Mergers and Acquisitions 2010:
A White Paper on Current Trends and
Activities in Mergers and Acquisitions
Stephen H. Murray and S. Nicolai Kolding
of Murray Consulting
Table of Contents
The ImpacT of The DownTurn In housIng sales
on mergers anD acquIsITIons ........................................................................3
The markeT for mergers anD acquIsITIons
from 2010 To 2012 ........................................................................................4
facTors In ValuaTIons anD sTrucTurIng mergers
anD acquIsITIons ............................................................................................5
opTIons for ToDay’s sellers ..........................................................................6
abouT The auThors ......................................................................................12
Page 2 Mergers and Acquisitions 2010
A White Paper on Current Trends
and Activities in Mergers and
For sellers considering the sale of their firm, Murray Consulting has put together the following
white paper to lay out your options for terms and prospective buyers. The challenges for each
seller are unique, and so too will be the terms and conditions of the sale of your firm. Finding a
buyer that is right for you means understanding wthat’s out there and what their general offers
may contain. To better understand the context of today’s market, this white paper outlines
general information about national and regional firms that have expressed interest in growth
through mergers and acquisitions (M&As). We will also look at how buyers typically valuate a
brokerage and the different strategies for sellers to get paid. Finally, we will look at the options
for sellers in terms of the potential buyers in the market today.
The Impact of the Downturn in Housing Sales on
Mergers and Acquisitions
The period from 1996 through 2006 was the most active period of merger and acquisitions
in the residential brokerage industry in modern times. In excess of 800 significant mergers,
acquisitions, and other forms of combinations were completed in this period. NRT,
HomeServices, Prudential Real Estate Affiliates (PREA), GMAC Real Estate, RE/MAX, and
several large regional brokerage firms were the main acquirers during this time, with NRT
accounting for well over half of all major acquisitions.
There were a number of factors accounting for this volume of merger and acquisition, such as
the boom in the housing market, the number of large independents without succession plans,
and most importantly, the appearance of several well-capitalized national firms (such as those
mentioned above) that had a strong appetite and capability for growth through M&As.
As the market turned down in late 2005 and continued to do so through 2009, the pace of
merger and acquisition turned down substantially as well. Purchasers became far more cautious
about which deals they wanted to look at, and, as it became apparent that the downturn would
last far longer than any prior recession in housing, the prices and terms they were willing to
offer turned down significantly as well.
While there were sellers willing and able to sell, the market for such transactions on terms
acceptable to both parties declined. Also, there were changes in the national firms that led the
acquisition surge. GMAC itself was acquired and its owned operations sold off (2009). NRT’s
parent company went through first, a public offering, and then a leveraged private buyout that
Mergers and Acquisitions 2010 Page 3
left it with significant debt. RE/MAX also took on some debt to acquire regional franchise
operations and became more cautious about using its own capital for more acquisitions.
Last, there were fewer candidates for growth through merger and acquisition among large
brokerage firms. Many had already sold and there were few new firms of this type (more than
300 sales associates or $15 million in Gross Commission Income) available in the market.
Thus, from the period of 2006–2010, acquisitions of major residential brokerage firms were at
the lowest level in nearly twenty years.
The Market for Mergers and Acquisitions
from 2010 to 2012
We expect a slow recovery in both the housing market as well as the market for mergers
and acquisitions. The challenges we list above outline the main impediments to the use of
M&A’s as a tool for growth. Other challenges include lack of capital, lack of managerial
and leadership talent, and the failure to appreciate the nonfinancial issues that sellers and
purchasers alike face.
First, while we do not expect a return to the era when purchasers were willing to pay 50
percent or more of the purchase price in cash at close, the percent of cash down will likely
be better than it has been over the past 3–4 years. And, except for the smallest of firms,
most large companies firms will require in some cases hundreds of thousands of dollars in
cash-down payments to make a deal work. There are not that many independent realty firms
nor affiliates of national, branded networks that have rebuilt their capital bases to such an
extent that they can easily afford this level of commitment. This factor may favor NRT,
HomeServices, PREA, RE/MAX, and Keller Williams Realty, as they do have access to
capital at this level.
