Real estate brokers do not live forever. Most do not want to work forever. As a result, they need to give some consideration to whether their brokerage will continue to exist once they stop working. They might stop working through retirement or experience an unexpected death, incapacity, or a suspension or revocation of their license.
Planned Sale Of Brokerage
Selling a real estate brokerage is not an easy undertaking. If the selling broker wants to generate the highest price, the broker should address many considerations in preparation for a sale.
What Are Buyers Looking For?
Buyers are looking for an asset that will generate a return on their investment. Buyers want a secure cash flow and growth opportunities. As a result, in preparation for a sale the broker must first consider what generates the cash flow for the brokerage. Is the selling broker the business generator? Do the agents generate their own business and thus the brokerage income? Is there income generation from a variety of activities?
Once the selling broker has honestly defined the sources of the cash flow, the selling broker needs to determine whether the brokerage system and structure can easily be implemented by a prospective buyer. The selling broker will need to demonstrate that the system and structure will not fall apart once the selling broker is no longer present.
One of the main issues is to be able to demonstrate that the existing agents will remain once the selling broker is no longer a part of the brokerage.
Prepare a Sales Information Package
A sales information package should be assembled that describes what the broker is selling. It should include extensive information including the following:
- Historical financial data.
- Information about the office space, including whether it is leased or owned.
- Information about office equipment and other assets, including whether they are leased or owned.
- The number of agents, their performance and longevity with the office.
- Information about the office/ management staff.
- How long the selling broker will remain after the sale.
Initial Documentation and Considerations
The selling broker should consider asking the prospective buyer to enter into a confidentiality agreement early in the process. The selling broker will not want the brokerage’s financial information shared with third parties. The selling broker will also want to control how and when the existing agents learn about the proposed sale and the proposed buyer. In most instances, it is best if the agents learn of the potential sale from their broker, not from the buyer or from some third party.
It is helpful for the selling broker and the prospective buyer to enter into a letter of intent that outlines the major deal points. Once the letter of intent has been negotiated the parties will have the transaction structure negotiated so that a sales contract or asset purchase agreement can be prepared.
During the initial negotiations, the selling broker may want to evaluate the prospective buyer to determine if the buyer is the type of person that the selling broker is comfortable with running the broker’s business. The selling broker will also want to verify the prospective buyer’s availability of funds and sources of capital.
Depending upon the size of the brokerage, there may be a due diligence period (option period) contained in the sales contract or asset purchase agreement. The due diligence period will allow the prospective buyer the opportunity to more fully investigate the brokerage operations and do more in-depth research concerning the agents, their performance, and whether they will remain after the purchase. The prospective buyer will want to review the financial records and verify the existence and condition of the other assets being purchased.
The closing of the sale of a business can often involve a variety of documents. In addition to a bill of sale, there may need to be an assignment of lease or a sale of the office building. The buyer may sign a promissory note for a portion of the purchase price. There also may be a guaranty agreement, consulting agreement, and a noncompetition, confidentiality, and non-solicitation agreement. If the brokerage is part of a franchise, the applicable franchise documents will need to be executed.
Instead of a sale to an unrelated third party, there may be a structured turnover plan with a long-time associate or partner. The lead broker may plan to step out of management (sometimes over a long term) as the associate/partner takes on more responsibility. In such a case, it is wise to have a written agreement stating how and when the ownership interest transfers are made and what conditions must be fulfilled.
Consideration must be given as to how and when there is a change of the sponsoring broker so as to always have a licensed broker available to sponsor the sales agents.
Unplanned events often cause an immediate and unexpected succession. If the broker dies or if the broker’s license is suspended or revoked, all licensed activity stops. All sales agents’ licenses are suspended by TREC immediately upon the death of their sponsoring broker or if their sponsoring broker’s license is suspended. No sales or brokerage activities can be performed until such time as a replacement sponsoring broker is in place.
Before the sales agents can perform any activity requiring a license, there must be a new sponsoring broker. If the original sponsoring broker was an individual, the agents must change their sponsorship to be with a new broker. If the original broker was an entity whose designated broker now has a suspended license, a replacement designated broker must be put in place with TREC before the sales agents may engage in any licensed activities. It would be wise for all business entity brokerages to have a successor designated broker pre-identified so the business is not shut down longer than necessary while the replacement designated broker is put in place.
Brokerage succession planning is more complicated than it may first appear. Even the smallest brokerage should give advanced thought to succession issues, especially the issues that arise when there is an unexpected death, incapacity, or loss of license by the sponsoring broker.