Why You Should Think About Succession Planning Earlier Than You Think
August 30, 2023
Last week I asked a lot of our real estate leaders a question about their succession plans, and many of you were kind enough to give your responses! Thank you for that. The question was: when it’s time to turn over the reins of your business, would you rather step back but keep a hand in, or would you rather retire fully and wave at your real estate business as you see it recede in your rearview mirror?
The answer was unanimous. 100% of respondents said that they would rather keep their foot in the door and still work. I guess we’re really a bunch of workaholics at heart, aren’t we?
Still, the very unanimousness of the response surprised me a little. I’ve helped orchestrate many real estate business transitions – or successions, as we call them in the business. Of all the transitions that we’ve worked on, the answer to the same question was more evenly divided. I would have to say at least half of my succession clients were ready to get out of the business entirely – get out, see you later, wave goodbye and everything.
So perhaps there’s a reason why 100% of respondents said that they’d rather keep working: all of my respondents aren’t nearly ready to retire yet, and that’s okay. Perhaps they’re not even ready to explore the idea of succession yet at all. At best, they’re in the earliest stages of planning for it.
The truth about succession planning is this: it doesn’t actually matter where you are in your real estate business now. Whether you’re ready to start thinking about it or not, beginning a plan to turn over all or just part of your real estate business should be a part of your thought process anyway.
Let me explain why you should think about succession planning earlier than you think:
Transitions are an incredibly slow, painstaking process. On average, I’ve found that turning over a real estate brokerage or team can take anywhere between five and eight years of planning and execution. Talk about having a five- and ten-year plan for where you hope to be!
It’s incredibly common for the team leaders and brokers to come to me asking for an evaluation of their business. This is somewhat like an appraisal, and it’s a very useful step. However, the problem is that when they come to ask for this evaluation, typically they are in discussions with someone, and they have no idea how to handle the actual process of the transition itself.
In order to help those who are ready to make a change, I ask a lot of questions and always review the profit and loss statements (P&Ls) for the past three years. Most real estate businesses that I review are nowhere near ready for a liquidity event – a sale.
Here are the problems I usually see: Their books are usually far from normalized; this is a relatively easy thing to fix but it can be complicated. The sales production often comes mostly from one individual. Marketing is nowhere near where it should be, indicating excessive past client business that can be unstable on a sale. Company cultures may be weak and need strengthening. And sometimes the business is fluctuating. They don’t have a stable gross commission income (GCI) or a low EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Long story short, if you think you might be considering a sale, merger, or share transfer in the next 10 years, then now may really be the time to start planning. Remember what I said about it taking at least five to eight years!
So many issues that impact a smooth and profitable exit – or even semi-exit, can be fixed with a little time and the right advice and execution. If you want, schedule a complimentary call with me to talk about your plans. This is my area of expertise and I’m sure I can offer sage advice!