One area that many firms overlook when seeking to grow through mergers and acquisitions
is that of managerial and leadership talent. When one firm acquires another and grows
significantly as a result, often the combined firms need additional talent to operate
effectively and efficiently. While it can be profitable to combine two firms with 50–70 sales
professionals each, it is one thing to manage two such enterprises and another altogether to
manage one with 100–120 sales professionals. With the exception of one national franchise,
most brokerages are not built on models that support this many individuals per office.
Ultimately, for most sellers, the potential sale of their business is a hugely emotional and
personal issue. For many, the sale is a sign of “giving up” rather than a way for a seller to
grow. Given the likely prices and terms available in the market over the next 2–3 years, it
is not likely that an owner is going to get rich from a sale. They may be relieved of many
liabilities, but even this is questionable, given the level of such liabilities for many medium to
small residential brokerage firms.
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The sale of one’s firm, therefore, is more likely a personal and emotional decision than strictly
a financial one. Often, purchasers overly emphasize the deal prices and terms rather than
the personal ones. Also, sellers can shift their views of a transaction almost daily at times;
this is not the result of deal terms, but rather the seller dealing with a sense of either failure,
exhaustion, or suspicion as to what will truly happen after a deal is completed.
Those who appreciate each of these factors will likely enjoy success in growth through
merger and acquisition in the years ahead. Those who focus inordinately on the financial and
structural aspects of M&A’s are likely to have more difficulty than those who first look to the
personal issues, then to the financial ones.
There are several factors that will affect the market for growth through merger and
acquisition in the next few years, some positive and some negative. Some of these factors are
financial, some legal, some structural, and some psychological.
Factors in Valuations and Structuring Mergers
While this is not meant to be an in-depth look at valuations, Murray Consulting/REAL
Trends has updated its “Valuing a Residential Real Estate Services Business” as of 2010,
which goes into more detail about how to value these issues. There are a few factors
concerning what typical buyers will look at in valuating your firm that are relevant to
considering your options for a potential merger.
Valuations for residential brokerage firms are highly affected by the number of acquirers for
a particular firm, any restrictions on the sale of the firm (such as from Buy-Sell Agreements
or Franchise Agreements), the level of competition in a given market, and the compatibility
of one firm to another in terms of commission plans and culture. While each of these factors
is important, the compatibility factor is a larger issue during the downturn. In this case,
compatibility refers to the potential of either retention or loss of sales professionals, which is
perhaps the biggest issue affecting valuations. While brokerage firms employ a variety of both
positive and negative incentives to prevent the loss of sales professionals, the potential of loss
is a critical factor in valuing a residential brokerage firm.
Due to the nature of risk in residential brokerage, both the purchaser and seller are trying to
find a balance between price and terms. One affects the other significantly, and when one of
these factors rises (such as price), the other tends to fall (the terms are less favorable). Generally,
the higher the “price” sought by a seller, the less favorable the terms offered by the purchaser,
such as a lower amount of cash down and longer period of time for “earn-out” payments.
Therefore, as a general rule, the greater the price the seller wants, the more the purchaser
will hedge its risk of the loss of sales professionals—resulting in less cash down and longer
“earn-out” periods and terms. The lower the price the seller seeks, the more the purchaser will
generally grant additional cash and easier “earn-out” provisions.
Mergers and Acquisitions 2010 Page 5
The valuation of residential brokerage firms reached its zenith during the 1996–2006 period.
With the advent of the downturn, both prices and terms were reduced by all acquirers.
While prices did not fall quickly, purchasers did adjust the terms to reflect uncertainty in
the level of future housing sales. Where previously a firm might expect to receive more than
50 percent in cash at close, purchasers were now offering from 10–30 percent in cash with
the remainder in longer term “earn-outs” or contingent payments based on the retention
of sales associates and production. For sellers, earn-outs mean that they must consider the
long-term stability and profitability of the company purchasing their firm. With so many
brokerages struggling in today’s market, this can be a significant factor in choosing to whom
they ultimately sell.
