5 Steps to Mastering a Real Estate Merger

Over the course of my 20+ year career in real estate, I’ve been captivated by the art of the merger and acquisition (M&A) deal. I’ve experienced them from the perspective of an agent, a broker, a brand consultant and a franchise sales director. But it wasn’t until two years ago, when I joined a regional, multi-state brokerage at the behest of its growth-minded founder, that I became an M&A architect and executor.

As COO of Coldwell Banker Premier, I worked closely with founder Steve DuBrueler on mapping a way to achieving an adjusted GCI target of $11 million. We agreed that adding existing brokerages to the company made sense, so I got to work. To cut to the chase, we kicked off 2022 with three acquisitions/mergers in 45 days, adding around 130 agents and eight offices and increasing the size of our business by 142%. But getting to that point required preparation. Here’s how we did it.

Step 1: Scaling Operations

Before we could add another company – or companies – we needed to make sure our operations would scale. I spent my first year putting systems in place that would support expansion across multiple markets.

We focused on refining internal processes like lead generation, recruiting and onboarding. The goal was to reduce pain points across these areas, shoring up any vulnerabilities in terms of recruiting and retention prior to bringing on new people.

As a relative newcomer to the company, I facilitated the discussions around process improvement, sharing appropriate insights gleaned from my exposure to hundreds of other brokerages as well as from my time with the Coldwell Banker brand in engagement and business development roles.

I also infused my passion for process, which I honed during my years working with Fannie Mae on foreclosures. I have earned the nickname of Captain Spreadsheet for my ability to automate processes to improve efficiency. Formulas for the win!

Step 2: Identifying Potential Partners

Once the company was in prime position for expansion, we started looking for prospective companies. Steve wanted any target company to be within a four-hour drive, making it possible to get there and back in a day. That gave us our geographic catchment area.

We simply drew a circle around the company headquarters in Winchester, Virginia. Other approaches I’ve seen include focusing on referral corridors and migration patterns to establish presence in areas that can support the existing business. For example, New York and New Jersey brokerages often focus on expanding into Florida to capture retirees or snowbirds.

The next step was identifying targets that were of a significant size with an operational structure in place. Companies of a certain size were important from a scale and efficiency perspective to maximize our investment and capitalize on the inherent growth opportunities.

And finally, it’s important to know how you want to add the operations to your company. Are you expanding an existing market by acquiring a local competitor? A roll-in may be on the table in this case, either into your space or the competitor’s. Depending on the market, acquiring the brick and mortar may be critical to making the deal work.

Step 3: Engaging with the Prospect

My standard opening is that I am always interested in speaking with growth-minded individuals. I have found that a soft, indirect approach works best when testing the waters. I ask non-threatening questions like, “What’s the next chapter of your business look like?” or perhaps a bit bolder version “Are you interested in learning about future opportunities for your business?” or “Do you see any opportunities for us to collaborate in the future?” 

To be completely transparent, I typically strike out 95% of the time. But I always ask if they are open to keeping the lines of communication open and most times, the answer is yes.

Once an owner is ready to talk, I spend most of the conversation asking about the business. I try to understand the pain points, because if someone has agreed to speak to me, they are probably experiencing at least a little pain.

As our conversation progresses, I offer to sign a confidentiality agreement to build trust and rapport. At the end of every conversation, I ask if it makes sense to keep talking. It can take up to a year to get to the finish line and sometimes even longer. That’s why regular check-ins with the owner are important to keep you top of mind.

Step 4: Negotiating the Deal

When it comes to negotiating a merger or acquisition, the best piece of advice I picked up over the years is to keep the real estate out of the deal. You’re interested in the brokerage business, not the building.

If your potential target owns a commercial property, consider it a separate asset outside of the M&A deal. With that off the table, you can focus on the terms of the deal. In my experience, terms vary based on the owner’s goals, needs and desires. Some want a salary and stability, others want to ease into retirement, and they always want the best for their agents.

But you must have in-depth knowledge about the company, the market and the company’s potential in that market. Understanding the distribution of the production – and how much of it is the owner’s – is critical to structuring earn outs. 

You should also be positioned as a solution for the company, one that will protect the agents, the business and the owner’s legacy. We always want owners to stay on for a period of time to support the integration and ultimately retention. Owners must understand that selling their company is not selling out. It means they are a savvy investor and a smart steward of the company’s resources.

Step 5: Closing the Deal

We typically submit a written letter of intent that is based on our conversations up until the point of moving forward with the deal. After the back and forth, we provide a written agreement that, once signed, transfers the assets to us.

In reality, the close is probably the most anticlimactic part of the process. I actually view the close as Day 1. This is when the work begins. Having a well-thought-out announcement and a structured transition plan makes a tremendous difference in working through the integration.

It was not our plan to close on three companies in three new markets in less than two months. We would have much rather spaced them out, but when a deal is ready to close, you close.

Thankfully, we had our internal operations primed and ready, and we are now focused on creating a cohesive family of companies that are aligned on the path forward.

This article was originally featured on RealTrends.com, written by the same author.