The Art of M&A: Striking the Right Balance Between Integration and Autonomy

0:03This is it. M &A Science is expanding with our first M &A Conference. Introducing the M &A Science Fair this October 5th in New York City. This will not be like any other M &A conference. You know the ones I'm talking about where it's panel after panel after panel until you're bored out of your mind and need to hit the bar for tequila shots to restart your brain again. The M &A Science Fair is built around peer-driven conversations in a design thinking format that encourages real collaboration. Bring your challenges, workshop them with your peers and leave with practical solutions you can apply to take your practice to the next level the M &A science fair is exclusively for heads of corporate development and heads of M &A integration I know it's pretty limited but we want to make sure this first event drives the best quality networking we'll probably expand it from there if you're interested request an invite at mascience.com slash fair.

1:10Again, that's mascience.com slash fair.

1:19I'm Kisan Patel and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:44Hello, M &A scientists. Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about the products and services we developed to support world-class M &A teams or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com and get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Glenn Sanford, CEO of eXp World Holdings.

2:21eXp World Holdings, together with its subsidiaries, provides cloud-based real estate brokerage services for residential homeowners and home buyers traded on NASDAQ under EXPI. Today, we're going to talk about M &A lessons learned from a founder CEO of a publicly traded company. Glenn, how are you doing today? Good, Kisan. Thanks for taking a break from doing deals to have the conversation with me. Can we kick things off with a bit about your background? EXP Realty is where as a founder and we became a public company back in 2009 as a cloud-based residential real estate brokerage. ironically our first big m &a thing was we actually bought a public company so we could merge ourselves into it back in 2013 and then 2018 we went from the otc to nasdaq but prior to real estate which i got into actually in 2002 i was involved with a number of tech startups and a lot of really small micro cap public companies i've been involved in investor relations and sort of some light deal structuring and some other things on some stuff back in my late 20s, early 30s.

3:25Now I'm 56. So I've got a few things done. But anyway, that's a quick little history of my background since then. In 2013, we bought a public company, 2018, uplisted in NASDAQ. And then just not even a month ago, our little public company got added to the S &P 600 small cap index, which was an unexpected surprise. So we've had a nice run over the years. What's the acquisition history been like or EXP? We've done a few. We've done some really small ones. They were really acqui-hire, where we acquired a company really for the talent and paid a little bit of money for the acquisitions. I look at our first significant acquisition was a company called Verbella.

4:06It's a virtual world for work platform, a metaverse before the word metaverse was popularized by Mark Zuckerberg. In 2020, we did a couple more acquisitions. We bought Success Magazine, 125-year-old brand. And then we also bought a company around the same time, a small real estate search technology company. And then last year, around this time, we actually closed on the purchase of a company out of Toronto called Zucasa, a real estate search portal that was at one time across Canada, consolidated to Toronto. And then now we're expanding across Canada and into the US. So those are kind of our bigger acquisitions, but we had some small ones.

4:53And when I say small, I'm talking like a million dollars or less that were really more around bringing somebody in that had a small project that was their hobby project. But in order to get them over, we said, hey, we'll buy you and give you a little money to continue to work on your hobby project. But we really want you for this. Can we walk through some of these deals? I'm curious to learn, how did you perceive these as financial opportunities or more around the strategic impact you're looking to make on these deals? And it seems like they vary quite a bit, but I'm only assuming that there's varied reasons and why you made those different acquisitions.

5:30EXP Realty, we started it in 2009. Give you a little history there. We ended up using a virtual world for work platform called Teleplace. They raised some money, about$10 million or so. So in Silicon Valley, a startup to provide this virtual world for work platform, within about a year or so, they ended up going out of business. And then we ended up using an open source version of their platform for a while. We ended up pivoting to another platform, which ultimately it went out of business as well. What we recognized is that we were getting a ton of value for us in using these virtual world for work platforms because we run, just to give you a little context, eXp Realty is the largest single real estate brokerage in the US, maybe the world, as a single entity brokerage.

