Building a successful commercial brokerage and management company
My wife and I sold our company Bluestone and Hockley Real Estate Services in November of 2021 to a local competitor. We were happy with the success of our company, but we made mistakes, and hope you learn from them. This is our story.
Tough beginnings
My wife and I bought our small property management/real estate brokerage company over 35 years ago. We bought it from her father and mother who had been active in the business for over 15 years. I was a young 27-year-old who was ready to climb tall mountains. We agreed to pay them a retirement in trade for them selling us the company. (We were young and did not have any money).
Little did I know that the company was hemorrhaging cash. We purchased the company in 1987 when interest rates ranged from 10–15% and brokerage income was almost nonexistent, and we needed the revenues from property management and property maintenance to keep the doors open. At that time, our company only managed residential properties, and had only a few commercial accounts.
We tried increasing the management fees for a major long-term client who was paying a below-market rate. They promptly quit and we lost 50% of our business. It was bad news, but it was a money-losing account and essentially cleared the decks I decided we needed to diversify our income stream.
Growing our company
Commercial buildings were in trouble and there was a lot of REO. We identified the opportunity to build a commercial department to manage properties for banks and insurance companies. It created a base for us to sell those buildings and learn the fundamentals of commercial leasing. So, we grew. We developed budgets, implemented KPIs, joined best practices groups, hired consultants, and learned as much as we could.
But our margins were horrible. Making money was tough. Wages were increasing and our income was not. Some of our employees required more skill and experience in order to well-represent our company. To help navigate these challenges, I worked on obtaining my CPM (Certified Property Manager) designation. Then, we became an Accredited Management Organization and implemented these best practices.
Big mistake
Eager to continue growing, we hired more brokers and bought a 6000-sq ft building to expand into. Then my father-in-law, our controller, mentioned that the brokers were making more money than we were, and we needed to reduce their commissions. Well, that went over like a lead balloon. We lost all of our key brokers.
One step forward, two steps back. It took seven years to rebuild what we lost on one fell swoop. Instead of reducing commissions, we should have increased our minimum leasing fees, because our brokers were doing many, many small deals.
Building a successful business
From these missteps, we learned what not to do. We took the following steps to grow successfully:
We improved our hiring processes and budgeted more for wages, benefits, and vacation time.
We adapted to remote work early to keep critical employees.
We hired consultants who helped us with our planning model.
The consultants also helped us refine our compensation model for our key managers. These key managers had bottom line responsibility and were compensated for growth, net return, and cooperation within the management team.
Monthly financial statements were produced on time and shared with the managers.
Operational leaders (ex. the Controller, Executive VP) were also paid bonuses on the net return of the company. These leaders were efficiency experts constantly looking for ways to save money.
We gave all employees an annual bonus that was scaled to company success.
We budgeted extensive training and certifications for our staff. We even brought in English teachers and industry experts to teach all of our staff how to complete their jobs with improved technical skills.
As we grew, we hired marketing professionals to improve our visibility on the internet and in the marketplace.
We ensured that we had the most current technology for our brokers and employees to use.
Most importantly, we shifted our operating model to reach key benchmarks that a potential buyer might be looking at:
We hired a business valuation expert to help us prepare an annual company valuation.
Over a five-year term, we doubled the return of our company and thereby doubled its valuation.
Consultants can be helpful
Eight years before we sold the company, we met with a consultant who really hurt my feelings. He told me I was not operating the company properly. Candidly, I thought I knew it all.
He pointed out (after meeting our staff and reviewing our financials) that we were not making enough money. He framed it this way for me: “If you took a bag of money and invested it, how much return would you need to justify all of the time you are investing in your company? 5%? 10%? 15%? To get there, what do we need to do?”
We didn’t need to grow the company — we just needed to be more efficient.
Our options included:
Charging more
Resetting our pay structure
Resetting our staffing structure
Increasing efficiency
Increasing business
Not having the CEO try to do everything
Along our path to success, we hired three or four consultants who delivered accurate market data and helped us frame a direction. We kept these assignments well defined and set goals we wanted to reach. Our budget for consultants was not huge, but enough to help us solve our problems and educate us. (A membership in Vistage is an example of a 2 year commitment we made that helped us improve our operating standards and patterns).
Some suggested steps to facilitate an exit of the CEO
Build annual net income to 10% of gross revenue.
Build operating reserves to three months payroll. Replace used emergency funds before bonuses are paid.
Assemble a team of key people who are interested in leading the company. Then, identify the next generation leader for the company.
Create a plan that allows for the transition of the company to the next generation.
Tips to grow and improve your brokerage team
Leaders need to be skilled to mentor their team. They need to be incentivized and compensated when they reach goals set by management. They can be incentivized both on gross income and net income, or only net income. You will get different results.
Know where you are going and set a realistic time frame to get there. Share that vision with your brokers so they can help pull the weight.
Recruiting takes time. Onboarding systems need to be in place. It helps to have successful brokers who can help mentor new brokers.
Focus on every advisor having at least 10 listings or generate $___________ gross per year. Lease and sale combined.
Ask all brokers to get on the CCIM track.
Not all people are good listing agents. Maybe some will focus on buyer representation.
Construction, property management, and financial analysis skills can help you be successful.
Sales training helps.
Successful brokers are:
Developed over time.
Tenacious. They don’t give up.
Not afraid.
Supported and not bogged down by paperwork.
Goal-oriented and have the drive to reach them.
It’s the economy that may stall your success
You need to understand economic cycles. You are not operating in a vacuum. Reading the tea leaves (i.e. the future) is critical. The past does not always resemble the future. Having a diversified flow of business as well as financial reserves to manage through a year or two can help you succeed into the future.
Valuation
Companies are valued using a few different approaches:
A capitalized earnings method: 3.5–6 times earnings.
Gross revenue method: Reviewing financial data and looking at profit. Remember, a buyer will be paying you back from your revenue stream. So there needs to be a revenue stream.
Market data/comparable approach: A valuation company can give you the differential rates for brokerage/management companies.
As an owner of a company, you need to be reasonable. If you think you own gold, your net profit will show you if you are correct. Gross profit means nothing in my mind when it comes to valuation.
Common questions
When is the right time to sell? When you at the top of your game and make more money than you ever thought possible. But we can’t forget that timing is important and you have the opportunity to plan 10 years out. Your health makes a difference. When you are sick and not feeling well, it’s very hard to meet your targets.
Who will buy my company? Usually, a local or regional company that wants to grow its footprint.
Who will sell my company? A competent business broker.
Can I accelerate my growth by buying from other companies? Yes, you can. We sold accounts to streamline our business and bought businesses to help us grow faster.
Conclusion
Your eye on the exit will force you to manage your company more effectively. This overview is the tip of the iceberg of the many things you need to consider as you build your company to sell.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
