Re broker-5e - 16

 Preparing For the Future
◦ Planning is important to any business throughout
its existence.
◦ Every successful business regularly reviews and
updates its business plan to ensure it continues to
meet the needs of the company.
◦ Change is inevitable and should be embraced if
your goal is success.
◦ There are four ways to expand your business:
 Organic growth
 Horizontal expansion
 Vertical expansion
 Mergers and acquisitions (inorganic growth).

 Organic Growth
• Introduction
o Organic growth is business expansion by increasing
sales and output as contrasted with inorganic growth,
which is achieved by mergers and acquisitions.
o The core business is the central or main business
activity of the company.
o Edward Hess identified in his book, The Road to
Organic Growth, six keys to organic growth.
 Key One: “High growth companies have a simple,
understandable business model that their employees can
understand and execute—none has a complex or
sophisticated strategy.”

 Organic Growth (continued)
• Introduction
o Edward Hess identified in his book, The Road to Organic
Growth, six keys to organic growth.
 Key Two: “High organic growth performers have a small-company
soul housed in a big-company body. A small company soul is
entrepreneurial, with employees having ownership of the customer,
being held accountable for results, and sharing in the rewards of
those results.”
 Key Three: “One of the six keys to building a consistent high organic
growth company is measurement—of everything. The 22 companies
on the organic growth index (OGI) list track a variety of metrics—
financial, operational, behavioral—to understand which areas of their
business are not performing as efficiently as possible, and then they
take action to shore up those numbers.”
 Key Four: “All the high-growth companies have a high management
and employee retention, high employee loyalty, and high employee
productivity as compared with their competition. Employees in these
companies ‘own’ their results and their careers, and most even own
part of the company. These companies’ management teams are
frequently homegrown, with long company tenures.”

• Introduction
o Edward Hess identified in his book, The Road to Organic
Growth, six keys to organic growth.
 Key Five: “Rather than being overly confident about their
success, at high organic growth companies, leaders are
frequently paranoid about complacency, arrogance, and
hubris. Although many leaders are very wealthy, for the most
part, you would not know this from their dress, their office,
their demeanor, their attitude, or any outward appearance.
Few of the leaders, if any, take credit themselves. There is a
sincere respect for line workers, where many had begun their
careers.”
 Key Six: “The high-organic companies generally do not have
unique strategies, products, or services, nor are they market-
leading innovators. But they are execution champions—day
after day, they have figured out how to get consistent high-
quality performance from their people. These companies use
technology to drive efficiencies across their value chain. To
them, technology is not a service function; it is an operational
function.”

• How to Grow Internally
o Specializations or Designations
 Senior Housing
• Age-restricted housing is housing that generally restricts
residency and ownership to active seniors 55 years and
over.
• A retirement community is a planned community for
residents who either have retired from an active work life or
have reached a set age.
 Manufactured Homes
• Due to the increased need for affordable housing and the
relative low cost to build, factory-built housing has become
a major source of the residential housing supply.
• Generally, your real estate sales associates can list
manufactured homes when they are considered real
property.

o Specializations or Designations
 Resort Property
• Resort properties are often second homes.
• Your agents who specialize in second homes will need to
understand resort seasonal buying patterns, financing, and
possibly tax-deferred exchanges.
 Green Properties
• A green building is a type of building that incorporates
healthier and more resource-efficient models of
construction, renovation, operation, and maintenance.
• Selling Points for Green Properties
o Energy Savings and Lower Utility Bills
o More Comfortable
o Healthier and Greater Value

o Physical or Website Expansion
 Physical expansion takes careful research, planning, and
financing.
 For a real estate brokerage, an effective website is an
integral part of business.
 Be sure your website is designed to draw visitors into your
site and get them to stay.

 Horizontal Expansion
• Introduction
o With horizontal expansion, you would expand your
existing brand into other real estate brokerage
opportunities.
o Horizontal expansion targets the broader commercial,
industrial, and agricultural markets.
o Business brokerage is another type of expansion
opportunity.

 Horizontal Expansion (continued)
• Commercial Property Sales and Leasing
o Commercial property can include everything from raw
development land to industrial buildings and office
buildings.
o Most commercial agents specialize in specific property
types, such as office, retail, hotels, apartments, or industrial.
o Commercial brokerage requires a higher level of technical
business knowledge, so your agents should complete a
concentration of business courses and specialized
designations.
o Certified Commercial Investment Members® (CCIM) are
recognized experts in commercial real estate brokerage,
leasing, valuation, and investment analysis.
o Brokers or sales associates with the Society of Industrial and
Office REALTORS® (SIOR) designation are top producers in
industrial and office real estate brokerage.

 Horizontal Expansion (continued)
• Farm, Ranch, and Land Brokerage
o Depending on your locale, your company may currently be
doing some farm and land brokerage.
o Your agents will need a good working knowledge of their
product, but this type of expansion does not usually require
any unusual expenses, just a clear focus on this submarket.
• Business Brokerage
o Business brokerage is a growing industry and presents itself
as a profitable opportunity.
o The drawbacks include finding individuals with the
background and education to broker businesses.
o Although profitable, it is a highly specialized and difficult
business.

 Vertical Expansion
• Introduction
o Vertical expansion is the addition of related services
(real estate auctions, mortgage services, insurance
services, home warranties, escrow and title services,
property management, and others) as a way to
increase profits.
• Real Estate Auctions
o Auctioning real estate is very popular in many parts of
the country.
o Auctioneering is not necessarily an expensive
expansion to add to your company, although it does
require specialized knowledge and training that must
be acquired before you can open the business.

