Riders on the storm

In 2018, Connells Group shut down Hatched, Purplebricks’ shares slid after trouble Down Under and eMoov went into administration.

And that’s just the big boys, but just because the online agents haven’t turned out to be the disruptors they planned to be doesn’t mean they haven’t affected the market at all with their intense price competition. Throw in the tough market and many independents are now struggling to survive, as evidenced by Local Data Company (LDC) research released in November, which showed that estate agents were the second fastest declining retail category in the first half of last year, with 211 closures.

If you are an agent that is even reasonably good, reasonably effective, your ability to earn a lot of money is amazing.

LDC said the market was facing a “perfect storm of lower transactions and lower commissions, both of which hit agents’ bottom lines”.

DEAL WITH IT

One way many agents are now dealing with this “perfect storm” is, ironically, by taking a leaf out of the online agents’ books and getting rid of – or reducing – their physical presence, many doing so with the help of a franchise. In some cases they are doing so with a franchise that sells itself on being anti-premises, for example, Keller Williams, but more traditional franchises such as Hunters and Belvoir are also playing a role by helping franchisees acquire businesses to consolidate their premises – and cut costs.

CONSOLIDATION TREND

At the beginning of last year, Belvoir predicted a wave of consolidation during 2018 and speaking in early December, CEO Dorian Gonsalves said this had very much proved the case. “Of the 25 acquisitions we’ve done so far this year, all 25 have been where a franchisee has bought out one of their competitors and closed their office.”

Of the 25 acquisitions we’ve done so far this year, all 25 have been where a franchisee has bought out one of their competitors and closed their office. Dorian Gonsalves CEO Belvoir

He says the number and value of last year’s acquisitions was about double the year before, with combined turnover of £6.1m for the 25 businesses, compared with £3.3m for businesses acquired in 2017.

“Our acquisition model is slightly different, we tend to buy an independent business or help a franchisee to buy an independent business. The franchisee then closes the business and ports across the bits of the business that they want. Typically, they wouldn’t need two sets of premises, they wouldn’t need four vehicles and they may not need all of the staff across both businesses, so there will be cost savings. And then it is very likely that the franchisee is paying less for goods and services because they benefit from the wider network, and again that is a cost saving, so it can be very profitable for franchisees to buy other businesses.”

Yusuf Majid, who has owned Belvoir’s Derby West franchise for four years, is among those the franchise has helped to acquire another business. “The starting point was quite scary but because Belvoir was there and came in and talked to the seller and also gave me finance for it, everything was very smooth.”

Although Majid kept the branch of Elder & Twells in Heaton he purchased open – as it was 10 miles from Derby, he is actively looking for more acquisitions closer to home. “If I find something else that is within one mile or two miles from where I’m based, then it doesn’t make sense to have two premises, I could save more on costs.”

Majid says one of his motivations for growing is the tenant fee ban. “I am going to beat the fee ban by buying people out. We have to face the fact that the tenant fee ban is coming, so no matter what you are going to lose on your bottom line. You can cry about it or do something about it. My thing is that if I grow more I could cover whatever I was going to lose.”

RED TAPE RUSH

While the fee ban is undoubtedly on everyone’s mind at the moment, lettings regulation, and indeed regulation across all areas of the business, is another factor leading not only to consolidation but interest in franchising generally, says Andy Bushell, Franchise Director at Hunters. “Businesses that are joining us join for many reasons, they join for marketing and technology and training and that’s always been the case, but I think now regulation compliance is a much bigger thing.”

Businesses join us for many reasons, training, marketing and training etc., but I think that now, regulation compliance is a much bigger reason . Andy Bushell Hunters

This was one of the factors that led Mat Barnes, Director at Hunters Chesterfield, to convert to the franchise 18 months ago. “Personally, from a director’s point of view, when running your own business it is always hard being the one ultimately responsible for keeping up with stuff that is always changing,” he says. “From the lettings and sales side we’ve had GDPR, we’ve had the change in money laundering in the last year and Hunters had their team look into it and keep the franchisees up to speed and give them any tools they needed to overcome the changes.”

Such are the number of changes that Bushell says the type of potential franchisee is changing. “One thing we have noticed recently is that a lot of larger businesses have been contacting us. We used to get a lot of businesses with maybe one or two branches but now we are seeing more with multiple branches. It doesn’t surprise me as there is so much going on in the market – we’ve never had a backdrop like this before, with the economic uncertainty and the regulation changes.”

CONSOLIDATION

Bushell also notes a rise in consolidation, for the same reasons. “We’ve done a number of portfolio purchases this year and will continue to do that. We encourage the franchise network and our group-owned offices as well to purchase portfolios and we also have a financial assistance programme in place and help with due diligence. We’ve seen a number of branches consolidating their own branches, for instance, where you’ve got a business that has got two small branches, they are consolidating into one large hub. I think we will see a bit more of that going into 2019 as well. We still fundamentally believe in high street branches, but I think a branch can reach much further now.”

But while Bushell may still be a firm believer in the high street, some of the other franchises catching independents’ eyes are not.

“Having expensive high street premises serves no purpose really in terms of finding and winning business in your local marketplace,” says Nick Neill, Managing Director at EweMove. “Our franchisee in Basingstoke has the biggest market share in the town, he has about 20 per cent, he doesn’t have a shopfront and he’s reached that position in about two years.”

There are other advantages to EweMove’s franchise model, says Glen Stuart, whose lettings agency in Redruth, Cornwall has just joined EweMove with a plan to expand into sales. Stuart currently has a shopfront but is planning to get rid of it.

He says the fixed fee nature of EweMove’s model was one of the main attractions. “I wanted to go into sales, I’ve been looking to do it for ages but to raise the capital to do it yourself and then to do it as a newbie is difficult. I also considered Hunters but with Ewe Move they don’t have a share of your business. With Hunters they would take a chunk of your turnover.”

Ewe Move charges an upfront fee of £2,000 to join and £1,000 per month thereafter rather than taking a percentage of turnover as franchises such as Hunters and Belvoir do.

FINE FIGURES

An even lower initial outlay is on offer at Keller Williams, although commission fees are actually higher than the other franchises – at least up to a certain point — so it’s perhaps more likely to appeal to an agent looking to move out of employment rather than an independent looking to join a franchise.

Agents can join the company simply by paying a monthly fee (ranging from £125 to £225, plus VAT, depending on location) and the company can also help with business finance for those without funds to tide them over while they build their business. However, once agents are earning, Keller Williams takes 10 per cent in commission, and agents must also pay 30% of the remaining funds to the market centre – a regional hub with desk space agents can use – they are attached to, subject to a cap of £20,000 per year outside London and £60,000 in London.

Ben Taylor, Managing Director at Keller Williams, points out this compares very favourably to employment for agents. “If you are an agent that is even reasonably good, reasonably effective, your ability to earn a lot of money is amazing. We did a model on an agent that earned £16,000 basic salary and 10 per cent commission in a traditional model and we worked it on them doing £150,000 worth of income, a modest amount. On that in a traditional model they would earn around about £31,000. On like for like, here they will earn £106,000.”

There are also options to own a market centre or convert an independent high street agent to ‘powered by Keller Williams’.

While some of the newer franchising models in the market may not appeal to more traditional independents, the fact there are now more ways to become a franchisee means the option is open to more and more agents and, indeed, employees. And while the online-only agents look to be a dying breed, one of their central themes of cost-cutting on premises looks set to stick around.