How to win the succession game

by Timothy Inklebarger

The real estate industry has come a long way from the days when a retiring agent kept the business, and often its namesake, alive by handing the reins to their children or a trusted colleague. But with the retirement of the baby boomer generation, the handoffs by agents who have spent decades in the business have become more common and increasingly complex. Rather than selling a book of business for a fixed amount, they’re more often forging relationships with agents who provide referral revenue for years — in some cases indefinitely — as part of the succession plan.

‘The Golden Handoff’

There are a number of resources through Realtor associations and brokerages on how to develop a succession plan, but there is no one-size-fits-all solution, and specialists in the field are few and far between. Nick Krautter, author of “The Golden Handoff: How to Buy and Sell a Real Estate Agent’s Business” and CEO of Portland, Oregon-based City & State Real Estate, bought his first book of business from an outgoing agent in 2010 and over the next few years, added several more to his roster. “When I started doing this, I assumed everyone was doing it,” he said, noting that he was surprised to learn how little guidance there was available for succession planning.

Over time, Krautter began developing best practices for succeeding outgoing agents and eventually began advising his colleagues on the process. As his knowledge grew, Krautter began work on his book and started giving lectures to associations and groups across the country. He describes three typical kinds of outgoing agents: those who are totally finished and want to do as little as possible; those who no longer work with clients but act as a consultant to the successor; and those who maintain the business and still actively generate leads but delegate most of the work to others.

Krautter says the outdated strategy of paying a flat fee for an agent’s database of clients is a risky proposition that might not necessarily increase the bottom line. Instead, he advises the outgoing and incoming agents to establish a referral fee structure, where the successor pays a portion of their commissions for a set period of three years. He suggests that in the first year, the split for transactions with adopted clients be 70/30. The percentage goes 10 percentage points in the successor’s favor for the next two years, and then the book of business transfers completely to the successor.

“Of course, you can customize the number of years you take in your Golden Handoff and the percentage splits according to what you two decide is fair,” Krautter states in his book. But succession isn’t just about passing along the Rolodex and moving on. He suggests developing a marketing strategy that heavily involves the outgoing agent so that clients make the connection. It’s also critical to have your book of clients in order so the successor has a clear road map for how to make contact.

Avoiding the pitfalls

That’s a lesson one longtime agent learned the hard way when she retired and sold her business to a colleague. The outgoing agent, who spoke under the condition of anonymity, had been in the business for decades when she decided to pass along the business. She said that she had amassed hundreds of clients throughout the course of her career, but she failed to consolidate their information into a single database. This created a major hurdle for the successor and resulted in the permanent loss of many of her clients, she acknowledged. “When I started out in real estate, there wasn’t a lot of technology involved as a Realtor,” she said. “I adopted technology over the years and went from one CRM to the next. All my clients were in the databases, but not in a way where anybody (but me) could find them easily.”

Krautter says CRMs aren’t the only game in town when it comes to working with an outgoing agent’s clients. He suggests collecting names and information from their cell phone address books, social media accounts, mailing lists and email contacts. Client aggregators like Nimble and Contactually can be useful for consolidating the data, Krautter notes. The successor and outgoing agent should also spend time working through these databases together so that they can share notes on clients and better define the importance of each.

The longtime agent whose succession went poorly said she also misjudged the successor, assuming that they would be able to connect with clients in the same way she had. “I found out they were not like me at all,” she said. “I think some of the clients were disappointed because they didn’t feel like they were getting the same level of communication.” That’s a key component to successfully passing along a business, according to Jesse D. Moore, owner of Pickett Street Properties in suburban Seattle, who was a successor to a number of businesses between 2010 and 2015. “Real estate is a relationship business … and there needs to be a transfer of power and expectations, and when that happens, you want to make sure it’s a cultural match,” he said.

The uncertainty about whether a successor will click with their new clients makes it difficult to place a value on a book of business, he explained. “In order to do this well, you need to care about their leads as much as they do,” Moore said. “You are inheriting someone’s gold mine; you have to mine for gold. You have to be accountable to following up with each and every one of those leads effectively.”

Get it in writing

Chris Read, CEO of CR Strategies in Naperville, Illinois, who works as a real estate consultant and instructor, gives clients a succession agreement guideline that details the commission splits; assets that will be included in the transfer; and the duties of the successor, such as marketing and disclosure of transactions. Accountability and clearly stating expectations between both parties are crucial, she said.

Read and Krautter both stress the importance of establishing a strong marketing strategy when passing along a book of business. “Putting out marketing together with both (the outgoing agent’s and the successor’s) names on it reinforces the relationship,” according to Read. In Krautter’s book, he suggests including a marketing plan committing the successor to communicate all new business to the outgoing agent and to pay for all marketing for succession clients. “It ensures you don’t get too busy and start dropping the ball with adopted clients. Specifically, it means you will market to the clients for the term of the agreement and that you are committed to adding staff and possible other expenses to serve the adopted clients — all of them,” Krautter notes.

Moore said he prefers agreements that are as simple as possible, particularly as it concerns commissions, but he added that if the business being transferred is big enough, agents may consider a formal contract with some legal oversight. Krautter also suggests considering including a clause in the contract that gives the outgoing agent the chance to return to the business in the future, if they have a change of heart about retirement or decide the successor is not meeting their obligations in the contract. Such a clause can create an incentive for the successor to uphold their marketing and outreach commitments, he explains.

Succession is changing

It’s a changing world for succession planning, according to the experts. And not only are brokerages now courting retiring agents in an effort to adopt their books of business, at least one brokerage, eXp Realty, has succession planning built into the system, according to Collette McDonald, of Collette McDonald & Associates, eXp brokerage. McDonald joined eXp in 2019 after more than two decades working in Atlanta real estate — her main goal was to transition out of real estate while maintaining an ongoing stream of revenue from her book of clients.

“My goal has always been to have a business that I could create and expand on as my life changes,” she said. She was attracted to eXp because of the company’s structure that encourages agents to recruit other agents. The company in turn sends a portion of its side of the commission split back to the founding agent. This means an ongoing revenue stream, even if the original agent leaves the industry entirely. She also noted that eXp is an international company, so agents can recruit from anywhere. “Everyone prospers at this company by paying it forward,” McDonald explained. “I call it a perpetual referral share.”

McDonald said the business will continue to grow even after she stops selling, because she will continue to operate as a guide and coach for her network of agents. She’s brought on 52 agents so far, about half of which are outside of Atlanta in places like Pennsylvania, Arkansas and even as far away as Alaska.

The eXp model is just one of the many ways agents are finding creative solutions to structuring a succession plan. “It has become more complex for a lot of different reasons,” according to Moore, who said that while office fees, commission splits and other factors motivated agents in the past, these days they’re looking more closely at stock options, vesting and buybacks. He believes the industry is just getting started in its development of succession models. “I can see this happening more and more often,” Moore noted. “Real estate moves quickly, technology moves faster and what I did 17 years ago isn’t as effective now. I see a lot of agents saying, ‘This is moving faster than I am, and I don’t want to move at this speed, and they’re partnering with someone younger and faster.’”

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