 Vertical Expansion (continued)
• Mortgage Services
o Mortgage services are a very popular way to produce
additional revenue.
o Some sales associates are loan officers as well as real estate
licensees.
o Others have started their own in-house mortgage company
and persuaded their agents to do business with that
company.
o Still others have created working arrangements with
mortgage bankers or brokers.
• Insurance Services
o Homeowners insurance has also proved to be another
excellent source of additional income.
o Typically, an in-house company or an affiliation with a local
firm handles this service.

• Home Warranties
o A residential service company offers home warranties
to maintain, repair, or replace all or any part of the
appliances, structural components, electrical,
plumbing, heating, or air conditioning systems of
residential property.
o Home warranties probably fall into the second
category of extra income, support services.
• Escrow and Title Services
o Depending on your state laws, escrow and title
services are also a source of additional income.
o Title insurance is state regulated and therefore subject
to your state statutes.

• Property Management
o Property management involves maximizing net
revenues by increasing income through tenant
relations and effective property operations.
o Property managers are usually involved in leasing and
facility management decisions.
• Miscellaneous Services
o Some companies will offer pest inspection services,
appraisal services, or homeownership/concierge
services including landscaping, security, appliance,
and home repair.

 Inorganic Growth
• Introduction
o Inorganic growth is growth through mergers and
acquisitions.
o A merger is a transaction between two companies joining,
which results in a wholly new firm.
o An acquisition is a transaction in which a firm is absorbed by
another firm, with the ownership vested in the acquiring firm.
o A fold-in acquisition is an acquisition in which you would
acquire some or all of the hard assets plus the agents of the
company and move them into your present location.
o The seller would close down his or her existing location.
o This contrasts with a roll-in acquisition in which the seller’s
location becomes a branch office to the buyer’s company.

 Inorganic Growth (continued)
• Introduction
o Top Ten Reasons to Acquire Another Real Estate
Company
 Become more profitable
 Add a team of new agents
 Gain a market share
 Form a partnership with a talented owner/manager
 Gain a presence in a prime location
 Inject new life and energy into your company
 Cost efficient use of your existing resources
 Add outstanding facilities or services
 Add a niche specialty to your company
 Increase visibility

• Introduction
o Top Ten Reasons to Sell a Real Estate Company
 Not making any money
 Going back to selling
 Starting a new career
 Retiring
 Tired of managerial hassles
 Partnership dispute
 Want access to better resources
 Personal or legal problems
 Loss of agents
 Burnout

• The Process for Mergers and Acquisitions
o Identify Your Company’s Goal in the Process
 What is your primary motivation?
o Identify Potential Candidates
 Potential candidates will be those that not only meet your
specific market goals and qualifications but also companies
that have a good or neutral reputation in the marketplace.
o Approach the Potential Candidate
 Your approach to potential candidates is critical. The
overriding factor has to be confidentiality.
o Build Rapport with the Potential Candidate
 The first rule of any sale is to develop rapport. You have to
develop a relationship with your candidate that will carry
you both through the ups and downs of the transaction.

o Gather all the Information Possible
 There is public information available, such as real estate sales
information and private information that you may be able to gather
through industry sources, such as title companies, loan officers,
appraisers and the like.
o How Much is the Company Worth?
 Book Value Approach
• The use of asset based methods to determine the value of a company is
very common.
• Sometimes called the book value approach, this method simply adds up
the value of the company’s assets and subtracts the debt.
 Market Approach
• The market approach relies on comparables in the given market. This
is very similar to the way you would do a market analysis on a home
you were listing for sale.
• The per-agent valuation method of a real estate company is
determined by placing a value on the agents themselves without regard
to the tangible assets.
• The per-listing valuation method is very similar to the per-agent
method―only in this method we place a value on each listing.

o How Much is the Company Worth?
 Income Approach
• The income approach is typically going to be the most reliable
approach in valuing a brokerage firm.
• A net income multiplier is a factor used to estimate the market
value of income producing properties.
o Blue Print the Transaction with a Letter of Intent
 The letter of intent simply outlines the final transaction so an
attorney can put the details into contract form.
 Issues to be Addressed in a Letter of Intent
• Description. What exactly is being purchased?
• Terms. The purchase price, payment, a projected closing date,
etc.
• Due diligence. The purchaser will reserve the right to audit all
pertinent company records prior to closing.

o Blue Print the Transaction with a Letter of Intent
 Issues to be Addressed in a Letter of Intent
• Indemnification. Sellers agree to indemnify the buyer from
any lawsuits or claims arising prior to closing, or any
misrepresentation by the seller.
• Other considerations offered to the seller. For example, a
private office, part-time secretarial staff, a larger
commission split, etc.
• Confidentiality agreement. Agreement between all parties
involved regarding the confidentiality of the transaction.
• Signatures. Although the letter of intent is not binding, the
act of the seller signing the agreement goes a long way in
getting the transaction closed.

o Create a Final Contract
 Typically, attorneys will create the final contract using the
letter of intent as a blueprint.
o Develop a Smooth Integration Plan
 Your transition plan should include a transition budget,
new materials, such as cards and signs, a timeline of
events, a kickoff day for your new agents, media
announcements, and your initial business plan.
o Combine the Two Companies
 This is a time to avoid radical change, but at the same
time implement new ideas.
 It is also an exciting time to generate new momentum and
take your company to another level.

o What are the Results?
 After 90 days, you should have a good feel for the
acquisition.
 An additional analysis should take place in one year to
evaluate the impact of the acquisition on your bottom line.
 Finally, it takes two or three years to know if the
acquisition was successful.

Re broker-5e - 16

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