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I’ve always said, one of the great rivalries of real estate is the debate between selling and non-selling principal businesses.
Many advisers to the industry preach the worth of principals not selling and focusing on ‘working on the business not in the business’. This is a good thing but it is not the be all and end all.
In fact, if you want to maximise your profit without taking on the risk of a big team, for many, it is the way to go and I have seen some awesome results for such businesses.
Every year, we analyse the results of what we consider our ‘benchmark’ clients to identify the opportunities for improvement in real estate businesses of all shapes and sizes.
This is what we found:
|Selling Principal Businesses||v||Non-Selling Principal Businesses||Insights|
|Average Total Income||$4.04m||v||$4.98m||So non-selling principal businesses tend to be bigger|
|Average Gross Sales Income||$3.32||v||$4.04m||Implying less reliance on PM in a selling principal business|
|Average Profit [before owners remuneration]||$1.01m||v||$612k||Selling principals may be smaller in size but derive bigger $ profits on average|
|Profit % [before owners remuneration]||25%||v||12%||A big driver of the difference in profitability is a result of Principals leaving their commission in the business|
|Advertising, marketing and promotions||$26k less average spend||Selling principal businesses are more reliant on the profile of the principal|
|Rent Roll Size||37% smaller||Non-selling principal businesses just have-to-have bigger rent rolls|
|Total Expenses||54% more||Bigger machines attract greater risk|
These facts don't make either option right or wrong but appreciating the facts enables you to structure your business accordingly and understand how to better pull the levers that drive profitability in your business.
Don't forget: sales are vanity, profit is sanity, and cash is reality.
One of the things I find intriguing about the 2 different business models is the relationship between the principals of an office and their sales team.
In a selling principal environment, often you hear moaning about the principal being in competition with the team. This can also be a massive advantage. When the selling principal has a high profile in the market, the best agents in the team are piggy-backing on that profile to get their own traction in the market. The team also benefit massively from the example the selling principal sets and the quality of the mentoring and experience you can lean on.
Don't forget if you are working with a high performing selling principal, it means there are a lot more signboards around the place with your office on them!
The culture of the business and the values of the principal plays a massive role in how well a selling principal is received and how the team looks at that principal.
In a non-selling principal business, the team tends to be almost 100% of the attention of the principal.
The rent rolls are bigger and so the team is also probably fed a lot more from the rent roll [perhaps meaning they do not have to work as hard to get their listings] but it doesn’t have to be that way.
If your culture is one where everyone is treated as a business it doesn’t matter whether the principal is selling or not selling.
One of the biggest downsides I see to a selling principal business is when the principal themselves lose their mojo. The real estate game is a fast-paced, dog-eat-dog world. It is not uncommon for the principal to sooner or later lose their mojo.
Often the result goes 2 ways:
1. They break through by changing their role and transitioning to a non-selling principal
2. They break through by delegating some of their current roles [like PM and administrative duties] to others in the office so they can still sell
3. They shut up shop.
Selling principals absolutely must get the balance right in the rest of the business to avoid burnout. This may mean sacrificing some profit by employing other senior people to take management roles in the business or getting more support for their own sales function.
The bigger teams that tend to exist in non-selling principal businesses can arguably result in bigger headaches but this ultimately comes back again to the principal's role in the business. If they are not selling [and assuming they are not lying on a beach somewhere] then they need to be doing something – this tends to be looking after the team.
If you had nothing else to do but look after the team do you think these individuals would be giving you that many headaches? I think not. You will always have some individuals that are needier than others, but on a whole, when you give the team [you could insert ‘kids’ instead of ‘team’ here] attention they tend to behave better.
The reasons for the headaches are more because you are not holding them accountable, not performance managing those you need to and not having the conversations you need to have with the team. Usually, this is because you just don’t have the time or just have not prioritised enough of your day to do this.
When we look at the results of a real estate business we like to break profit down into the different divisions of the business. One of these divisions is the ‘Principals’ division. This is so we can see how much of the profit [or loss] is the result of the principal.
Often people are surprised when they see that without the direct profit contribution from the principal sales the business would hardly make anything. But, this is probably an over-simplistic view.
If you are a selling principal business you need to understand what that means. The reason the business is reliant on principal sales is because that’s how you set it up. Don't forget if you didn't have the rest of the team and PM division paying your fixed costs every month the ‘Principals’ profit contribution wouldn't be so high.
The important thing is being able to track your contribution in the first place – this is easy to do in Xero and MYOB [but if you need a hand give us a shout].
Why did you go into business in the first place? If it was just to grab a greater percentage of the sales commission then often you will burnout and struggle to grow. This is not necessarily a bad thing, but if your long-term plan is to run a small boutique agency with you as the selling principal at the heart of it, if you work hard you will likely make good money and should structure your business accordingly.
But I often see the non-selling principals having a much bigger vision for their business and why they went into business in the first place is driven from a very different place. Maybe they had a burning desire to create their own brand. Maybe they wanted to be in absolute control of their own destiny or pride themselves on how they train, mentor and develop a team.
When starting a business, it is hard to resist the idea of selling – this brings in big licks of cash and reduces the time it takes to reach breakeven. In my opinion, this is a good strategy BUT where it all goes wrong is when they lose sight of the big picture and get stuck selling.
Sit back and remind yourself why you went into business in the first place – that way you make the changes you know you need to make and it may mean at some point in time, stepping back from sales and focusing on other areas of your business.
Whether you should be a selling principal or non-selling principal has no black or white answer – in fact there are many shades of grey.
We see both models work very successfully but the drivers of what is right for you are probably more internal than anything. What sort of business do you want to be a part of? What timeline are you working towards? How do you want to spend your day?
You need to:
1. Know where you are now.
2. Know where you want to be in the future.
3. Put plans in place to make that happen.
4. Do it.
Where it goes bad is when ‘you’ as the principal, do not grow or evolve your own role in the business and do not put in place the support you need to make it happen.
Here are a few more insights on selling and non-selling principals. Check out my Real Estate Uncut podcast appearance with Kevin Turner talking about how vital it is for selling principals to remember that they have 2 businesses and that they must always keep their eye on the big picture.
We also have an upcoming breakfast event focused entirely the pros and cons of selling and non-selling principal businesses.