For Brokers: Expansion Planning

FOR BROKERS: Expansion Planning

BY LARRY KNAPP

Time to pump up your business?

Grow or die. That’s the survival-of-the-fittest philosophy many company owners hold. If you’re eager to grow your business, you need to know how to expand smartly, without flaming out. One of your first tasks? Deciding whether to acquire another company and consolidate back-office services or grow organically by opening another office from scratch. The strategy you choose will depend on your objectives and organizational structure.

Generally speaking, if you want to increase revenue quickly, acquisition is your best bet. You can accomplish this in one of two ways:
1. If you’re acquiring an office that’s geographically close to an existing office, and company cultures are similar, you can consolidate.
2. If you’re trying to gain a foothold in an entirely new market, then acquisition without consolidation makes sense.

When speed is less of an issue, organic growth—that is, opening offices from the ground-up—is often the better option. It’s a realistic approach for your company if you’re finding brokers and associates, in an area where you’re not represented, actively seeking to affiliate under your banner.

My company, Alain Pinel Inc., REALTORS®, based in Saratoga, Calif., has gone the organic route. We’ve grown to more than 1,000 sales associates in 20 offices, up from one office in 1990, largely by launching new offices at the rate of at least one per year. In 2003, the company ranked seventh in sales volume and 42nd in transaction sides in the United States, according to REALTOR® Magazine’s Top 100 Companies survey.

What’s more, the company has executed this strategy in Northern California, the heart of where residential real estate giant, NRT Inc. of Parsippany, N.J., has made some of its biggest acquisitions. Full disclosure: I served as senior vice president of NRT for the Western region through the late 1990s and early 2000s.

How has Alain Pinel added an office a year? Part of our appeal has been that the company offers brokers and salespeople an independent alternative in the rapidly consolidating market.

Of course, you can’t grow your company just by being an alternative for salespeople looking to make a change. Your company must be a place associates want to join on its own merits. As a homegrown independent with solid name recognition, Alain Pinel was poised to leverage its brand with associates in new markets.

Finding the right site for a new office is a key consideration. Our most recent launch, in late 2003 in Burlingame, a high-end San Francisco submarket, is a good example of how to do it.

We sited the office adjacent to our office in San Mateo, enabling us to buy advertising for both areas through one media market. The location also capitalized on the fact that our listing signs already dot the neighboring market.

As a result, we found acceptance in the marketplace more quickly than we would have had we not started with some local recognition of our company image and reputation. (For more detail, see “Fast push into Burlingame,”page FB4.)

If you choose your location well, profitability will follow—but generally not right away. The cost to launch an office from scratch is significant. Although expenses will vary by market, you can expect your rent, tenant improvements, and equipment to easily total $250,000 for an office that’s about 5,000 square feet. You also need to factor in your probable operating loss for the first year or two, which might total as much as $250,000 to $500,000. Further, expect it to be at least 120 days before any revenue comes in by way of closed sales.

If planned well, your new office could be profitable within a year. But be financially prepared to wait two or three years.

Acquiring heft
Acquisition is a faster process. By purchasing an established office, you instantly add associates to your organization and, by consolidating functions, you can lower your operating and marketing costs. Assuming you buy a company that has offices in the same area as yours, you could house managers and associates in fewer offices and locate back-office operations at a single site.

In one case, when I was with NRT, we acquired a company with $4 million in annual administrative costs, an amount almost identical to the costs of our existing overhead in the market. By combining the two companies’ operational functions, we were able to reduce overall costs by $3.5 million with no adverse impact to our branches or sales associates. To do that, however, we did have to reduce some of the support staff made redundant through the merger.

We were also able to merge 10 of the acquired company’s offices with our established offices. The hard cost of operating each one of those offices was about $500,000 per year. By merging, we reduced our costs by $5 million annually.

We saved on marketing, too. Where each company might have spent $2 million annually in marketing, the combined operation reduced total spending to $3 million, for $1 million in savings. Thus, the combined cost benefit of the acquisition was $9.5 million, and the merged operations were, I believe, stronger than when we started.

