Here are some best practices to identify potential brokerage acquisition targets
Three traditional methods are available to brokerage firms for growth. The first two are organic and should be the primary focus of all brokerage firms.
Development. Effective coaching and training can increase the productivity of your agents.
Acquisitions. To increase your agent count, acquire, merge, and roll-in companies.
Although not all companies are interested in acquisitions, there are best practices that will help you become a successful buyer.
RTC Consulting works with many firms who are very adept at acquisitions. It’s a tool that has been in their arsenal for a long time and has proven to be a great tool for growth.
Acquisitions can be quite daunting for some companies. This is something that they have never done before or where they have failed in the past. If your company falls within the latter category, here are some general principles we have passed on to our clients who want to succeed in this method of growth.
Get your inner house in order
You need to make sure that your internal environment is clean and that you have an effective organic growth strategy. This should not be overlooked. Your messaging should be confident. You’re selling the virtues of your company to buyers, even though you’re a buyer.
You should also ensure that you have an internal or external team capable of supporting the legal and financial aspects of potential acquisitions.
How to identify prospects
If you don’t know who you want to target, you can use the tools to help you identify them. Lone Wolf’s BrokerMetrics can help you identify potential candidates. We recommend that you stay within your footprint and not venture out of it.
If they are already within your reach, operational synergies will be more common. Consider the trends in your target market. Do they grow, lose ground, or remain the same relative to your market?
Scott Wright and Steve Murray will be joining us at this year’s DealMakers & Gathering of Eagles. Register now!
Your potential targets should have similar compensation plans. Traditional graduated commission plan firms shouldn’t be targeting flat/monthly-fee 100% firms. Our rule of thumb: If your retained company dollar exceeds 3%-5%, you are probably barking up a wrong tree.
What do you know about the reputation, culture, and leadership of a prospect? For a deal to be successful, it’s crucial to be culturally compatible.
This information may not be obvious at the time of your meeting, but it is important to quickly learn it. Are they retiring as leaders? Are you aware of a potential internal successor? You may not be able to tell this information prior to the meeting, but it is important to get it ASAP.
Engage prospects and meet them
Once you have identified your prospects, you can start by calling them (not via email or letter) and asking for a meeting. You have the right to ask them why. Keep your message short (ex. “I am coming across your agents increasingly, and want to learn more about you”, “I’m really impressed with what your firm has done recently, and just wanted you to get to understand me better.”
At the first meeting, invite the prospect to breakfast/lunch/dinner/wine/walk in the park/coffee/etc. The sole purpose of the first meeting is to build the relationship. If they bring up the possibility of an acquisition, you should not bring it up. If they do, don’t ask if they’re for sale. Instead, say something like “My goal is growth, to make more money and have fun…I’m sitting here because if we combine both our companies, that might help us accomplish that” (don’t say “buy”, just combine).
Get to know the person and try to understand their company. Establish a relationship!
Once you have established a relationship with someone, which may take more than one meeting to do, you can broach the ‘combination topic to see if there is a way to exchange information and sign a non-disclosure agreement. Once you have established a relationship, you can move from prospecting to potential conversion.
You will then meet with your team to assess the financials and do due diligence. Finally, you will create a term sheet (also known as a Letter Of Intent) if you are interested in this opportunity.
This phase can be very tedious and will likely involve some negotiations so it is important to be patient. Remember that this is an emotional time for the seller. It’s their baby. This is where a strong, trusted relationship built during the previous phases can be very helpful.
Prospecting is a constant process. It’s almost certain that you will be rejected. This is why it is important to focus on the relationship first. You may not be able to sell to everyone, but building a relationship allows you to stay in touch with prospects should they decide to sell.
Scott Wright is a partner at RTC Consulting, which specializes in real-estate brokerage consulting, valuation, mergers and acquisitions.