In our practice over the past four years, every deal we have been involved with resulted in
more than 70 percent of the total deal in contingent payments in the form of “earn-outs”
over at least two and up to five years. Nearly 1 in 5 had less than 10 percent of the deal
in cash at closing. Purchasers are hedging their bets about the housing recovery as to the
challenges of converting sales professionals from one system to another that is somewhat
Options for Today’s Sellers
There are noticeable differences in operating philosophy among brokerage firms. As Murray
Consulting/REAL Trends pointed out in the 2009 white paper on Realty Business Models,
there are at least four distinct models at work in the industry today. They were outlined as
1. Traditional Graduated Commission Plan firms
2. High Commission Concept firms
3. Capped Company Dollar firms
4. Freedom Realty firms
There are significant differences in the way these firms share commissions, charge franchise
fees, charge fees for services or rent, and in their overall cultural approach to the relationship
between the brokerage and the sales professional. Regardless of earnings before interest, taxes,
depreciation and amortization, or company revenues, if there are large differences in fee and
commission plans or structural differences in firms, then an acquisition or merger of two
disparate firms becomes a very high-risk proposition.
Several options are available to brokerage firms when considering whether to sell to or
combine with another brokerage firm. We will break them down here and highlight the
opportunities that each provides.
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In considering buyers, sellers should first weigh the options within the two categories of
candidates for sellers today:
1. A local independent brokerage
2. A local franchise brokerage
There are upsides and downsides to both that should be considered.
1. Local Independent Brokerage
Regional or local brokerage firms will generally want to change the name of your firm to
theirs, but they have the flexibility to do otherwise. There are documented cases where
independent brokerage firms can maintain more than one brand in a market with some
manner of identifying an affiliation with the parent company.
Most of these are privately owned and require no permissions from others to do a
transaction; that is, they do not have membership or franchise agreements that restrict or
restrain them from growing in any direction or geographies they desire.
Generally, there is no franchise fee that will be payable; however, in most cases, you will need
to change the commission/fee program to the acquirer’s system or, in some cases, a new blend
of the two. This, however, is true for any combination or merger.
Commonly, these firms can pay the same prices and terms as those affiliated with national
brands, but this is not always the case. Firms affiliated with certain national brands have
access to capital that local or regional ones do not always have access to for the same prices
The legal requirements, such as non-compete and non-solicitation agreements, are usually
consistent with those required by firms affiliated with a nationally branded realty network.
Independent brokerage firms differ widely on their cultures, commission plans, and the level
of services they provide to their sales professionals. When considering whether a combination
is the correct one for a particular firm, it is important to understand that there is no one
standard that describes independent brokerage firms from market to market.
2. Local Franchise Brokerage
With major franchise brokerages, it is most likely to be the actual local franchisee, not the
franchisor that will act as the buyer. Depending on the franchisor, the franchisee may have
the financial and logistical support of the franchisor in the purchase and transition. (One
exception is NRT, the owned operations of Realogy, where it is the parent company doing
We list these in alphabetical order and include several national brands, as well as independent
Mergers and Acquisitions 2010 Page 7
Keller Williams Realty (Keller Williams)
The unique ownership and operational structure of Keller Williams offers potential
merger-or-acquisition candidates alternatives to when and how they receive funds from
a combination. It can and does offer options to remain an owner of a Keller Williams
Market Center, either as a majority owner (known as an Operating Partner) or as a minority
shareholder. This is generally unique in that most large regional brokerage firms, whether
affiliated or not, do not usually provide for ownership in the acquiring firm to a seller. (It
does depend on the comparable size of firms involved in a transaction.) Keller Williams may
also provide financing to a local franchisee looking to make a sound acquisition.
Keller Williams will enlist an incoming seller and their sales professionals in the Keller
Williams Profit Sharing Program, where a seller can receive additional monies from the
sales production and recruiting results of the sales professionals they bring with them. (This
is a program that is generally unique to Keller Williams, although some firms are offering
some incentive programs that resemble several features of the Keller Williams Profit Sharing
Program.) Keller Williams has profit shared in the hundreds of millions of dollars since it
began the program nearly fifteen years ago, so this feature can offer significant additional
long-term compensation on top of the terms of the sale.
