How To Place A Value On Your Sales Team

Transcript

John Warrillow:                Have you ever wondered what your sales team is worth? Turns out it might be worth quite a bit. My next guest, Mark Deutschmann, sold his real estate brokerage firm. 350 sales people, $30 million in revenue, but in essence he didn’t have a lot of hard assets. He did have some real estate sitting underneath his company, but essentially what he was selling was a profit stream generated by a group of salespeople that he managed. In fact, he thought of his salespeople, as he will tell you, as his customers. He ended up selling the company for $9.75 million, so I guess your salespeople are valuable in the end. Here to tell you his story is Mark Deutschmann.

John Warrillow:                Mark Deutschmann, welcome to Built to Sell Radio.

Mark Deutschmann:        Thank you for having me.

John Warrillow:                You’re like the King of Nashville.

Mark Deutschmann:        The King of Nashville. Where did you get that?

John Warrillow:                Oh, I don’t know. You’ve sold a million dollars worth of property in Nashville. So yeah, it must be close to the king, but you are in effect the the founder of Village Real Estate, which is I think the biggest agency in Nashville. Certainly sort of put Nashville on the map in a way.

Mark Deutschmann:        Yeah, I think it’s one of the biggest locally-owned companies in the city, and I would say that we’re more urban than most, meaning that we focused on the urban core and all the ring neighborhoods in Nashville. I started the company 22 years ago when Nashville was a hollow shell of what it is today.

John Warrillow:                Well I was going to say it’s just incredible growth in that city. I was down for a conference maybe six months ago and it’s just amazing how much it’s evolved. And so you had a residential real estate brokerage, which as I understand is great because everybody will immediately understand what you do. Because most of us have bought or sold a home or interacted in some way with a real estate agent, so it can kind of pretty quickly get the business model. Was there anything unique? I’m sure there were many things, but from the business model perspective of your brokerage?

Mark Deutschmann:        I would say that from the very beginning, again, we were more urban than most, and Nashville didn’t really have any housing downtown when we started. As the zoning code shifted and it began to allow for housing in the core, we shifted and created something that we call our multifamily residential sales strategy, and we focused on selling projects for developers. So we’d sell big condo projects in the Gulch downtown in some of the emerging ring neighborhoods and still do that today. In fact, many of the great agents at Village are very good at working with developers.

John Warrillow:                So you’d get a developer and, let’s say they had a hundred units in their condo. You’d get the contract to basically sell all those, correct?

Mark Deutschmann:        Yes. Create volume.

John Warrillow:                Excellent. And so just give me the economics. I’ve always been curious. We just sold a home in Toronto, actually, and I think we paid, I want to say it was 5% to the agent, the selling agent. I don’t know if that’s standard or not or we got ripped off, but I think that’s what we paid. Something in that sort of ballpark. Give me the breakdown. What proportion of that does the real estate, my selling agent keep? How much do you keep as the broker who employs the agent?

Mark Deutschmann:        So just realize that my customer at Village Real Estate Services was actually the real estate agent. So the agent goes out and engages with a customer who hires them to sell the home, and let’s say they list the home for 6%. You might have a buyer-broker come in with somebody who’s outside of the listing transaction and bring a buyer, and that agent would receive 3% of the transaction. Our firm would receive 3%, and then we have a pre-negotiated commission with our agents based on their productivity. The more they sell, the higher their commission split is, and generally they might start out at 70/30, so they keep 70% and we keep 30% of that revenue stream. But as they progress, they might even cap, meaning that if they sell enough real estate, then they’re essentially paying no more to the firm. They’re keeping all of it.

Mark Deutschmann:        We also would charge our agents essentially a transaction fee. For every transaction they would pay $100 or maybe $150 or $200 depending on what services we offer, so we get a share of the commission, we get a processing fee per transaction. And just to put it perspective, Village sold over a billion dollars of real estate back in 2018 and 2017, I believe, and yet the gross commission income to the firm was perhaps just under $30 million. And so you can see that the … from the gross transaction to the gross commission to what we end up keeping, it becomes a fraction of the total real estate sales. It might seem like I’m king, but when you really realize how much is coming back to the company, I’m a pauper.