6:21Most brokerages, real estate brokerages are franchises. You think about REMAX, Keller Williams, Coble Banker, etc. But as one brokerage, one owner, no franchise locations, we're the single largest in the country, maybe the world. We operate without any physical offices at all. And we said, how do we support a real estate brokerage to build a national, international platform if we don't have physical offices? and how do we make sure that our agents, brokers, and our staff are connected. We recognize that a virtual world for business solved for a sense of place, a place to go to work, a place you could run into people, where you can have water cooler conversations, and you could actually feel like you're there.

7:02And so that was kind of our way to solve that piece. And so we've been doing that for a long time. And when we think about we've got a market cap that's in excess of$3 billion, but one of the reasons why we have that market cap is because we figured out a much lower cost to operate than any other real estate brokers out there. So we were getting tons of enterprise value from using these platforms. The problem was, is they couldn't charge enough to their other clients and create a SaaS model where it actually made sense for these companies to stay in business. But 2018, when we bought Verbella, we recognized we were one, their single biggest customer by far.

7:37We were over 50 % of their revenues. They were charging us what would be considered market rate staff's contract fees because they wanted to scale to multiple companies and multiple users and this and that. So the per user cost was$10,$15,$20 per user per month. As you can think about it from that perspective, and they couldn't get enough users on the platform. Now we were getting, actually we're paying substantially less than that on a per user basis, but even so we were their largest customer and we've determined that it made more sense for us to buy them, to basically make sure they stayed in business so they could continue to provide us the enterprise value.

8:13It was really around not having to make continual pivots into different platforms as each one went out of business. And then we had to make a move to another one. First one was just to preserve our long-term trajectory as a company. It's making sure that you secure that tech capability that really allows you to scale your agency model as a tech-enabled service offering, basically exactly so that was our first one that was fairly sizable the second one was we did two in 2020 one was a company called showcase and what we wanted to do is we wanted to control our website from a search perspective consumers search for homes we were using third-party software contracts to actually manage that and we wanted to bring that service offering in-house where we could actually manage the consumer experience and how the leads are generated and how those got channeled to our agents.

9:09And we recognized that it was going to be a lot faster for us to build up that expertise by just buying a company and then having them pivot. You know, we spent, I think, three or$4 million on that company, but it was really kind of an actual hire in a lot of respects and that we were really acquiring them for their skills and expertise to build out the infrastructure for our future websites. Is that something you had in your roadmap? And then you essentially acquired this team to accelerate development against our roadmap? Yeah, our experience was we weren't really able to hire in the talent to do what we needed to do in a timeframe that made sense and then to ultimately deliver some sort of product in a reasonable period of time.

9:54So it was one where it just made more sense to just acquire a team and then retask them on building out that infrastructure. So it was really a build versus buy and we said, hey, buy makes more sense. Got it. So that was the search technology. What was the Success Magazine? Did you end up buying a magazine? The magazine was an interesting one. As a virtual real estate brokerage, one of the things that we wanted to do was put something physical in our agent's hands that sort of matched up with where their heads were at as salespeople, independent contractors out there building their own businesses, so to speak.

10:32And so Success Magazine, a good portion of successful real estate agents have at some point either picked up the magazine, subscribed to the magazine, listened to the CVs that were included in the magazine, etc. So it's part of the personal development ecosystem that a lot of salespeople have been exposed to. And so a number of years ago, somewhere around 2018 or so, I had an opportunity to actually start to shift the magazine with a wrap that had EXP on it to our agents and brokers. And we did that every once every three months originally. And then it went to once every two months. And it was just a way to stay in front of our agents with something that kind of gave them a sense that we cared about them, that we wanted them to be successful.

11:12We want to give them just things from just a mindset perspective. We became the single largest customer of Success Magazine because our agent base had grown so much up through 2020. We were in the 15-ish thousand agent range at that point. And so we're mailing these magazines to all of our agents. I built a good personal relationship with the previous owner, and then he wanted to sell. And so I was like, this would be a really interesting magazine for us to own because we could then leverage that into more personal development deliverables for our agents and brokers and actually start to build up other stuff in that ecosystem that could really help our agents.