Keller Williams will require that you change the name of your firm to Keller Williams,
but, depending on whether you are being rolled in or will remain as a standalone, you may
be able to keep your firm name as part of the Keller Williams brand (This is true for most
nationally branded firms.);
Keller Williams has a franchise fee that is equal to 6 percent of gross commissions with an
annual cap of $3,000 that is all paid by sales professionals associated with Keller Williams;
Keller Williams also operates with an “open book” style of management, where sales
professionals are engaged in many facets of the brokerage, have access to financial and
operational details of the firm, participate in most decisions, and assist with planning. This
philosophy is unlike that found in most other brokerage firms, and it needs to be analyzed
fully by those contemplating a combination with Keller Williams affiliates, as it can be a
significant advantage in merging cultures and gaining buy-in from sales professionals (while
also presenting a challenge to principals who are not used to such openness).
In considering the Keller Williams option, one must also be aware that the operational focus
on recruiting and training at the office level differs from most others. The focus on training,
which Keller Williams considers one of its key strengths, is due to its philosophy that sales
professionals can and will do most other functions to the level that suits their (the sales
professional’s) own business.
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Prudential Real Estate Affiliates (PREA)/
Prudential Real Estate Financial Services of America (PREFSA)
PREA itself does not acquire brokerage firms, but rather provides financing, through
PREFSA, to assist its own affiliates in acquiring other brokerage firms or to assist other
brokerage firms in acquiring or merging with existing PREA affiliates. Even in this downturn,
they have continued to be active in providing such assistance.
PREA affiliates generally have access to capital from PREFSA to do mergers and acquisitions,
but not always. As a result, PREA affiliates have the ability to be more aggressive in the prices
and terms that they may be able to offer. Financing from PREFSA can result in it taking
either an equity or debt position in the assisted firm, which may then allow for PREFSA to
have oversight into certain operational and financial decisions.
PREA affiliates, whether they utilize PREFSA capital or not, generally require that a firm
being acquired or merged adopt the name of the PREA firm. Regardless, when combining
with a PREA affiliate, a firm must use the PREA brand name.
Firms combining with an affiliate of PREA will pay a franchise fee that is dependent on the
size of the firm with whom a seller is combining. To the best of our knowledge, the franchise
agreement calls for a starting rate of 6 percent of gross commissions, but we are aware that it
can be lower depending on a number of other factors.
Another interesting point about Prudential is its ability to refinance brokerage firms whether
in an acquisition or other form of combination, or simply due to the desire of an owner to
sell interests to insiders or next generation owners. This is a very unique feature offered by
Realogy-related brands (Better Homes and Gardens Real Estate, Century 21,
Coldwell Banker, ERA, Sotheby’s International Realty)
Realogy approaches mergers and acquisitions in several ways. First, it outright acquires firms
through its wholly owned subsidiary, NRT. At this time, it is focused almost entirely on
markets where NRT already has owned operations, and most often these are associated with
the Coldwell Banker brand. The focus of this acquisition activity is currently with “roll in”
transactions, whereby sales offices are consolidated.
Second, Realogy assists its affiliates with acquisitions of other (non-Realogy affiliated) firms,
or similarly with firms not affiliated with Realogy to acquire existing Realogy-branded firms
(so long as the combined entity is Realogy affiliated). They do on occasion allow one of their
brands to acquire one of a different Realogy brand and keep them separate, but this is not a
regular occurrence. Last, they will help their affiliates acquire other firms with assistance in
terms of candidate vetting, valuation assistance, and other consultative guidance.
Mergers and Acquisitions 2010 Page 9
In terms of the merger or acquisition of Realogy-branded firms with others outside their
network, Realogy will sometimes provide capital in one of two forms. First, a Development
Advance Note (commonly referred to as a “DAN”), which is a note received at the time
of closing and forgivable over the length of the franchise agreement so long as the affiliate
remains in compliance with all franchise obligations and certain revenue targets. The terms
and conditions of a DAN can vary considerably, but they are generally designed to cover the
costs of brand conversion and allow for some assistance in the financing of the transaction.
