The Brokerage Industry's Biggest Challenge Today: Portable Agent Equity

Every time I read one of these ranking reports, I think of only one thing and it is this.

Wow, how extremely portable is the equity in the residential real estate brokerage business!

Long before Compass offered signing bonuses and equity in their company, I wondered why brokerage companies were sold without the regard for the agents that created nearly 100% of the revenue that determined the value of the company’s equity.  Further, why when a company was sold was the earn out to the broker hinged on the retention of agents?  As if it were some kind of unknown in the deal or a considerable risk factor for the buyer.  And then I realized that the answers to these questions were that in traditional brokerage it is an unknown and to a buyer of a residential real estate brokerage company it is a risk factor.  A big one.

Thee are important lessons to be leaned in this industry from those we "love to hate.”  So then I thought about what we could learn from companies like Compass.  

And here’s what I noted about the ranking reported in the attached accounting.

In terms of volume nationwide, Compass now ranks #3 in the Nation.  That’s right I said #3.  In no time at all, Compass has leveraged the capital of its investors to amass a huge amount of sales volume and GCI.  Why?  Because it has essentially made an attractive offer to the industry that has caused the equity that was once someone else’s - to now be their’s.

So what?  So plenty.

When I say plenty, I am not referring to the commission dollars lost, I am referring to the equity in the business lost. No vanished. The main ingredient of a broker’s end game, the life blood of their coveted multiples, that kind of “plenty.”  And here’s the craziness of this situation.

It did not need to happen!

Compass invented nothing, it created nothing new, it has made no attempt to improve anything in the consumer real estate experience.  The company has the same types of offices you do, it struggles with the same agent tech adoption that you do and it even “puts the dame for sale signs in the lawns that you do.  Then what makes it different?  What makes them different is that they launched an all-out attack on the “equity generation units” - the agents in your company.

Remember, the only way to dislodge something that is existing is to simply make that thing a better offer.  So what do you need to do now?

I suggest that you enjoin your top agents in building a company that represents something of secure value.  And that means that I am suggesting that you grant those same top agents the opportunity to earn equity in your company.  Create a ICSOP.  An Independent Contractor Stock Option Program.  And in doing so what is the best gift yet?

Unlike Compass, you do not have to pay a signing bonus to agents that already work for you.

What you need to do now and in the years to come.

Now take 20% of your company stock and grant is as options to the top 20 to 25% of your agents.  Without them, and their individual production, you will not have the valuation you could have if they did not leave for another company like Compass.  Grant this equity as options to these agents that vest over a 3 or 4 year period in return for a contract to stay of the same term.  And I would definitely do it now.

Then, when the Compass agent contracts begin to expire in a few years, go after those agents and do the same thing for them with another 10% of your company’s equity.

Agents under contract and who have the potential to benefit from the multiple of a stronger, bigger revenue number will stay and play with you when you are ready to pursue an exit.  Don’t let those agents leave now just because you are clinging to equity that DOES NOT exist without them.  Think about it.  It is contrary to what has been done in the past, but in this day and age it just makes sense.

Have a great day.