Estate agency is sailing in stormy seas. The corporates, of course, are able to cut costs by trimming branches or making redundancies, but independents that are already running a tight ship don’t have many options.
As Andy Bushell of Hunters says, “It’s almost the perfect storm right now – tenant fee bans, increased compliance regulations, not to mention what’s happening economically – and it’s getting quite tight for some smaller companies to make a profit.”
It used to be about rebranding and marketing discounts, then it was all about tech; now it is regulation and compliance. It’s not that they can’t do it, they don’t have the time or the money. Andy Bushell, Hunter.
The franchises are waiting to pick up the pieces and right now, a surprising number of independents are taking up the offer.
Hunters has been doing conversions for five years now, typically with a one or two branch agency at around the £250,000 turnover level. “We give them a free franchise,” Andy Bushell explains, “We give them a rebrand, and we give them a ‘day one’ cash payment – which a lot of them use as a cash investment into the business.”
Strength and profile
A national brand has huge advantages; TV advertising and digital marketing can be significantly more effective. But it’s not just a rebranding, because the franchisee will get all the software and digital marketing advantages of belonging to the network.
It’s interesting that the reasons for independents joining the franchise have changed.
“It used to be about the rebranding and the discounts branches could get on marketing, then it was about tech and marketing and support and it’s changed over the past 12 months to being all about regulation and compliance,” Andy Bushell says. “When I go to see an independent company, it’s not that they can’t do these things, but that they don’t have the time, or they don’t have the money.”
Winkworth has also been prominent in taking on independents; for instance, in April this year, Think Property in Leigh on Sea rebranded to Winkworth after nine years of independence.
Belvoir, too, has been taking on existing businesses.
EweMove is another agent that has been active in acquiring and rebranding independents. It didn’t even accept former agents as franchisees till 2017; now, established agents represent 50 per cent of the current mix of new recruits, and while two thirds come from a background in one of the corporates (sometimes using their redundancy money to buy in), one third come from (and often with) an independent agency. In 2017 EweMove announced a special offer to experienced agents wanting to take on a franchise, dramatically cutting fees. That kind of creative thinking has helped boost branch numbers, and they are continuing to move ahead.
However, not everyone is interested in making conversions. Ian Wilson of Property Franchise Group says of his core franchises that, “We haven’t fished in that water – we believe that independents looking for a franchise are often not quite top drawer.”
While others might dispute his conclusion, they probably wouldn’t quibble with the assertion that franchising isn’t a panacea for those who are finding life tough. EweMove declines over 50 per cent of applicants, and Hunters rejects over 80 per cent of initial enquiries.
Over recent years, another route to expansion has grown in importance; it’s become increasingly common for franchises to take over independents – not directly, but through one of their franchisees acquiring another business.
For instance, Winkworth Highcliffe bought out Humphreys & Orr, while Northwood franchisees have been active; Northwood Warminster has recently acquired Wilsons of Westbury with 110 managed properties, and the Glasgow franchise picked up 191 properties under management with the acquisition of Domino Estates. Belvoir franchisee Tom Way has picked up no fewer than four acquisitions, most recently Grey & Co in Wembley Park.
Belvoir started an Assisted Acquisition Programme in 2014. CEO Dorian Gonsalves says the aim is “helping franchisees to buy out local competition, rebrand them to Belvoir, and be provided with the ongoing support to successfully integrate the new business into their existing one.”
Belvoir either supports the business’s profitability at an early stage, by reducing its management fees for a period, or we can offer loan facilities with advantageous terms. Dorian Gonsalves, Belvoir.
It is, in part, a response to challenging markets, “developing an innovative new layer to the business model and growth strategy” in order to develop the network. “It also offers a readymade exit for any agent who may find themselves struggling, or simply decides that the time is right for them to sell, or to join a franchise.”
Belvoir’s dedicated in-house acquisition team works to identify the right vendors and buyers and helps with due diligence and negotiation. Deals are structured to that the franchisee should be debt free after five years. “Belvoir either supports the business’s profitability at an early stage,” Dorian explains, “by reducing its management fees for a period, or we can offer loan facilities with advantageous terms.”