John Warrillow:                You’re king to me. You’ll always be king of Nashville to me. Okay, so $1 billion of real estate sold nets out to revenue gross revenue the brokerage of ballpark $30 million.

Mark Deutschmann:        Correct. Yes.

John Warrillow:                That’s helpful. What was the trigger that made you want to sell? Was there some sort of event that made you think, “Okay. This is time to sell?”

Mark Deutschmann:        No, no. It was sort of a series of things. Nashville becoming “it” city. We’ve become increasingly popular as a city and I’ve started to see some of the national and international firms coming into our marketplace, and there are companies that have a different model that are even more agent-centric than ours. There’s one particular firm that has the backing of Silicon Valley that seems to be more of a technology play, and they started coming in and recruiting agents and paying them pretty ridiculous commission splits in my opinion, meaning that they are giving the show away possibly because it was a loss leader for them to come in and attract some of the big agents and set the stage for market share on the town. So that was disruptive in 2018 and a little less fun as not just my real estate company, but other real estate companies saw an exit of some good agents.

Mark Deutschmann:        Yet I was always proud that we were locally owned and community facing. We celebrated 22 years in business in December of 2018, and we had 450 of our agents and their guests and some of our community partners at the event. It was really wonderful. It was … I was very proud of the group and excited that we could gather in that way, and yet at that moment I didn’t have any idea that I was going to sell the company. This is December, 2018.

Mark Deutschmann:        You asked for a trigger. The trigger was that I learned that one of my agents and five former agents were planning on starting their own firm. So I called the agent in and I said, “David, what are you doing?” And he said, “Well, I want to be like you. I’ve watched you grow this company and it’s so exciting and I love being a real estate agent. All these people came up through the company and they’re all my friends and they’re all great and we’re going to start a company.” I said, “Why don’t you just buy into Village? And he said, “I didn’t know that was an option.” And less than an hour later we set an appointment and I sat down with the group and they said to me, “Well, we’d want to buy a majority of the company.” And I said, “Okay,” “And we’d like to buy the main office,” and I said, “Fine.” Literally I received an offer the next day.

John Warrillow:                Wow. So are you at this time working kind of full time in the business when David … David was the name of the agent still working for you?

Mark Deutschmann:        That’s correct, yes.

John Warrillow:                When David approached you, were you sort of going into nine to five and very much just sort of an active owner or were you sort of a little bit-

Mark Deutschmann:        I would like to say that I have another business called Core Development, which I started in 2003, and then I have my own personal sales team that I started in 2005, and then I have a holdings company that started with originally with the company, but I was still the CEO of Village. We had 350 agents and staff, so we had a lot of people that I was responsible for, but I say that I’d probably split my time 33% Village and my team and then 33% Core, my development company, and then 33% I was doing community service. So I call myself a community builder and I always put a lot of time into the community

John Warrillow:                I want to talk about the new book as well in a moment. I’m wondering, though with regards to, because I think a lot of entrepreneurs reach this point. Maybe I’ll ask it as advice. A lot of entrepreneurs, and particularly ones that are sort of focusing on some of the stuff we talk about, building value, et cetera, they get to a point where they can afford to focus on some other stuff. Maybe their company only needs them 10, 20, 30 hours a week, and so they get involved in other projects. They start other businesses. They’re involved in philanthropy. They’re traveling. They’re doing fun stuff. Maybe they, you know, spend some of the fruits of their labor and they buy a fancy car, and all of a sudden employees start to go, “Oh, hold on a second. We’re doing all the work and Mark seems to be cashing a lot of checks. I want a piece of that.” Did that happen? It sounds like with David that that happened a little bit. Was it that he envied the lifestyle, the variety? What was it that you think he envied in what you were doing at the time?