11:54So coaching and training fits really well into success. And then we also expanded. We thought about the idea of brand expansion. We thought we could profile our most successful agents. We could create different things that's where Success Brand will endorse our top agents and brokers and again, give them a tool. So that was the idea. And that's how we've been building it out since. We've added a co-working company to it. We've added a speakers bureau to it. We've expanded it a bit, but it is still an investment. But it is a nice asset to own as a sister company to a realty company, because even our real estate agents see it as somewhat of a defensible moat, because we have people like Tony Robbins has been on the cover multiple times.

12:37we can actually go and get speakers for eXp that might not be interested in doing things with eXp, but because of the success magazine tie-in, we can get them tied into our real estate ecosystem. So it's a cool thing because anybody who's successful, they'd like to be on the cover of success or Forbes or Inc or whatever. So it's a kind of a cool magazine to bring other people into the ecosystem. Zucasa was another tech play. It was, yeah. So that we acquired last year. So that was our last big acquisition. What Zucasa represented for us was a second brand that we could scale up to actually do lead generation and then monetize those leads through our agent base and actually create another revenue stream.

13:23It's really the one that's designed to be accretive. The other ones were more to reinforce different parts of our value prop. But in the case of Zucasa, we actually bought it because they already had an already existing lead generation platform that they had matured in primarily in the greater Toronto area, the GTA. But they had one time been owned by Rogers Communications. And Rogers had invested, I think, over$10 million a year for multiple years in a row just marketing and branding that property across all of Canada. So it was actually a well-recognized name in real estate in Canada. And so we see it as a great way to create leads for our agents through a portal that consumers already recognize in Canada.

14:10We have 6 ,000 agents in Canada. we can give them another way to get new inbound business, and then we can actually monetize those leads. What factors do you consider when looking at potential companies to acquire? The one that's probably most important is cultural fit, meaning that they want to be with us for the right reasons. It's a lot easier when, in the case of Verbella, we were already their single biggest customer. Even though we acquired them, it wasn't like we actually asked them to do anything different the next day or change their team up or any of that stuff because that was very much a known quantity.

14:45We didn't micromanage them, et cetera. Zucasa was similar. Showcase was similar. Success was a different, we didn't initially have the cultural alignment in that because we were fundamentally not in that sort of, let's say the magazine business didn't quite understand it as well. It had been structured in a way that was structured for sale and then trying to actually do that business. That was probably our roughest conversion was because we really didn't have a continuity of leadership in that transition. Their previous CEO, he was the one selling the business and he wasn't staying on. He wanted out of that business.

15:20And so we didn't have truly the expertise in-house or even on the team to run and scale that business. So that was a tougher acquisition. The brand is great. We were able to start leveraging that right away. But in terms of just figuring out what we do next and how do we do that, It took us two plus years, probably figuring out what we were going to do to actually work with the existing brand for success. So a big thing for us is making sure that we've got a culturally aligned ecosystem. Certainly, I'm not trying to compare myself to Warren Buffett. But one of the things I like to do when we bring on a company is to leave the team intact and to allow them to continue to build maybe with a slightly different focus than they previously were on.

16:07But the idea is not to bring them on and then micromanage them to an entirely different business. That's worked really well for Bella. It's worked really well on Zucasa. It's worked reasonably well with the showcase team. And that's because it came with the talent already in place and they wanted to be with us. So it's more of like a partial integration you're doing where you tie in some of these core back-end things, but then you're essentially letting this team having their autonomy to a degree. We really like the idea of aligned autonomy. And so obviously there's some payroll systems and some HR stuff that kind of gets handled from a corporate perspective.