The second is an “APIP” or Additional Performance Incentive Premium, which is, in effect,
an additional rebate on top of the standard PIP that all sizeable affiliates can qualify for.
Affiliates cannot receive both a DAN and an APIP for a single transaction, although they
can have more than one form of assistance if they have acquired multiple firms. At this
time, it appears that Realogy has been modifying its use of DAN financing to create more
customization in this program.
Firms that become affiliated with a Realogy brand are subject to a franchise fee that varies
with a stated rate of 6 percent of the gross commission revenues of the firm, and a rebate
that is publicized in their FDD (Franchise Disclosure Document) which allows for the net
effective rate to be lower than the stated rate, especially for larger firms.
Firms that become affiliated with a Realogy brand must adopt the network’s brand name
with which it is becoming affiliated in a format approved by Realogy. Firms can and do
frequently retain their own local brand name in concert with the Realogy brand name.
One great advantage that Realogy-branded firms have at this time is their ability to perform
mergers with firms from various Realogy-branded brokerage firms. Since they have more
affiliates in most markets than other networks, this generally creates more opportunities for
growth through mergers and acquisitions.
RE/MAX does have an active program to assist its affiliates with growth through mergers
and acquisitions. It does not provide direct capital in most cases, but does contribute to a
combination through the selective reduction of certain franchise fees that would be due
under normal circumstances.
RE/MAX has acquired some firms directly, but at this time does not have an active program
to acquire other brokerage firms for its own account. We do not know when or whether it
will resume its program for additional acquisitions.
RE/MAX does require that all firms that become affiliated either through acquisition of an
existing RE/MAX firm or other combination with an existing RE/MAX firm assume the RE/
MAX brand identity.
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RE/MAX does require that all firms that are affiliated with it pay franchise fees that are
basically in two parts: a monthly flat-dollar amount on a per-sales professional basis and,
secondly, a percentage of the Gross Commission Income earned by the sales professionals.
These fees vary somewhat, depending on whether a firm is in a region owned by RE/MAX
(the parent company) or is privately owned.
RE/MAX offers its own unique culture with a focus on high-commission concept plans,
which is also reflected in their having the highest per-person productivity as of this date. This
culture and focus on high-commission payouts create both advantages and disadvantages
when considering mergers and combinations. Whenever a merger or combination of some
form is contemplated between firms, the commission plan and the culture can both have
a significant effect on the prospects for success. For firms that combine with a RE/MAX
affiliate, therefore, it is clear that a careful examination of how two potentially different
programs mesh is needed.
While merger-and-acquisition activity has slumped along with the housing sales market,
most national and regional firms have active and well-funded programs to grow their
networks through assistance in this area. Some provide capital, and some do not. All provide
guidance, education, and other tools to assist affiliates in growth through mergers and
acquisitions. All will also generally expect that any form of assistance will be conditional
upon the signing of a long-term franchise agreement (or the extension of a current
The section on what the major national networks and leading independents are doing is not
meant to be exhaustive, but gives a general overview. Each has made exceptions to their own
rules when the opportunity was right for all parties. Each has senior-level executives involved
on a full-time basis working in this area—a sure sign of the importance each places on this
area of their business.
We do expect that with slow but steady improvement in housing sales, the prices and terms
available in the market will begin to improve. However, we do not expect a return to the
prices and terms that were prevalent in the 2002–2005 era. In particular, while prices may
return, a far lower percentage will be in the form of cash at close and a far higher percentage
will be in the form of performance-based earn-out payments.
Mergers and Acquisitions 2010 Page 11
About the Authors
Stephen H. Murray and S. Nicolai Kolding of Murray Consulting have been the leading
mergers, acquisitions, and valuation advisers in the United States and Canada for the past
twenty-four years. The principals of Murray Consulting have been involved in more than
920 successful mergers and acquisitions with aggregate value over $15 billion.
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