Mark Deutschmann:        I think agents … I remember Bobbi Noreen, she was my broker for years, she said it’s not if they’re going to leave, it’s when they’re going to leave. Agents do move around, and so David is not the first person who’s gone off and started his own company. There are hundreds of agents here in the city of Nashville that have come in and trained at our firm and where they’ve gone off and either started their own show or started a division of another company or did something else. There is a place where people come and go. I do think you’re right, though. I mean, I did have it down … I feel like in 2017 I had it down to a nice science and I had a great exec team and we’d have one executive meeting every week and that was my main role, and then I’d come in and help. I wasn’t even leading sales meetings. I had gradually given up. I had originally been the broker when there was just three of us, and then I grew to a place where I had a broker, and then later on I had a broker team, and then I have an exec team that I was managing and I was able to continue to delegate most of the functions, even the recruiting function, out to others.

Mark Deutschmann:        And yet still, when things are difficult like it became when some of these companies were coming in from out of town, it requires more focus and you still have to come in and try to steer the ship in the right direction, and sometimes I’m not sure if I was the right person anymore. It was time for me to let somebody else take that role, so hence the sale.

John Warrillow:                What advice would you have for a fellow entrepreneur who wants to make sure that he doesn’t get held hostage or she doesn’t get held hostage by his or her employees who say, “we’re doing all the work. You’re off gallivanting around. We want a cut.” Could you provide any sort of advice for someone who is trying to make sure that that didn’t happen to them?

Mark Deutschmann:        Well, typically an agent will come in and want to negotiate their commissions and tend to want to go higher on their commissions if they feel like something’s happening or if they feel like they’re giving more. You have to be careful about giving special treatment to a few because if you start giving special treatment to a few, they say they’re not going to tell, but the word gets out and next thing you know you’re giving special treatment to everyone, so we had to be careful about that. Sometimes when people feel that way, you just have to let them go. There’s times where, “Well, I guess it’s not a fit for us anymore if you think that you can do better somewhere else.” I’m sorry to say that that’s sometimes true.

John Warrillow:                Yeah, absolutely. Was there part of you when David came into your office and said, “Look, I’m going to start a brokerage,” was there any part of you that felt sort of stabbed in the back that here’s this guy who you’ve trained and coached along and there he goes out the door and wants to compete with you. Did you feel a sense of betrayal, I guess, is my question?

Mark Deutschmann:        Well, it’s not David necessarily, but there’s been, David and a hundred others have sometimes done that where you feel like you’ve trained them up and given them your best, and then next thing you know they’re your competitors. You have to let a lot of that go. Otherwise you’d just be a grumpy old man.

John Warrillow:                How did you let it go? Because I don’t think, I mean, I don’t know … I wouldn’t be very good at it. I should say, I’m not very good at it.

Mark Deutschmann:        I’m doing better now because I’ve sold the company. All of the former agents that I know are, they’re back in my circles and I can talk to them about different things and just just say, “Hey, isn’t it great?” But there is a place where once they’ve gone, it’s like, “Bye-bye. Don’t let the door hit you.” And I don’t really communicate with them. So there was a place where I didn’t do it so well either. And yet, I grew up and started selling houses and I moved around through several companies before I started Village, and I was a very top agent in the selling community and I’m sure people felt the same way about me when I left and either went to another company or started a new company. I just think that’s the way it goes in business.

John Warrillow:                Yeah, for sure. Let’s get back into the sale. So David and the other five former agents, former colleagues came to you and said, “We’re looking at starting–.” You said, “Oh, why don’t you buy Village?” Where did it go from there? Did they come up with an offer? Did you suggest a price? What was the next step?