Assimilation is key
For such savings to take root, the mergers must be effective. And that requires the people at the acquired company to adopt the vision of the acquiring company, or at least feel that the merger will ultimately be to their benefit.

If associates and brokers don’t adopt the new culture or otherwise feel hopeful about their future, they’ll look for other affiliation opportunities. How can you help your associates feel they’ll be successful in the merged company?

Be open. Sales associates and brokers at the acquired company didn’t choose to work with you, and there’s little to keep them on board if they feel their needs won’t be met in this new environment. So, you should strive to earn their respect.
Maintain continuity. Keep managers of the acquired company in place if you can. Otherwise the merger can feel like a takeover to associates.
Minimize disruption. Show that everything at the office isn’t going to change overnight and that only necessary changes will be made.

It’s trite but true: People are the key to a successful expansion. Make sure your staff and sales force are ready to go as you piece together your growth strategy.

Knapp, CRB, GRI,is president and COO of Alain Pinel, REALTORS®, in Saratoga, Calif. He can be reached at 408/913-7777.

Before you start

Whatever your expansion strategy, be sure you have a strong operational foundation in place. Otherwise, you’ll lack the means to sustain your operations as demands on them increase. You need:

1. A solid game plan. This is an absolute must. Know why you want to grow. Your goal may be to

Realize greater revenues and profits while keeping your cost and income structure in balance.
Make your company more attractive to future buyers when you’re ready to sell it.
Lower per-unit expenses through the efficiencies of back-office and other fixed costs.

In addition, know how you’ll grow. You can follow a specific strategy, such as organic growth, or you can mix and match growth plans depending on the situation. For instance, you might expand organically to the next town where you already have market recognition but buy a company that has a strong presence in an area where your company isn’t known.

2. Systems. Do you have strong systems for accounting and financial management, human resources, marketing, training, and information technology?

Your IT systems are especially important because the real estate industry is seeing an influx of people from other professions who are trained to work with, and expect to have, state-of-the-art technology. These recruits are your top salespeople of the future. Keep them happy.

3. Financial resources. However you do it, expansion isn’t cheap. Acquisition requires significant upfront resources. And organic growth means outputting significant dollars to get a new office up and running before any revenue starts flowing. As a rule of thumb, hold back on organic expansion until you have a financial cushion that can tide you over for at least the first four months of operation.

4. The right leadership. Your line and branch managers, those directly responsible for the sales- and revenue-generating side of the business, are a critical conduit to the source of your production—your sales professionals. Make sure managers are strong recruiters and provide solid oversight of associates’ transactions.

Fast push into Burlingame

If you plan to grow organically, first decide where you want to expand based on your company strengths. Then cultivate the brokers and sales associates who’ll affiliate with your company in the new market.

Alain Pinel, REALTORS®, in Saratoga, Calif., has developed a reputation as a high-end specialist in Northern California, home to some of the country’s most affluent markets. Thus, it was natural for the company to target Burlingame, Calif., as a key new submarket.

With a current median home price of $1.1 million, according to data from the San Mateo County Association of REALTORS®, the Burlingame area fits our profile. It’s also a short commute to San Francisco and Silicon Valley, both of which are established markets for us, and it’s adjacent to our office in San Mateo, allowing us to take advantage of our name recognition and existing operations.

We were fortunate in our expansion to this area because a team of top professionals, ready to hit the ground running, came to us last year. But that also meant we had to move fast.

To bring the new team on board quickly, we secured a one-year lease on a space, an office building that had been vacated by a defunct high-tech company. The building is poorly suited for long-term operations. It’s off a main road and not large enough for the planned sales force. But it’s a space; we installed phones and equipment, which we’ll take with us to our permanent location.

I initiated plans for the Burlingame office shortly after I came in board in June 2003, and by November we had 32 associates operating out of the temporary quarters. The number quickly grew to 40, and by early this year, we had nailed down a long-term lease arrangement on a 60-desk permanent office, which will be ready for occupancy this summer.

On tap: A bigger presence in San Francisco and offices in Marin County and the Oakland Hills.

—Larry Knapp