Brokerage

Choosing a New Path

Affiliation and Merger Are Two Routes to Consider When Mapping Out Your Future.

After almost 30 years as an independent broker, B.K. Allen, CCIM, GRI, owner of B.K. Allen Real Estate in Reston, Va., decided to affiliate with a national commercial real estate company. “I was doing more administrative work than interacting with clients. I am very much a people person and missed that interaction,” she says of her decision. After shopping around for several months, Allen affiliated with Sperry Van Ness, an investment brokerage firm based in Irvine, Calif., to take advantage of its resources and services.

David A. Huffman, CCIM, based in Oklahoma City, experienced a similar situation. “I found that administrative and personnel issues consumed a great deal of time and prevented me from practicing real estate and achieving my long-term goals,” he says. However, instead of affiliating, Huffman chose to merge his company, Property Resource Group, with another local commercial real estate company, Wiggin Properties, in 1999. He now serves as a partner and senior vice president at Wiggin.

Their situations are not unique: An increasing number of independent owners and agents are realizing the benefits of combining forces with other companies through affiliation or a merger.

Affiliation, sometimes called franchising, generally refers to the practice of paying fees or commissions to use a larger company's name and resources, but without ownership changing hands. A merger, on the other hand, involves the consolidation of two companies into one, with ownership depending on which of the two former companies controls more of the new entity's stock.

If an independent business owner decides to join forces with another company, he first should investigate what choices are available. Commercial real estate professionals who are affiliates or who have undergone a merger explain their reasoning for doing so and offer their advice about the due diligence process.

Affiliation Pros and Cons Commercial real estate professionals who affiliate primarily do so to gain the exposure and resources of a larger company while maintaining their autonomy.

“Affiliation gives you the infrastructure and support of a national company but allows you to maintain your independence,” says Ray Zabielski, CCIM, a senior associate at Sperry Van Ness in Naperville, Ill.

Affiliation also increases a small company's chance of survival in the national marketplace. “With the affiliation, we have moved from being a local player constantly battling for market share to being a national player, operating at times without competition,” says Steven J. Martens, CCIM, CPM, president and chief operating officer of Grubb & Ellis/Martens Commercial Group in Wichita, Kan.

With his affiliation, Jeffrey Ackerman, CCIM, SIOR, now can “get in the door with local-based clients that might otherwise not be receptive to a smaller company but who are impressed with the array of services we can now provide. ... Affiliation also has enabled us to do large corporate and institutional investment work.” Ackerman affiliated with CB Richard Ellis in 1996 and is president of the Pittsburgh office.

If your company is associated with a national brand name, it also is easier to “attract quality commercial real estate professionals to work for you,” says E. Thomas Naseef, CCIM, president of Coldwell Banker Commercial ETN in Las Vegas.

However, “no relationship is perfect or really turns out the way you plan it to. Personal situations change and companies change,” Allen says. Affiliating can enhance your business greatly, but it does have some downsides.

In some cases, “you are limited to using an [affiliate] office in a particular market that may not be the best firm in that market,” Ackerman says, referring to companies' networking requirements. He also believes that many independent firms won't send business to affiliates because they view them as competitors.

Affiliation also may cause a temporary loss of local identity due to the name change and new branding, says Van W. Martin, CCIM, SIOR, CRE, president of CB Richard Ellis/Martin in Lansing, Mich. Martin, whose company previously was named Martin Commercial Properties, experienced some confusion in his marketplace when he affiliated due to the name change. To combat it, he developed an aggressive marketing program to create awareness in the community.

To Merge or Not to Merge Independent business owners also should consider merging with other local companies to gain many of the same benefits as affiliation. “Any type of company would benefit [from a merger] as long as increasing its market presence would allow it to grow and be more profitable,” says Henry W. Hagendorf, CCIM, CPM, executive vice president of Williford Property Group in Houston. He merged his former company, REOC Property Services, with four other local ones in a three-year period.

Like affiliation, the ability to compete with large companies on a national scale is a leading factor behind mergers. The “bigger business calling card we now have has given us more opportunities, better listings, and a bigger presence,” says James P. Keeley, CCIM, SIOR. He merged his company, Classic Real Estate, with Colliers International in 1998. Based in Scottsdale, Ariz., Keeley retains 50 percent ownership of the new company, Colliers Classic.

