Over the past many months, I have had numerous conversations with major brokers related to the topic of “what about Compass.” While these brokers entered the conversation with me wanting to know how I thought they could defeat the mighty Compass machine, they ironically left the conversation doing something they had not expected. They learned more about how to look introspectively by dissecting and analyzing what they hated most about Compass.
Let me explain.
Compass has essentially funded the largest roll-up of a single brand in the history of the industry. By offering generous signing bonuses, leasing offices that resemble the Taj Mahal, securing agent contracts and sharing the company’s equity they have scooped up enough value to do some very interesting things now. And how has the traditional brokerage industry responded?
"That’s simply bull and Compass will never amount to anything.” And oh yes this - just a whole lot of extreme shock.
But there is more to what Compass is doing than just that. Lots more. So let’s take the time to dial back and better understand how did they did all of this? Compass secured $1.4 billion in capital to lure enough revenue out of traditional brokerage companies to ramp up a current $4 billion valuation so that they can one day soon attempt a $10 billion something IPO.
Now any way you do that math, this strategy works. Or at least Compass and its investors hope that it does. That’s what they have done and, more importantly, here’s a note of what they have not done.
They have not rolled back the ultra high commission splits, they have not delivered any truly unique technologies, they are aligned nationwide under a single cool brand and - most critically - they have shockingly NOT changed anything as it relates to any of the traditional brokerage processes used by our industry to assist consumers in buying and selling properties.
So why is this?
This is because they have a different end goal than most all of the brokers in the industry today. Their big objective is to score is on Wall Street and NOT on Main Street.
Now don't get me wrong. There are many, many ways for a company to realize its value by executing an exit strategy. But no matter what the exit strategy may be, in the residential real estate brokerage business, it all boils down to a multiple of top line and bottomline revenue. And that revenue is generated by agents, not the company. It is that complicated and it is precisely that simple.
So here’s what Compass realized about you and your company. You have no direct relationship with the consumer. Further, the agent controls that relationship and they "rent it to you transactionally” in return for a very high commission split. At least that is until something better happens to come along for the agents. And when that happens, the agents simply bolt and usually without even so much as a thank you.
So Compass decided to put that “something better” on steroids.
They needed to dislodge "agent value" from your company by moving your agents from your P&L to their P&L and balance sheet. So they offered them a big signing bonus that you could not afford to match. Crafty. Then they assured that the agent would stay for many years by insisting that they pay back that same bonus if they left before the end of their “contract”. Smart. And they did not mess with the high agent commission splits. Expected. And finally, they enjoined the agents in the event they had planned all along, namely their anticipated IPO. And that was simply brilliant.
And there my friends is the key. They provided a means for the agent to share in the result of a multiple of all the agent’s revenue that would be realized on the day the company executed an exit.
Why is this so brilliant? Because they knew if they could generate enough capital to cause the “leakage” of agents from your company and take their related revenue from your company they could realize the added value of the assurance of little to no “breakage” after the company went public or sold. And it is working big time.
The agent leakage for companies in the industry has accelerated with the award of signing bonuses and equity and the preventative medicine for breakage was secured by a contract with the agent to stay. Boom.
And Compass knew this one other thing. They knew that you would never do what they did. They bet that you would never share the equity of your company with the agents. So they used that knowledge funded by the $1.4 billion to raid the traditional brokerage industry and to build one of the biggest brokerage companies in the Country - in record time.
So what does that tell you and what happens now?
Unfortunately they were right, and I was wrong. I had assumed that by doing this they would have awakened the brokerage industry to a new reality, but that has not happened And two, I had expected the industry to counter this “attack” in order to prevent the “leakage.” But shockingly, that has not occurred either.
I get that as a broker you want to maximize the value of years and years of hard work on that day when you exit the business, but I am equally shocked that the reality of what has just been done by Compass has not resulted in a counter attack from the installed brokerage industry. Each day I am amazed that brokers still feel that they do NOT need to share the equity in your company with the those agents that produce the great majority of it.
So here’s an exercise I suggest that might help to change your thinking.
Take your company and determine how many agents contributed to at least 80% of your revenue thus far in 2019. Then take that number of agents and multiply that by $100,000. That my friends is the cost for a signing bonus you would need to pay in order to recruit the agents that you already have today that are generating the revenue that will one day determine the majority of the valuation of your company! Truth.
No thanks to Compass, the recruiting game in this industry has been changed forever and from now forward a signing bonus and equity will be required to recruit any agents who is capable of adding significantly to your company’s valuation multiple. And that is a fact.
And you know what? The biggest advantage you have today is that there is no need to pay a signing bonus to those agents that are on your team today. But if they leave, getting them back is going to be a whole different game. Make sense? Please say yes.
So here’s my suggestion for you. If you have not already figured this out, today is the first day of the rest of a more secure future for your company. You and your company really need to implement what I call an ICSOP. An independent contractor stock option plan. You need to permit your top agents to vest stock options in your company so that they stay and that they help you build the value of your company as an integral part of its future success.
You can do this and you need to do this while you still have control of the destiny of your company.
If the assured Compass IPO does reach the market valuation of $5 to 10 billion, be prepared. Be prepared for, oh another 5 to 10 companies, just like Compass to emerge and go after the traditional brokerage industry’s equity. It is inevitable.
Take a big breathe now and think about this final statement I have long said to my clients that "the biggest gamble any company makes is in estimating the speed of change.” In the case of these brokerage industry dynamics there is no estimate needed. Because when it all boils down to it this change is here - it is now - and it here to stay.
Have a great day!