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Why Large Firms Are Growing While Small Firms Face Uncertain Futures: 5 Strategies for Success

July 30 2020

While a friend of mine was attending Steve Murray's M&A webinar, he sent me a screenshot showing that small firm valuations are dropping. If you do not know of Steve Murray, I recommend familiarizing yourself with his work. He operates Real Trends, a business consulting firm he founded to focus on valuations, mergers, and acquisitions. Steve knows his stuff when it comes to trend recognition. He is right. Small firms are dying.

Devaluation of Small Brokerages

wav large firms growing small firms face uncertain futures 1His analysis of the plight of the small brokerage is real. Frankly, being a small broker is just not worth it. The margins are too tight, and the competition is too fierce. There is much more profit in being a real estate team of 10 to 50 than it is running a brokerage of 10 to 50. Sadly, until you have over 350 agents in high-end markets or 500 agents in lower end markets, the brokerage business is a horrible investment. Balance sheets are simply too tight.

Rise of Enterprise Firms

It's all about the balance sheet. Real estate is a world of local commission economics. Scale drives efficiency. Everything gets cheaper in operating a real estate brokerage as you grow. The cost ratios of delivering broker dollar go down dramatically at scale, and new opportunities for non-commission revenue sources appear. It is the benefit of being the market maker.

Wage Growth for Producers

Brokerages do not make significant profits on top producing agents, but these individuals provide lucrative marketing for their brokerages. An affirming sight for your brokerage's success is promotion via real estate lawn signs, which unifies your brand in the communities you serve. The symbolism communicates trust, experience, and an active market to consumers, urging them to work with an agent from your company. Those yard signs stimulate the development of the most valuable asset of a brokerage – brand awareness and word of mouth. While the high commission rates, commission caps, and the company's carrying costs (not to mention management headaches) naturalize most profits from their production, top producing agents and teams grow their brokerage's legacy.

Five Strategies for Brokerage Expansion

1. Have a great technology story

wav large firms growing small firms face uncertain futures 2Listen to the narrative of Keller Williams, Realogy, RE/MAX, Compass – they are screaming technology – but the true story is that technology does not sell real estate and adoption rates are low. People sell real estate to other people they know. It's a repeat and referral industry. But the message about your technology advantages is critical. Shiny objects work. Keep them coming and try to get to the next shiny object first. Realogy purchasing Zip Realty may not have been great move on paper, but it was an extraordinary move strategically. RE/MAX buying Booj, Compass buying Contactually, Long and Foster and Howard Hanna buying into MoxiWorks – all super strategic.

2. Diversify your training program(s)

Choose more than one coach and/or system. Too often I have witnessed a brokerage focus on one coach. Competitors who also hire that coach may now have an advantage in recruiting your top people.

Every coach has a style and no single style matches every agent in your firm. Mix it up to diversify the risk and empower a wider group of your agents with selling skills that match their personality. The important message here is that brokerages are selling organizations and that you must make this a center of excellence within your company. If your managers are great coaches, that is even better.

3. Understand the value of emotional intelligence

Enterprise firms understand that operating a brokerage has little to do with selling real estate and everything to do with managing people. Moreover, office managers must have the capacity to stabilize an approach for a real estate brokerage. A simple equation to growing a real estate company quickly is to decenter executive management while ensuring office managers have adequate resources for creating fantastic company culture.

Office managers supported by brokerages that recognize their unique strengths deliver outstanding performance in agent recruiting and retention. Importantly, enterprise firms know that they can acquire a small firm with a great owner, convert them to the office manager, and that person can now focus on generating business growth, free from the time constraints of company ownership. Be sure to have a lock tight contract with these managers too. A broker's growth plan is devastated when managers walk across the street to a competitor and take 40 great agents with them.

4. Invest in your brand.

I gave a well-deserved shout out to Steve Murray in opening this article; another deserving firm is 1000watt. For more than a decade, 1000watt has been seasoning their skills with an incredible passion for helping their clients win. I watch firsthand when they do a brand refresh or create a brand from scratch. It's an investment and it's complex, but worth the energy if your dedication reflects the investment. Their job is to help you find your authentic brand voice. When a brand opens themselves to this work, the effects are amazing.

5. Find and create opportunities to engage the industry.

Being a successful brokerage means that you need to show up to MLS meetings and get involved in your association of REALTORS®. These trade partners are vital to the success of your brokerage.

If you are not engaged, you could fly your firm directly into a brick wall. Communication in these realms connects you to knowledge regarding changes to policy and accommodation, helping your firm to see these shifts coming and adapt before they get there. Your involvement allows you to help chart the future of our industry by creating one that enables your business to thrive.

How can we help?

WAV Group has been laser-focused on helping our enterprise brokerage clients navigate through shelter in place. Our clients who have remained focused were able to easily beat the market by double digits. Times of turmoil release the greatest opportunities for massive success.

I am super proud of our world class team at WAV Group. Marilyn Wilson creates enormous value for firms through her expertise in strategic planning, research, and marketing. David Gumpper builds technology strategies that work by bringing business intelligence to executives, enabling them to understand core business operations down to the fine print. Kevin Hawkins leads WAV Group Communications by empowering companies to carry their voice across the industry. This year, we're thrilled to have Myra Jolivet join WAV Group as a PR strategist who brings focus to our MLS and association clients. I truly have the deepest gratitude for our technical and administrative staff as they maintain our vessel for thought leadership through detailed project management and excellent technical support. The heartbeat of our firm's international success is coordination and collaboration between all individuals on our team.

To view the original article, visit the WAV Group blog.