The ability to offer clients more services is another reason to merge. For example, Hagendorf now can offer his clients investment sales brokerage, tenant representation, project leasing, and property management in addition to the consulting work of his original company.

Yet mergers also have their disadvantages, the most prevalent of which is the reorganization of the new company. Although mergers “add partners and other personnel to manage the affairs of the company and eliminate administrative responsibilities,” independent owners who were once autonomous may find it hard to relinquish their control, Huffman says. “Reliance on a larger organization for decisions and implementation of policy,” was a difficult adjustment, says Robin L. Webb, CCIM, CRB, who merged his company with Arvida Realty Services, which has since combined forces with two Coldwell Banker companies. Webb is now vice president and managing broker of the company's commercial division in Winter Park, Fla.

The potential for backlash from employees and clients also exists, since most mergers require personnel consolidation. Employees may be relegated to new roles or laid off if positions overlap, and bad blood occasionally may exist between the new company and former employees, Hagendorf says. If a particular client's contact person is eliminated from the new company, the client may take its business elsewhere.

Finding the Right Fit If you do decide to affiliate or merge, you should investigate several options to find the company that best fits your needs and expectations.

If you don't already have companies in mind, conduct preliminary research to learn more about potential choices. “I spent a considerable amount of time researching real estate companies prior to joining, evaluating factors such as the volume of business sent, market domination, market coverage, and platform of services,” says Ackerman, who previously was affiliated with Oncor International before joining CB Richard Ellis. “I found out about Oncor by interviewing several of the companies in key markets and getting feedback on which companies were the best,” he says.

After selecting several companies that appeal to your needs, perform extensive due diligence. Strategies for investigating your top choices include the following.

  • Interview company management. Ask them in which direction they plan to take the company and compare their business philosophy with yours, suggests Michael Frye, CCIM, president of Re/Max Realty Group in Fort Myers, Fla.

  • Attend annual meetings. Experiencing how the other individuals in the organization interact will help you get the “flavor of a firm,” Ackerman says. It also will allow you to discover if your personality is compatible with others in the network.

  • Talk to others in the system. “The source I put the most credibility in was the other brokers already a part of the network,” says Richard E. Juge, CCIM, CIPS, principal/broker of Re/Max Commercial Brokers in Metairie, La. “This allowed me to ask more pointed questions ... I find you get a more direct answer from the other franchise or network members.”

  • Talk to people not involved with the organization. Learn how the company is perceived in the outside world and how it treats other brokers in the community, Frye suggests.

Culture Is Key However, no matter how much due diligence you perform, an affiliation or merger never will succeed if personal and business philosophies clash.

Allen found that the cultures of some of the companies she investigated “would be more difficult to exist in,” than Sperry Van Ness, which impressed her with its ethics and integrity.

Zabielski believes in Sperry Van Ness' business policy of open cooperation that allows him to market his clients' properties in the national arena. “If an individual doesn't believe he can increase his business volume through the infrastructure and philosophy of the firm, then he may not find the benefits worthwhile and probably should not join,” he says.

Naseef likes the fact that Coldwell Banker doesn't get involved in his company's operation and allows him to be a part of a national company “without the corporate regimen,” he says.

Colliers International also has a very informal culture, which attracted Keeley. The company's “culture seemed entrepreneurial. ... I liked the people I was dealing with,” he says.

A compatible culture was among the reasons Huffman chose to merge with Wiggin Properties. “Our work ethics and long-term goals were compatible and our skills complemented each other,” he says of himself and Wiggin's owner.

While investigating a company, try to get a feel for its corporate culture. If it doesn't mesh with the way you run your business, you may want to look elsewhere.

Considerations Before Affiliating Long-time affiliates suggest taking several things into consideration while performing due diligence.

Type of Agreement. Learning about the different affiliations available is an important first step in the process.

For starters, the number of brokers in your company may determine the companies with which you can affiliate. For example, Sperry Van Ness only contracts with single agents, according to Alison Jannotta, regional director of the Chicago area. On the other hand, in order to buy a franchise from Coldwell Banker Commercial, an office must have five agents and a dedicated office manager, says Jerry D. Anderson, CCIM, Coldwell's president, based in Parsippany, N.J.