Mark Deutschmann:        Actually, it’s a really smart group, and I’ve ended up keeping 10% of the company, by the way, so I still own a piece of Village. I know all these people quite well because I’ve literally trained them all. I brought some people up to sell some of the multifamily residential. Two of them I’d actually brought in through Core Development Company and trained them to be significant developers, and they’re very smart and they understand the numbers when I gave them the financials. They came up and made the offer. So I didn’t coach them on the offer. They just made an offer.

John Warrillow:                You guys were 30 million of revenue. Kind of roughly profit margin on that, what would you have been netting on that?

Mark Deutschmann:        It could be anywhere from a million to two million depending upon the year. Sometimes better than others.

John Warrillow:                So they came up with an offer. What was their original offer?

Mark Deutschmann:        It was approximately eight million dollars.

John Warrillow:                And roughly what … so that would have been, I guess the year you sold the year prior to Silicon Valley company was starting to nibble away at some of the agents.

Mark Deutschmann:        Yeah. And it was not a good year, 2018. 2018 was not a good revenue year for us. So we were in I would say somewhat of a weakened space. I’ll just tell you, we ended up selling the company plus the building it was housed in for 9.75. They made the original offer, which I actually considered reasonably fair, and then we ended up negotiating the sale and closed out at 9.75.

John Warrillow:                What did you think the real estate itself was worth? Of the 9.7 mile, what was the market rate, market value there?

Mark Deutschmann:        Probably three to four-ish. Somewhere in there.

John Warrillow:                Okay. So then the incremental …. they were also buying the profit stream associated with the company.

Mark Deutschmann:        Sure.

John Warrillow:                Got it.

Mark Deutschmann:        So actually, I mean I felt like … in truth, I felt like their offer on the building was a little high and their offer on the brokerage was a little low, but the blended number in the end turned it up, turned out to be better than my expectation.

John Warrillow:                Mark, did they separate it out like that? Did they say, “We’re going to pay X for the building and Y for the profit stream” or was it just-

Mark Deutschmann:        Sort of but sort of not, because in the end what they’re doing is they’re putting … they’re letting … I’m an owner in the new company and I own 10% of the company, but I also own a piece of the building, too, so it turned out to be a sale as a package. Now they’ve actually started selling pieces of the company to some of the top agents, so they’re building in some loyalty and they’re selling the same thing. So they’re selling piece of the company with building. So the people are not just buying a brokerage stream, they’re starting to get some assets and actually subsequently on, I have another office that I kept. Now I’m selling that to them as well, and I think working into the mix of ownership. I even have a third office that has Village agents and I may sell that to them as well.

Mark Deutschmann:        Just the fun thing about all this is that because when I sold the brokerage, it just made me feel like selling stuff, and I have a whole bunch of assets and I’ve just been selling stuff, so it’s opened up the floodgates. Now I’ve been selling land, selling some buildings in the old neighborhood commercial districts. I’m just like, “Hey, this is fun. I like selling stuff.”

John Warrillow:                You’ve been selling stuff all your life.

Mark Deutschmann:        I know, but now I’m selling stuff.

John Warrillow:                Now you’re selling your own stuff.

Mark Deutschmann:        I’m selling my own stuff.

John Warrillow:                How did you get the offer from eight to 9.75?

Mark Deutschmann:        I’m just going to tell you a little story. I had just celebrated my 22nd year in business and we had a big celebration party in December of 2018. 450 of my agents and their significant others and some community members were at a big party. We had great entertainment, we are celebrating, there was dancing, and I was so proud of every everybody and what we’re doing, and then a week later I’m sitting, talking to David and then the whole group of them about selling the company, but I was leaving. The day we sat down and started talking about selling, I had planned a trip to go shark diving with some of my entrepreneurial friends from the Entrepreneur Organization and we were heading to Guadalupe, which is a remote island off the coast of Mexico. I climbed on a plane on Saturday morning to fly out to San Diego to jump on the boat, and I got the offer while I was on the plane, and I had to get to San Diego.

