There are two major trends developing in real estate brokerage mergers and acquisitions (M&A) that are dramatically changing the landscape of where agents hang their license and access technology. Both can provide a small business merger solution for brokerages struggling to meet transaction minimums.
The first trend involves larger firms acquiring and merging with smaller firms. The second involves the investment in and acquisition of technology firms that serve the needs of real estate agents and teams.
Small Firms Selling to Stop the Bleeding
There are fixed costs to operating a brokerage. Just think about the basics. Every business needs to handle accounts receivable, accounts payable, payroll, taxes, office expenses, and more in order to operate. Operating a business forces companies to manage this burden, regardless of the number of agents or volume of transactions.
There are 108,000 real estate brokerages in America. When you look at the number of transactions per brokerage and you benchmark the bottom third of firms in any market, you realize that the majority of real estate brokerages are operating at a loss.
According to George Slusser, my co-author of the book we published last month, Acquiring (More) Profit, “there is a basic economic principle driving merger activity among small firms.” The baseline cost of operations in every brokerage is determined by sales volume. If it takes $30 million in sales volume to cover the fixed costs for a given market and office, and the firm is operating below that threshold, then owners are writing checks to keep the business afloat.
“When you combine the production of two brokerages operating at $20 million in sales volume, both of which are losing money, you wind up with a firm doing $40 million, which becomes instantly profitable,” says Slusser. This is when a small business merger can make a lot of sense.
For now, trade volume in real estate is expected to remain at the current rate for another two to three years. Economists blame the low volume on the extreme rate increases by the Federal Reserve bank, effectively locking consumers into low interest loans that discourage the move-up market. Other influences include higher costs of living, driven by inflation and stagnant wages.
The outcome is that brokers who are operating at a loss are facing another four to eight quarters of unprofitability. For those firms, it’s time to find a merger partner, whether for a small business merger, a full acquisition, or another type of partnership, so they can move on.
Technology Firm Consolidation by Brokerage
Compass has achieved one point of differentiation that no other major brokerage can claim. They invested an obscene amount of capital into developing the core technology that is used by Compass agents to service their clients.
You can argue all you want about the wisdom of such an investment, or about the quality of the applications. But you cannot dispel the truth that Compass has a proprietary suite of tools for their agents that no other firm has. If you want to use the Compass tech, you need to be a Compass agent.
The wisdom of this strategy is not new to real estate. Windermere was among the first firms to set itself apart with technology. If you recall, it was the first major firm to launch map search to consumers at scale, and developed its internal CRM and listing presentation tools. This placed a wall around the technology that required agents to join Windermere or become a franchise to use the technology.
A similarly successful but somewhat different model was made popular by Booj. Booj, which stands for “be original or jealous,” was a successful technology company that operated under the principle that only one firm in a marketplace would be allowed to offer the technology to their agents.
The company was very successful and developed wonderful technology. To the dismay of their brokerage clients, RE/MAX acquired the company. This terminated the exclusiveness of the technology in the marketplace and led to the demise of the products.
The sale of Booj to RE/MAX immediately disrupted brokerage firms who were all-in on that technology platform as a differentiator. Their customers felt betrayed, and they learned a deep lesson about partnering with technology providers. The best strategy to create exclusivity when partnering with a technology company is to own the company (potentially through some activity like a small business merger) or to invest enough in the company to offset the disruption caused by an acquisition.
It is pretty hard to say how many agents a firm needs to justify owning their own technology. The main denominator is less about the number of agents and more about the income per agent. Keller Williams charges their agents and franchises a technology fee, allowing them to deploy those fees into the development of technology and the training and support.
In similarity to Compass, you can argue about the quality of the technology, but there is no argument for the exclusivity of it. If you are not a Keller Williams agent, you can’t use it. Regardless, in every brokerage there is a number of agents that justify the firm’s investment in owning the core technology that is exclusively provided to their agents.
Losses Will Continue to Drive Acquisitions
Brokerages on solid financial footing today have a once-in-a-lifetime opportunity for growth. Firms can expand their sales volume through small business mergers by acquiring small firms, and they can can lock in exclusive tools and resources by purchasing and building core technology.
You can draw a circle around the top 50 firms in America by transaction volume to target the ones that have the best opportunity in today’s market. Historically, real estate brokerages have been more successful at acquiring other firms than acquiring and developing technology, but that is changing. Everything in technology is easier today than it was just five years ago. Databases are cheaper to operate, application development can be done with fewer people, and APIs have smoothed the path to platform development by driving application interoperability.
WAV Group exists to help brokerages like yours thrive in challenging markets. If you need help with your acquisition strategy, please contact Victor Lund. If you would like a valuation on your brokerage, please contact George Slusser. If you are struggling with the technology you have today, please reach out to David Gumpper. And if you have a great strategy but are not communicating or marketing it effectively, reach out to Kevin Hawkins or Bondilyn Jolly.