The Acquisition Inquisition

As a part of a huge residential real estate company for 30+ years that morphed into a variety of brands, I had a front-row seat to a lot of acquisitions and one merger. Some were small and some were really big such as when Jon Douglas Co. bought Fred Sands Realtors in LA and when NRT bought Prudential Jon Douglas Co. in the 90s. Most times we were doing the acquiring but I have also been in a company that was acquired a couple of times in my career. Each one was uniquely different and no matter how much we prepared to acquire a company we never knew exactly how they would go. But we did learn over the years not to assume anything.

I remember one acquisition that went so poorly in Los Angeles, that literally almost all of the agents walked out a couple of days after the announcement. That was back before companies figured out the fine art of iron-clad earn-outs and claw-back clauses. We neglected to bring the managers into the fold and they left and most of the agents followed. Since agents are independent contractors, they are not bound by any of the details of an acquisition. And the competition knows that. That’s the scariest part.

When a company sells, it can be perceived by the agents and staff as a money grab by the owner who is selling. And it often is. Or the broker believes they have no other choice but to sell. Don’t overlook how that makes the agents and staff feel and the long-term damage it can do. As much transparency as possible will go a long way, particularly when selling to a fierce competitor.

It ain’t what it used to be.

More and more broker-owners are considering retiring or moving on from real estate. They rode the unexpected Covid boon and are now exhausted and ready to move on. Sadly, many aging broker-owners do not have succession plans in place. It might be because their heirs have no interest in taking on the company, particularly during this challenging time.

It’s a great time to buy, but not such a great time to sell a brokerage. That window has closed for the moment. The valuations have taken a big hit and now it is often basically just taking over debt and leases to get the owner out from under them. We will probably see more walkovers and big teams making moves as they search for a way to improve their business which creates even more uncertainty in valuations.

Peek behind the curtain.

Early on in my career, I would be told right about an acquisition right before the announcement. But as time went on, leadership knew it was prudent to bring me in to help review the company-generated business sources to see what might be at risk based on a result of our acquisition. Broker owners may want to consider including your Relocation Director or person in charge of company-generated services to help with the due diligence efforts so you don’t miss a big red flag.

When due diligence is being done on a brokerage, it is critical to examine the sources of all of their business and revenue. There are many entities and professionals out there that expertly establish brokerage valuations, but they may not know to ask about less apparent sources of company-generated business that may present as regular transactions. For example, if a broker is part of a network that is exclusive to a brand or requires the broker must be independent, we can be assured that the minute the announcement is made the broker will be bounced from the network. All of that incoming referral business will be lost.

If a significant amount of business comes from the broker-to-broker network, we must evaluate if the new relationship can replace that revenue somehow. And there are times when relocation management companies may refuse to work with certain brands or companies, particularly if the relocation department staff is a casualty of the acquisition. Relocation is a relationship-driven business. Take time to determine the partnerships that are driven by the staff relationships. If the staff goes, possibly so goes the business. Can you repurpose some of the staff to focus on other revenue-generating activities? Hang onto those that are well-connected and known in the industry. They can help ensure a smooth transition along with less business disruption and loss of revenue.

Any port in a storm.

I suspect there will be more mergers and walkovers too as the market continues to struggle with low inventory and high-interest rates. Mergers may indicate a mutual need for brokers to try and cut expenses through the consolidation of space, staff, and resources. It can also greatly improve your market position. If you are a Relocation Director going through a merger, don’t assume there will be a place for you in the new organization. Do your best to let all of the leadership know what you bring to the table and how you will continue to contribute. You must be your own advocate.

Now that companies aren’t writing big recruiting checks, even the opportunity for big moves for financial gains by individual agents has quieted down. We are seeing some boomerang situations. Agents and teams left their long-time firms, only to boomerang back after a short period when the grass didn’t prove to be greener on the other side. When the market presents challenges, agents often believe a broker or company change will solve their problems when in fact, they should probably look inward at their own business practices.

Take it one step further.

As brokers think of selling or buying a company right now, they need to consider their agent’s mindset. Would a big change be the straw that forces them into a move? Onboarding after a sale is often taken for granted. But now, particularly when agents are fragile, they should be treated with kid gloves to ensure a seamless transition. They need to feel they belong in the new company.

Instead of treating the onboarding as a step-by-step generic checklist created by people who are not agents, engage some agents to get their opinions on what the most important elements are during the transition. Make it as custom as possible and make it personal and seamless. Changing brands and company names is a hassle and can be costly for an agent. Don’t ask them to lift a finger or spend a penny. It’s your problem, not theirs. Have an FAQ ready that explores literally every question they may have. How can you as a Relocation Director help with retention? Step up to play a role in a successful transition however you can.

My husband started a new job recently. One week into his new role, a lovely bouquet of flowers was sent to our home with a note to both of us. What a simple, but thoughtful way to set the tone for the future. Set the tone however you feel will resonate with the staff and agents, but it may not be the same for every person. Take the time to think about what their worries are. If they are a relocation agent, they may be stressed about the potential loss of business.

What are you really buying?

As brokers start to think about the future of their company or buying another company, the key is to know the sources of business and what might be at risk. Are the ancillary services and unique company-generated business sources transferrable or is that revenue lost? That would include the usual external ancillary service partnerships and also relocation, referrals, license holding (referral) companies, concierge programs, internet lead sources, fee-based services such as rental assistance and property management, etc.

Throughout the years, I created an extensive checklist of questions for the leadership to ask the broker-owner of potential targets called ‘The Acquisition Inquisition’. Questions about potential lost revenue that the buyer may not think to investigate when they are so focused on the agents and all of the other metrics that drive value.

So besides looking at all of the elements that determine the valuation and scouring the books, we have to consider the leadership and management, customer base, agent loyalty, culture, values, strategic vision, potential risks, and market demographics to get the best picture of the future of what that company will contribute. While there will always be surprises in an acquisition, doing our best to mitigate the unknown is key. Go way beyond the typical review and don’t forget to look at the company-generated business that may disappear if the company is acquired. It can be a significant amount of revenue and transactions that may dramatically affect the overall long-term valuation of the company. If you are considering an acquisition, I am happy to help work through the potential landmines.

“Due diligence is about trust—and verification. You’re trusting what you’re being told by the other side, but you’re also verifying, making sure the numbers match the reality on the ground.” ~Mark Meloche, Director, Growth & Transition Capital, BDC