An immediate in-principle funding decision helps franchisees to move quickly. The payoff comes in the faster development of Belvoir’s franchise; in 2018, assisted acquisitions added over £6.9m of network revenue, and 62,780 managed properties vs 58,020 in 2017.
Managing the deals
Hunters, too, has a specialist team that can help to identify potential targets – though franchisees can bring their own prospects, too. “They help with negotiation and due diligence and will help franchisees secure the funding; we can also help finance the deal” says Andy Bushell. Instead of having to do a cold start, franchisees can expand into new areas by buying existing agents.
“We’ve been doing this for a number of years, but it’s really kicking off now,” he says, with a current pipeline of eight deals. “We’re already seeing more this year than we have in previous years. When I think we’ll really see it start heating up is 2-3 months after the tenant fee ban hits.”
EweMove has been acquiring managed portfolios, and also has an assisted acquisitions programme. “We encourage franchisees not to do it on their own!” says Nick Neill. The programme comes at nil cost to franchisees, who can benefit from the central team’s expertise in due diligence.
Acquisitions seem likely to become the way of the future. In recent years, trends that first became apparent 7-8 years ago have solidified; no one will buy a business unless it’s profitable, cold starts are much less common.
EweMove Yeovil, for instance, recently acquired 95 managed properties from Orchard Estates in Stoke-sub-Hamdon, Somerset, with support from the Sheep Pen headquarters. This was their second deal; they had previously acquired the portfolio of MPP Lettings & Management in February 2018. It’s difficult to see a hard-pressed independent managing that level of deal making at the same time as running ‘business as usual’.
Other EweMove franchisees are moving up the franchise ladder into other PFG brands. Ian Wilson says EweMove is an attractive first franchise, “because it’s not a High Street proposition, it’s relatively cheap to get started. Their big cost really is for six months they’re not going to earn anything but compared to cold-starting an office it’s vastly cheaper.”
In 2018, three EweMove franchisees started to develop as main brand franchisees. This year, EweMove Cheadle Hume has acquired a Martin & Co franchise in Wilmslow, and that’s a trend that Ian Wilson sees as likely to strengthen.
In fact, acquisitions of one kind of another seem likely to become the way of the future. Over the past few years, he says, trends that first became apparent 7-8 years ago have solidified; no one will buy a resale business unless it’s profitable, and cold starts have become much less common. “We did absolutely no cold starts last year in the core business – in our peak year we did 30.”
The agency market remains a highly fragmented market compared to most others, but it’s rapidly consolidating – franchises play an important part in that consolidation. Belvoir, for example, with over 61,000 properties under management, is now second largest to Countrywide with 110,000. Dorian Gonsalves says it is, “thanks to our Assisted Acquisition Programme that we are now a major consolidator.” The franchise, he believes, can be more agile than corporates. Corporates have had to close branches to cut their costs. “Our lean structure and low overheads make it easier to respond to a changing and challenging market.”
Hunters, too, sees franchise expansion as part of the consolidation of the industry. Andy Bushell believes that Hunters might also be contributing to another trend, the ‘hybridisation’ of agency. “We’ve tested the model in the past, and it works.” Having invested heavily in technology, franchisors are well placed to exploit call centres and customer portals to both lower costs and enhance customer service, while continuing to offer High Street accessibility. However, Andy thinks branches will now be able to cover a much wider geographical location than they did in the past – one per city rather than one per neighbourhood, perhaps.
The ability to develop multiple franchises will certainly appeal to the go-getting independent and that’s not only the case with the big franchise networks; even smaller franchises like Century21 (31 UK branches) are going gangbusters with multiple franchisees like Kamran and Hasan Youmis (Leytonstone and Stratford) and a separate SDL Property Management franchise), Hanane and Christopher Dawson (Putney and Fulham) and Joyce Newman who manages to stretch herself between Gibraltar and Leeds.