Mark Deutschmann:        Before we went out to sea, I had to scramble to find a satellite phone to make sure that I could communicate. I was able to get my executive team, really just two people, and pull in my business broker Mike Nolan into the room and said, “Okay, in confidence I have an offer and we’re going to have these conversations, and I’ve got a satellite phone.” And then we jumped on the boat and I went out to sea. It was 18 hours to go to Guadalupe, but when we got out there, I realized that the satellite phone didn’t work. It was two days into the trip and I’m sitting there with my entrepreneur friends saying, “Oh, my God, I’ve got an offer on the company and I can’t communicate and-”

John Warrillow:                Love it.

Mark Deutschmann:        And the captain heard me and he said, “Hey, I’ve got a satellite phone up in the bridge.” Well, I was like, “Oh, my God.” We went up to the bridge and he says, “You take the helm,” and he left and I called everybody, and they were panicked. They were like, “Mark, these guys are going to start their own company if you can’t get them a counteroffer.” And they had to do something really quick, so I gave them the counteroffer and they accepted it just like that. They had to act quick. They took the counteroffer. It was just the details that we had to negotiate, and by the time I got back from diving with a great white sharks six days later, I sold the company,

John Warrillow:                Oh, wow. That’s incredible. How did you come up with the 9.75 figure? What was your justification or your case for the higher number?

Mark Deutschmann:        I hope they’re not listening, but I always feel like when people negotiate, if you accept something then they’ll feel like they take too much.

John Warrillow:                Yup. Yup.

Mark Deutschmann:        So I just countered thinking that we’d negotiate a little bit more, but time was of the essence and they accepted.

John Warrillow:                Now, I understand why time was of the essence for you, because this ticking time bomb of them going off to do their own thing. Why was it so important for them to get the deal done so quickly?

Mark Deutschmann:        Two of the agents had left me maybe seven years ago when they started a new office down in the Gulch and they had a hundred agents they’re working with, and they hope to recruit some to the new firm. They were in a position where they were already talking to agents about this new firm and a lot of agents were talking about coming, but they needed to announce. They needed to make an announcement because they had already resigned from being the brokers and owners of this other firm, and if we didn’t start, if they didn’t buy Village, then they had to go and announce the new firm. So it was time of the essence for them. There was only a short window for them to try to purchase this company.

John Warrillow:                Got it. Got it. It sounds like a Hollywood script, a fairy tale. If you could do it, rewind the clock and do it all again back to 2018 when you’re having that celebration with all your colleagues and former colleagues and spouses before the transaction really started to accelerate, is there anything you’d do differently if you had it to do over again?

Mark Deutschmann:        No, because literally I’ve been thinking … I’m having a little more fun with my other companies, with Core Development and Village Holdings and my own personal sales team and community work, and there was a place where I was sort of weary of running the company and I had devised a plan to give it away. I was actually thinking of giving the company to my agents and staff.

John Warrillow:                Now you’ve got to tell them to stop listening. Go make a coffee.

Mark Deutschmann:        I know. That’s what my wife said. She thinks … she said, “You’re crazy. You can’t give it away. You’ve been–” but I really had literally been thinking about giving it away and I had a full-on strategy to do it, but the problem with giving it away is that I would have had to manage all the way through that process and it wasn’t that easy of a process, and so the choice between giving it away and staying in management or selling it, it was pretty apparent that the sale offer was the way to go.

John Warrillow:                What were the circumstances around you retaining 10% of Village?

Mark Deutschmann:        I think they know that I am … my team is one of the top teams in the city, so I still sell a lot of real estate with my team, and I think they wanted me to stay in the company. I’m chair emeritus now, so I have a title where I can walk around in the company. I have my own office up here. I can give unsolicited advice that nobody has to listen to, which is wonderful, but people still like to see me out and talk to me about real estate, and I still am needed to some degree but I’m not in charge. They wanted to keep me, so they offered the 10%.

