G.M. Filisko is a Chicago area freelance and former editor for REALTOR® Magazine.
Mergers and Acquisitions: Finding the Perfect Suitor
A tough market can make even the most fiercely independent brokers reconsider their long-term ownership strategy. Here¿s what to consider before being acquired.
September 1, 2009
Maybe you've always considered yourself to be a "live free or die” type of broker like Scott Senter, CCIM, GRI. Running your own brokerage is what you do, and you'll do it until you're ready to hang up your spurs. "I run a second-generation family business, and there's nothing anybody could offer to get me to sell,” says the broker-owner of Senter, REALTORS®, in Abilene, Texas.
But the reality is that today's tumultuous economic times have triggered deep soul-searching among many brokers, even those who never thought they'd be in the market for a suitor. Brokers who've recently gone through a sale or merger say there's a lot to consider when positioning your business under a new corporate umbrella.
For example: What are the benefits of merging versus being acquired outright? If you sell, would you prefer to retire or transition into sales—or do you want to retain a leadership role? What kind of payout are you looking for?
Your answers will help you find a new business structure that works best for you and your bottom line.
Scouting for a Sale
To determine whether it's better to merge with another company or sell, you first must examine your personal and business goals, says Jonathan Nicholas, ABR®, CRB, a brokerage consultant and speaker who heads The Company CEO Inc. in Winnetka, Ill.
Brokers who merge often do so because it's a quick way to grow their market share. "Perhaps a broker is weak in a contiguous area or ZIP code or is looking to expand into another area,” Nicholas says. "Or you might want to take out your competitor because you're constantly competing in the same niche. In those situations, you may accomplish more by joining together.”
Brokers who sell outright, meanwhile, often have decided to hang up their management hat altogether. "Probably the main reason many brokers want to be acquired is that they're tired and don't want to run a company anymore,” Nicholas explains. "They're not having the fun they had when they got into the business and were selling real estate, and they want to get back to that.”
That's the situation that Eileen O'Grady Newell and Millie Rosenbloom were in before they sold their companies in 2007.
For years, Newell split her time between selling real estate and managing 15 associates at her parents' company, O'Grady Realty & Builders Inc. in Chicago. But management was never Newell's true calling, and when it became clear that her aging parents would be handing the business over to her, she started contemplating a sale. "I was spending so much of my time training salespeople," Newell says. "And as a smaller company, we just didn't have the technology support that we needed to stay competitive."
For Rosenbloom, former broker-owner of The Habitat Co. in Chicago, the decision to sell was based on her observations that the real estate market was about to slow dramatically. "I knew home owners were going to struggle and lose their properties. I also knew there would be fewer transactions, but the same overhead costs,” Rosenbloom says. "I realized that unless companies consolidated, it would be hard for brokers to make ends meet.”
Do the Prep Work
Before reaching out to other brokerages, Newell and Rosenbloom each made lists of what they considered most important in a new business arrangement. Both wanted to continue working from the same location. Newell also knew that she wanted the acquiring company to have a similar culture. "Corporate places can be kind of cold and not have that family feel, which we prided ourselves on,” she says. And Rosenbloom wanted to retain as many salespeople as possible.
Before finding the perfect match, there were setbacks. When Newell first began contacting Chicago companies, several simply told her they'd send an information packet within a week, which she considered a weak gesture at best. A manager at a different brokerage breached the confidentiality of their conversation when a salesperson from the company called to ask whether the rumor that she was selling her brokerage was true. "I was almost ready to close my office because I wasn't willing to bend on the type of company I wanted to be acquired by,” Newell says.
Finally, she contacted Koenig & Strey. She sent an e-mail message to company president Doug Ayers, who responded within half an hour. "He said, 'Let's meet and have a discussion.' It created a much better feel,” Newell says.
Rosenbloom's first attempts also were rocky. She started by approaching her business partner, who led the property management division, with the opportunity to buy the company. When he declined, she undertook a detailed analysis of her company's market share, its office locations, and the neighborhoods in which her sales associate were most dominant. She then approached three competitors who she thought would be the best match. "One was in chaos,” Rosenbloom says. "The other was too new and didn't have the right market profile to be a good fit.” The third company, Baird & Warner, was just right. The brokerage had offices in the areas her sales associates covered, and Rosenbloom could continue to work from the same office.
Today, both Rosenbloom and Newell are top salespeople at their respective new companies. "I was a very good salesperson,” says Newell, now a broker-associate at Koenig & Strey GMAC Real Estate Chicago-O'Grady Office in Chicago. "But I didn't know how good until I focused on sales exclusively.”
Still in Charge
Though many brokers leap from management to sales, others remain in a leadership role when their company is folded into another. That kind of arrangement can benefit the acquired broker, the acquiring broker, and the sales associates that are being absorbed into the larger company.
"Many brokers who've built their company want to get out of the business when they reach retirement," Nicholas says. "Their strategy is to go to the new company and, for a couple of years, still manage their salespeople while getting a cut of production. Gradually, the salespeople get used to other managers and resources and to the new culture."