The trend to acquisitions by franchisees rather than at franchisor level is particularly interesting as it appears to reflect a disconnect between the stock market’s view of what businesses are worth, and the value to the business owner. Property Franchise Group’s annual report for 2018 states that no acquisitions at corporate level were sufficiently attractive or would have been earnings-enhancing. But at the same time, the company reported 27 acquisitions by franchisees.
Franchises are already sitting at five per cent of the market, according to Ian Wilson. He points out that there are around 20,000 estate and lettings agency businesses in the UK. There are fewer than ten estate agents listed on the stock exchange – out of which, Winkworth, Hunters, Belvoir and PFG are all running franchise models, with 1,000 outlets between them, or five per cent of the total market. “We’re a long way off from being a dominant force, but if you look ahead another decade… we’ll be pushing towards 10 per cent of the market.”
Larger groups can use digital media to reduce cost per lead. We can generate leads through our PPC system with a cheaper cost than we can do it through Zoopla and Rightmove. Ian Wilson, Property Franchise Group.
And it’s likely that the franchises will be the only business sector to gain market share, with weaker independents folding, and the corporates losing traction.
Nick Neill thinks corporates are losing because they are focusing on cost reduction rather than on delivering customer service. Stripping out costs leads to negative feedback and lower referrals, putting more pressure on the business model in a vicious downwards spiral. Meanwhile, EweMove has big plans for the future. “World domination, of course,” Nick quips, before suggesting that he’d be happy growing the franchise from 125 franchises now to perhaps 200 in the next couple of years.
The core business of being an estate agent – yes, most independent agencies are good at that – but they simply can’t compete with the big boys’ marketing budgets. Nick Neill, Ewe Move.
Franchising seems to be working reasonably well in practice. EweMove was profitable in 2018, making £400,000 pre-tax at the corporate level, with sales up 22 per cent and lets rising 26 per cent. Hunters increased pre-tax profit from £1.92m to £2.01m last year, and the annual report shows independent agents who converted to Hunters during the period 2014-17 increased their revenue by 21 per cent.
Franchises also get a boost from the increasing trend to social media. Ian Wilson believes larger groups can use digital media to reduce cost per lead. “We can generate leads through our PPC system cheaper than we can do it through Zoopla or Rightmove,” he says. That’s getting leads for franchisees that an independent wouldn’t even see through the portals – not just for sales, but for instructions too. And apart from Foxtons, he thinks the corporates are “fumbling” with social media and CRM.
Nick Neill concurs. “The core business of being an agent – most independents are good at, but they can’t compete with the big boys’ marketing budgets.”
He points out that you can only build effective demographic targeting systems if you have a high level of web traffic to generate your statistics; something smaller independents just can’t do.
Franchises deliver great marketing for their franchisees. Hunters, too, has focused on digital media. “Branches are able electronically to focus in on consumers at a point where they’re just beginning thinking about moving,” Andy Bushell says, and it also delivers a 60 per cent discount on portal fees. With many branches spending over £1,000 on Rightmove alone, that’s a significant saving.
Independence and support
So, it works at corporate level. But how does franchising work for the individual agent? According to Dylan Mollison-Cousen, Century 21 Cobham and Esher, pretty well. He had worked in the industry for nearly a decade before deciding to open his own business. He could have gone independent, but instead chose franchising (Century 21 with SDL Property Partners) for its support. “If I’d just opened up on my own, I would have been responsible for everything on my own,” he says, “and it’s a steep learning curve becoming a business owner.”
There have been financial benefits. Century 21’s team negotiated the lease, “a good saving on the rental it was advertised at.” Perhaps the greatest benefit, for him though, is that while he has a great deal of independence in how he runs the business, he’s not on his own. Belvoir’s Dorian Gonsalves says, “Working as an independent trader can be quite a lonely business.” Every other agent is a potential competitor, so you have no-one to talk to about the business. Within Century 21’s network, says Dylan, “You’re left to your own devices, but when you want something you can ask and it’s there. I can just call and speak to somebody; that makes a big difference.”