Buying a Real Estate Agency: What to Look Out For

Whilst buying a real estate agency involves similar issues to other professional and semi-professional service businesses, there are some very important issues that require particular attention to protect a buyer’s interest and their ability to run the business after settlement.

Franchisor’s Consent

Most real estate agencies are franchises, which (in the very least) require the consent of the franchisor to sell the franchise to the buyer. The contract needs to include a special condition allowing time for this to occur and giving the buyer a right to terminate the contract if franchisor consent has not been provided.

Under some franchise agreements, the franchisor may have an option to purchase the business first. This will have to be explored before the agency is publicly offered for sale.

Due Diligence

Normally most buyers will have ascertained prior to signing the contract whether the business is well situated, has enough parking or ease of access for clients and is close to facilities important to the business; however, the standard REIQ Business Sale Contract only provides a buyer with 15 business days from the date of contract to verify whether the financial accounts of the business are true and correct.  It does not provide the buyer with time to undertake further due diligence such as investigating the business’s goodwill, the licences and accreditations held or required by the business and its employees, or whether the company’s intellectual property is appropriate to the business, transferable or whether the plant and equipment is in good working order.

It is important to note that the goodwill of a real estate agency quite often rests with the reputation of the owner or principal licence holder and key sales agents. Investigation should be undertaken as to whether the owner or principal licence holder or key sales agents have ever been, or are, the subject of a professional or ethical investigation such as for negligence or professional misconduct. Any such charges or investigations could have a detrimental impact on the business’s goodwill, both at the time of sale and in the future.

A special condition to allow a buyer enough time and access to information to ascertain the true value and running requirements of the business is therefore imperative.

Work-in-Progress

Whilst many professional practice fees are charged up-front at each client attendance (such as doctors, dentists and veterinary practices), real estate businesses usually charge a commission with an account only being issued when the work is complete (e.g. settlement of a sale). It is therefore important that a basis for billing and collecting fees for work, which falls over the contract period and after settlement, be inserted into the contract.

In this regard, the standard conditions may not be adequate or may not reflect the parties’ intentions. For example, which party will be entitled to the commission on a sale if a sale contract is signed after the contract of sale for the business? Current listings should be attached to the contract so there is no doubt about the work-in-progress and consideration given to the circumstances in which a buyer will be entitled to the commission on sales.

Licences & Accreditations

In Queensland, a real estate agency must be run under a licence issued under the Property Occupations Act 2014 (Qld). A licence cannot be transferred, so the buyer needs its own: a corporation is eligible only if the person in charge of its real estate agency business is a licensed real estate agent, and the sales staff need their own registration certificates. It is important that these licences and accreditations are in place at settlement (if not before) so that the buyer can begin trading immediately after settlement. It is advisable to make the settlement of the contract subject to obtaining all necessary licences and accreditation by way of a special condition in the contract.

Restraint of Trade

The REIQ contract restrains the seller from running a similar business, dealing with past clients, interfering with customers and poaching staff, but only within a prescribed area for a prescribed period. For a business whose clients are not tied to one area, that may not be enough, and the clause says nothing about the seller using or disclosing confidential information about the business after settlement.

Therefore, it is imperative to protect a buyer’s interest by including a comprehensive restraint of trade clause in the contract that is specific to the needs of the buyer and the professional service business being purchased.

Software

Software can be crucial to the operation of a professional service business. It is therefore important to ascertain whether:

• the software is still available;
• the software is suitable or adequate for the purpose of the business;
• the software is up-to-date and the provider is updating it at least annually (this is especially important with accounting programs updating tax tables);
• the software can be transferred or a licence can be purchased without loss of existing client data; and
• the software will run on the buyer’s current computer equipment (if not purchasing seller’s computer equipment) and will continue to do so if the buyer upgrades its computer hardware in the near future.

These investigations would no doubt be undertaken during the due diligence period. However, it is advisable to make settlement of the contract conditional upon the transfer or purchase of a licence to run the software to ensure that all client information can be accessed from the day of settlement.

Rent Roll

If you are also buying a rent roll as part of the agency, please also see my article on buying a rent roll: Buying a Rent Roll Business: The 3 Critical Things.

Conclusion

As there are many issues unique to buying a real estate business, a buyer or seller should seek the advice of a specialist business lawyer prior to signing a contract to ensure that the contract includes all special conditions necessary to protect their interests. Without these protections in place, a buyer may find they are unable to run their new business properly, or at all, following settlement.