John Warrillow:                Got it. That’s helpful for sure. How has having this liquidity that I think on a net basis … 9.75, a lot of money-

Mark Deutschmann:        There is some debt on the building. It’s six something. I mean I ended up six something.

John Warrillow:                Yeah. How has this additional liquidity, and I don’t know your full financial picture but I’m assuming this is a lot of money … it is a lot of money no matter what way you slice it. How has that impacted your life?

Mark Deutschmann:        So my wife Sherry … we both sort of grew our companies since … we’re 11 years married and we met probably 14 years ago, and since the time we were dating she had started a company called Letter Logic. We were at about the same place in size of company, and so one of the really great things about our relationship is that we’re entrepreneurs. We came home and we’d talk about each other’s businesses and knew the insides and out. Well, she sold her business in 2017 and so she had exited and she brought some chips home and had her own entrepreneurial experience. Well, what this did for me is create some balance. Take chips off the table that were a little more balanced on the home front.

John Warrillow:                Oh, that’s the most honest answer I’ve ever heard of that question. That’s awesome. All of a sudden you’re not outnumbered. She’s like, “Mark, can you take out the garbage? Can you hang that wallpaper? The toilet’s running in the third bedroom. Can you get that fixed? Hold on a second, honey.”

Mark Deutschmann:        “Yeah, it looks really good on paper, honey. Can you bring some of that home?”

John Warrillow:                That’s awesome. That’s awesome. Well, I hope things are now a little more balanced on the home front.

Mark Deutschmann:        Yeah, they are.

John Warrillow:                That’s great. Tell me a little … I don’t want to … thank you for sharing the story. I don’t want to let you go without talking about One Mile Radius. Tell me about the book, what inspired it, what’s it about, et cetera.

Mark Deutschmann:        One Mile Radius is a story about sort of the evolution of Nashville’s real estate over 30 years from a real estate entrepreneur’s perspective. Again, since I was quite involved in the evolution of the urban core and then quite involved in helping to work, create walkability in the ring neighborhoods in Nashville, I am quite well-known in the city as somebody who is a community builder. I’ve been the president of Greenways for Nashville for six years. I had just stepped down as the chair of the Urban Land Institute, our local chapter. I’ve been on their civic design center. Things that are involved in smart growth in community are things that I like to be a champion for.

Mark Deutschmann:        And so One Mile Radius is the story of the evolution of these neighborhoods. But it also talks about building out the Greenway system and urban parks and smart growth initiatives and retrofitting homes for energy savings and helping seniors age in place. That has a lot of different stories about things that we’ve done in the city to help create a better fabric in our urban core. And so I wrote the book. It launched in 2017 and it’s been fun for me to get out and about and talk to civic groups and use it as a tool really to help promote some of the causes that I think need to be realized to make Nashville even better in the future.

John Warrillow:                And prove somewhat of a model for other cities as well that want to go through this-

Mark Deutschmann:        I think so. I think we’re not ahead of all the cities in the United States, but there’s a lot of cities that could learn lessons from what we’ve done.

John Warrillow:                Yeah. So it’s One Mile Radius, and people, I’m assuming, can get it on Amazon and sort of wherever good books are sold.

Mark Deutschmann:        You got it.

John Warrillow:                Question. How come you couldn’t keep PK Subban in town?

Mark Deutschmann:        Oh, no. I guess we didn’t win the Stanley Cup and so they have to make changes.

John Warrillow:                These are important priorities. You got to keep PK.

Mark Deutschmann:        I know. I think they made some pretty good trades, though. I think we’ll have a good team again this year.

John Warrillow:                I’m sure they will. It’s on my list, my bucket list to see the Predators live, so I’ll have to do that. Mark, it was great to meet you. Thank you for your candor and your story. It’s amazing on a lot … I know a lot of entrepreneurs will be helped by it, so thank you for doing it.

Mark Duetschmann:        Well, thanks for having me. I really appreciate it.