16:44There's some accounting stuff that needs to get done to match up with the accounting side. But the actual operation of the business and the decisions and the strategic initiatives and all those types of things, we tend to believe that's the secret sauce that these teams bring in. If we had the expertise in the house, we wouldn't need to acquire them. So why try to micromanage what they're working on in a virtual world for business? We're fundamentally a real estate brokerage. There are certain things that we need the platform to do for us, but they're not unreasonable things or what any customer would need for the platform to be useful, whether it be private sound regions or the ability to support more avatars or what have you.

17:23But those are just general just requirements from us. And so we're actually a customer in some respects of a company that we own in-house. When you mention culture, some of these businesses you've had a partnership with, they've been a big customer of theirs. I can sense you'd probably have a good sense of their company culture from that. But are there any of the deals where maybe you didn't have that foothold that you had to really figure it out what their culture is like and how do you do it? I mentioned success was one of them. We didn't really have a good sense of it. We were very much arm's length from all of the internal staff at success and the acquisition opportunity came up and there was a need from the owner to do a fairly quick close.

18:05We didn't get a chance to really do a deep dive on the internal team dynamics. So it went really from the time we met the internal team till the time we completed the acquisition was probably maybe 30 days. And that was literally hands-off from the previous CEO. He helped for about 30 to 60 days. And then he was like, I'm selling this for a reason and I'm going off to do my own stuff. Wow. But it worked out. Yeah. We've kept the magazine going. There has been definitely some hiccups along the way, but we've never missed an issue. Always got the magazine out. The magazine's been great quality. In that whole process, we've added other products and services, turned over a lot of the team.

18:44And so now it's actually a much more culturally aligned team than it was, obviously, when we first acquired them. I mean, is there things now that you learned that you would do proactively to understand a company's culture? If I was to go back and look at it, we were buying a brand and a history. And we wanted, obviously, the magazine to continue to be published. But I'm not sure what we would have done differently. If we would have had more time, it would have been good to get to know the team over the course of, say, six months to a year in some casual manner. As their single biggest customer, I could see that would have made sense.

19:16understanding who's there, what's there, build some strategic alignment in the shorter run before we actually pull the trigger. I think that would make a lot more sense because then we could actually have more what I call continuity of leadership. It's really important that teams come together around leaders and they adapt to that leadership style and they become quite comfortable and they have an affinity over time to that leadership style. And then when you change it, no matter what it is, it takes time to change that dynamic. One of two things we could have done differently would have been to have that leader stay on for at least a year or two to help in the transition or us get involved a year prior with an idea of a future acquisition.

20:03Yeah, sort of seeding in early to know your people so you understand the culture fit. Tell me about this reverse merger that you did, that you went public through a reverse merger. What was the reasoning behind the decision? We knew what we wanted to do as a company. We knew that we wanted to distribute equity to our agents and brokers. We made a couple of really unique innovations in the residential real estate industry. We were the first company that basically wanted to build a nationwide platform that was entirely virtual, no physical offices. And we recognized that high-speed internet in 2009 was pretty ubiquitous.

20:38We had 3G on our phone. We had internet in our homes for the most part and internet was just going to get faster and faster. This is a comparison to say 2002 where it was dial-up internet and you had to go to an office to actually get a fractional T1 or whatever, something high speed. So high speed was really reserved for the downtown office where the fiber had been run, et cetera, et cetera. It really hadn't got out to the households. And if you had high speed internet, it was an ISDM line. That was the high speed back in the day. because you now had high-speed internet, we said, why do we need physical offices?

21:11This is all stuff now we're talking about pretty much regularly. And now after COVID, companies can't even get their employees to go back to the office because fundamentally they're like, why would I go back to the office? Working from home actually makes sense for me. And we said that if that's the future because of what high-speed internet is going to do. So we launched the company with this cloud-based model. We innovated also around the way agents are compensated. Really, we took a page out of network marketing in terms of aligning around how agents can get compensated on not just their own personal production, but on the production of agents and brokers that they introduced to eXp and the agents and brokers that those agents introduced to eXp.