Consider the length of the agreement as well. Do you want a short-term (three to five years) or a long-term affiliation (10 years or more)? Avoid getting locked into a lengthy contract if you aren't completely sure affiliation is the right choice. Short-term contracts allow agents to change affiliations, but the time required to structure and publicize such changes may be costly.

Requirements. Each company has different requirements for becoming an affiliate, which will affect your options. For example, some require a minimum number of years in the industry or total sales to join. Also, expect to undergo personal and financial disclosures and legal checks and to provide business references.

Fees. Consider how much money you will be required to put down at the start of the affiliation and beyond. Does the company require a one-time payment for the length of the contract or is the contract commission-based? Some companies also require monthly or yearly fees for marketing and other expenses, which should be included in your budget.

“Nothing's for free, and affiliation comes at an expense,” Juge cautions. “One needs to consider all aspects of the cost. It really comes down to how much you pay to affiliate, and you have to consider that against how much you can increase your income by virtue of additional deals that you would not have otherwise gotten had you been on your own.”

Service. Ask what support the company will offer after the affiliation is complete. “You have to assess how committed the parent company is to supporting the affiliate program,” Martens says. “Is there sufficient staff to support the program?”

Networking Capabilities. One of affiliation's main selling points is increased networking opportunities through referrals, conferences, and other programs. Consider the size and reach of the company's network. Where are other affiliates located and how much business can you expect to receive from them? Frye was surprised to discover that residential real estate professionals in the Re/Max network referred business to him, as well as his commercial real estate counterparts.

Tools and Resources. Another main benefit of affiliation is the marketing, technological, educational, and other resources that national companies provide. What tools you wish to have available depends on the size of your company and your level of involvement in its day-to-day operations.

For example, most of the national companies offer human resources departments that help recruit new employees or deal with personnel issues. They also have marketing departments that conduct research and prepare presentation materials.

If education is important to you, ask if the companies help pay for designations, conferences, or technology training. Does the company offer its own continuing education courses or seminars?

Also consider a company's technological resources. “Technology leadership is a requirement to compete and it is very hard for smaller companies to keep up,” Allen says. Look for companies that offer technological tools that are “an asset and allow you to accelerate growth and market penetration,” Martin says.

Considerations Before Merging Merging with another company also involves research and serious thought. Those who have undergone mergers suggest considering the following points.

Finances. Mergers should result in a company with a stronger financial platform. Investigate a company's finances to ensure the survival of the new entity. Webb chose Arvida because of its “tremendous financial capability,” and “the certainty of survival was of significant importance,” he says. However, sign a confidentiality agreement before exchanging financial information, Hagendorf advises.

Services. Find a firm that both complements and enhances your company's services. Huffman's former company specialized in the management, leasing, and sales of office properties, and he “considered it very important to merge with a company that was multidisciplined, offering management, development, brokerage, and other corporate services with investment opportunities.”

Client Base. Take both your own clients and the other company's clients into consideration. Will your clients be happy with the structure and management of the new company? Does the other company have a deep client base into which you can expand your business?

Personnel. Compare the two companies' structure and management. Will many positions overlap and need to be eliminated? Does the other company have departments such as human resources that your company lacks? “The greatest benefit has been ... economies of scale achieved in administration. This has allowed me to devote most of my time to doing deals and less to administrative/personnel matters,” Huffman says. Work out any personnel issues, including severance, with the other company's management before signing any contracts, Hagendorf advises.

Also consider personality issues. Will you and your employees be compatible with the new management and staff?

Reputation. Be aware of the company's reputation in the market as well as your clients' perceptions of it. Hagendorf's company experienced “an initial weakening of company image ... because of reputation issues that were not identified in the initial due diligence,” he says. You may lose clients due to “bitterness over a corporate name,” Webb cautions.

It's Your Choice As you conduct due diligence, always remember that the final decision is yours. Some commercial real estate professionals ultimately have chosen to remain independent or have taken a different route. In today's ever-expanding commercial real estate world, affiliation or a merger are just two of the excellent ways to stay competitive and grow your business. 

Gretchen Barta

Gretchen Barta is associate editor of Commercial Investment Real Estate.

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