser, but we do occasionally see outside parties acquire these types of teams. This scenario tends to see better price and terms as it has been largely de-risked.
The bottom line is that convenience and personality teams — businesses that largely rely on SOI — can indeed have market value. It takes planning and intentionality, but team owners who seek to monetize their businesses have a path to do so.
Scott Wright is a partner with RTC Consulting, a firm that specializes in real estate brokerage and team valuations, mergers and acquisitions and consulting.