That's important, because many acquisition agreements state that for every sales associate who leaves after the acquisition, the acquired broker's compensation drops. "The sales associates are the broker's assets," Nicholas says. "If the new company loses them, it's losing the value of the deal."
Audrey Edelman, CRB, CRS®, avoided that predicament when her Ithaca, N.Y., brokerage was acquired. Retirement was in sight, and she started thinking about her company's future. But above all else, she wanted to make sure her sales associates would keep their jobs and remain happy with a new brokerage, so she stayed on when her company was acquired. "I started my company on my own 20 years ago, and I love the sales associates and staff,” she says. "I met with Merle Whitehead, head of RealtyUSA, five to six times for a great many hours in the year before we decided we were comfortable with one another. It was clear that he philosophically had the same feeling about his staff as I had about mine."
Edelman joined RealtyUSA in January 2005, retaining an ownership stake in her office and remaining its principal broker. "The plan was for me to stay on for several years to see how it worked out,” she says. "Merle said, 'Let's leave this as it is as long as you want.' As the years passed, we built another, larger office together. I hired all the staff, affiliated the sales associates, and even decorated." During that time, not a single one of Edelman's original sales associates jumped ship.
After Edelman hired new managers for both offices, she took on a new role with the business. Today, she's a broker-associate with Audrey Edelman RealtyUSA, and says she couldn't be happier.
Time to Scale Back?
Some broker-owners who are plodding through tough times conclude that shrinking their operation is better than being acquired or merging. Dan Rider and his business partner, Rebecca Dickson, decided last year that big changes were needed to make their Nevada company, Dickson Realty, profitable again. In March they sold their five Lake Tahoe offices while retaining operations in Reno, Sparks, and Truckee.
"We discussed whether we should merge or be acquired," says Rider, the company's broker-owner. "But Rebecca and I are both in our mid-40s, and we feel like we have a lot of miles left. We'd also like to leave a legacy for our children. It felt like a better decision to consolidate and dial our operations back a bit.”
Why did they single out the Lake Tahoe outposts? "The resort market has been hit really hard," Rider says. "We sensed it was going to be a longer recovery for that market. With just our Reno, Sparks, and Truckee locations, we're profitable again. We're feeling pretty happy with ourselves."
Keeping an Open Mind
One Denver broker, who requested anonymity, parted ways with one of his business partners last year and now is left with a company half of its original size. Now he'd like to jump-start what remains of his business, and he's feeling out all of his possibilities.
Everything is on the table, including the remaining owners' role at a new company, whether to do a merger or acquisition, and whether his company will retain its current franchise affiliation.
"We think there's strength in numbers, and if we can double or triple our size in one fell swoop through a merger, that makes sense to us," he says. "We also might go with an acquisition if that works out best for everybody involved. If we merge or are acquired, I'd like to have some leadership role—if that's the best thing for the company. And if the franchise affiliation isn't of value going forward, it would be dropped."
He initiated discussions with three of his competitors in early 2009, but he feels no urgency about making a decision. That's a good thing; although mergers and acquisitions are sometimes done quickly due to pressing financial circumstances, it's never wise to act rashly in these situations. "When we sort out the right opportunity,” says the broker, "that'll be the right time frame to make a move."
Whatever your plans are for your company's future, brokers recommend keeping your options open. "Listen to everybody who approaches you,” Edelman advises. "That way you'll know if the right opportunity comes along."
Make Sure It's a Good Match
If you're considering joining forces with another company, consider these six tips.
- Focus on culture. A culture clash can devastate the best-laid plans. "In one instance, two really old independents merged,” says Jonathan Nicholas, ABR®, CRB, a brokerage consultant and speaker who heads The Company CEO Inc. in Winnetka, Ill. "One was a high-end company. The other was more of a general middle-class office.” When the two companies moved into the same office, the high-end sales associates felt as though they'd been merged with a company from "the other side of the tracks,” Nicholas says. "The merger never truly took. The acquiring company was able to keep only about 30 percent of the salespeople it acquired.”
- Prove your worth. If you don't have the financial records to back up your company's value, you'll lose money in any transaction. "We've always made it a priority to have very good accounting,” says the broker of a small Denver company who's investigating merger and acquisition opportunities. "That's made our evaluation process relatively simple.”
- Build your intangible value. Create value that will make your brokerage worth more than just its pending sales and listings. "We're an inviting target for a merger or acquisition because of our placement in the Denver market,” says the Denver broker. "There's intrinsic value to our location, and you can't put a number on that.”
- Field all offers. "When I owned my company, people came to me all the time with offers, and I listened to every one of them,” says former broker-owner Audrey Edelman. "It helped me build a frame of reference for what was available.”
- Pore over details. "Look at the amount of cash you'll receive up front and the payments you'll receive over time, along with the solvency of the person you're considering doing business with,” Edelman says. "If you're an integral part of a company that's doing well and you walk out the door the day of the affiliation, your company will be less valuable.”
- Trust, but verify. "It's very important that you trust the person you're going to be with,” Edelman says. "If someone comes along whom you trust and are comfortable with, that's the time to do business.”