21:51And so we got what we refer to as a seven-level revenue share plan. So you can sort of think about as a seven-level network marketing comp plan. And that was pretty unique as well. Between those two things, we had a lot of cost savings because we were fully virtual. So we were able to pass on some of that savings in the form of an aligned compensation plan. And then we wanted to actually have our agents be shareholders in the company. We were hopeful that the Jobs Act, which was supposed to provide for more opportunities for unaccredited shareholders in a company. But the rules and regs around that just took a long time to actually mature.

22:24And we gave up at the end of 2012. We're saying, we're not going to get to that. So what other way could we actually distribute equity to our agents? Well, at the time, we were only 300 or so agents. We're doing not a huge amount of revenue. It was$7,$15 million a year in total revenue. We were way too small to be a public company through a traditional IPO process. We didn't want to raise money. We didn't want to give up a whole bunch of equity to the marketplace. I had been involved with a number of small public companies back in the late 80s, early 90s. I said, we should buy a public company.

22:59I've been involved around public shelves. And so I contacted a buddy of mine who had done a lot of things with public shells. He agreed to help me find a shell. We found one, cleaned it up, and then we bought it for the single purpose of sharing equity with our agents and brokers. So that was the whole concept. We went through that process. We bought the shell. We cleaned it up for the better part of about six or seven months. Then we merged ourselves into it. Then we still cleaned it up for another almost a year because we still had some legacy shareholders in the public company that were not fundamentally bought into the new model.

23:35So we wanted to get them out. And then at the end of 2014, we actually started to issue equity to our agents and brokers. 2015 was like the first year we doubled in size. So we went from 400 agents to over 800 agents. Then we went from 800 to 2 ,400 and then 2 ,400 to 8 ,000. And so we went on this sort of hockey stick curve of growth. And the reason why was a combination of the way we had structured our line compensation model and equity. Nobody had offered equity in the residential real estate space before because we were actually giving our agents equity. Just that single ingredient was huge for us.

24:10So it probably cost us a little over half a million dollars to actually become a public company. But at the end of the day, it was the best thing we could have done. It was the single biggest catalyst to our rapid growth as a company. How did your capital structure evolve? Because from what I remember in prior conversation, you started off bootstrapping, maybe raise some private capital, and then as a public company, it easier to raise money. What did that journey look like? So 2008 to 2009, so I had a team-based brokerage, meaning that I had a real estate team. And instead of affiliating with a real estate brokerage, which in 2007, we were running a team inside of Keller Williams.

24:50We decided in late 2007 to actually separate from Keller, but run it as our own brokerage. And so we had a great 2007. We had a great first half of 2008. And then the second half of 2008, the housing market collapsed. And so we raised about$150 ,000,$75 ,000. We borrowed $75 ,000. We took in and sort of friends and family. And that got us into 2009. And then in 2009, We retooled the entire business and launched eXp Realty in October of 2009. That was our big fundraising that we did. So it was just a friends and family round. When we bought the public company, we had some of our accredited agents and brokers, accredited shareholders, where we gave them the opportunity to buy some of the equity necessary for us to buy the public company.

25:39So in that, I think there was$200 ,000 or$300 ,000 that they invested in helping us buy the public company. And then after that, I think in 2018, we did another accredited round with some of our agents of brokers where they were able to do a small private placement into EXP. We never went out to institutions to raise money. So we've taken no institutional capital that we put directly into the treasury of the company. And there was some fundamental reasons around that. I wanted this company to ultimately be totally aligned with our agents and brokers. I felt when you go and you raise money in a more traditional sense, whether you're public or not, those companies that put money directly into the treasury, they're going to want to have you answer more directly to them.

26:26So we just resisted that. Now, we have a lot of institutions that own our stock now, but they bought it through the public market. We didn't, quote unquote, ask them to. We didn't go and pitch the company to them. It showed up. We screened for the ingredients that they were looking for in a company and they bought and sold and done the various things that they do. And so we're just part of their marketplace of stocks they look at, but we're not beholden to them because they somehow helped us get to where we're at. Very cool. Non-traditional. Can we talk about your experiences with board of directors and shareholders?