There is very little clarity today about the fast spreading news that Realtor Association shareholders of RE Colorado have given notice that they intend to sell their shares of the MLS to a private equity firm. The Realtor Associations want out of their investment, and it doesn’t really matter why. To date no MLS has ever been sold to private equity investors. Some MLSs have been sold outright to fellow Associations and MLS, but to our knowledge, we never seen private equity enter this space until now. This could set off a wave of transactions if private equity starts to pay attention to the profitable business models of Multiple Listing Services.

Given WAV Group’s significant business unit specializing in real estate valuations, mergers, and acquisitions, we received a flood of outreach from MLS and brokerage clients yesterday afternoon and well into the night about the transaction trying to understand how a private equity transaction works and what advantages it might bring. 

To be clear, WAV Group has spoken with various parties involved in the transaction, but we do not represent the buy or sell side of the RE Colorado stock purchase at this time. WAV Group executives George Slusser, Victor Lund, and Finlay Hair lead the WAV Group Mergers, Acquisitions and Valuations Division of WAV Group. The Acquiring More Profit Book WAV Group published recently articulates a step to step guide to valuations and the mergers and acquisition process honed from the more than 1500 companies bought and sold by the WAV Group team.  

MLS Governance Plays a Role in Valuations

Most Realtor Associations today are not for profit organizations. Many developed for profit companies to house their businesses in printing forms and listing books long ago which ultimately became the technology companies we know today as MLSs.  The profitable publishing companies contributed non-dues revenue to the Association to augment dues revenue from Realtor membership sales. It is estimated that at least 75% of MLS technology organizations across North America we are largely held by Association shareholders. Less than 20 are owned privately. 

The governance of any corporation determines the rights of shareholders.

Aside from the owner of the shares, MLSs have governance that extend ownership rights to shareholders. One specific right of shareholders can be the construct of board of directors appointment. In some cases Association shareholders may have the full authority to appoint directors to the MLS Board of Directors. In other cases, MLS governance structures dictate that all board members must be brokers, elected by geography, size of brokerage or any combination of Association appointees, brokers, agents, or outside directors. However constructed, the board of directors has the responsibility of representing the shareholder’s interest while serving the best interests of MLS subscribers. This includes duties like the supervision of the Chief Executive Officer, the budget of the corporation, the strategic plan, service offerings, customer satisfaction monitoring, mergers, or other major decisions like the offering of shares for sale.

As Chief Executive Officer at WAV Group one of my areas of  specialization in governance, Many of the areas of MLS and Association dysfunction today are caused by breakdowns in collaboration between Association Shareholders and the MLS or a lack of willingness to prepare for the future considering and acting on potential scenarios. Corporate Governance is vital to the healthy operation of any business, but especially an MLS. Governance has been in the crosshairs of MLS boards for a few decades as a result of MLS mergers and MLS/Brokerage relationship dysfunction.. The same is true of Association mergers, like the recent Tampa and St. Petersburg/Pinellas Florida Association merger facilitated by WAV Group. Many governance structures still provide Shareholder Associations with significant authority to control an MLSs budget, place board members on the MLS Board of Directors and even to sell the company to a fellow industry organization or to an outside party. Even some regional MLSs owned by multiple shareholders do not have the autonomy to make the decisions they believe are correct for the regional MLS because of the governance structure.

To my knowledge, no MLS organization has an MLS Board of Directors made up of leaders with diverse, traditional skill sets like other technology organizations do.. Most technology companies beyond MLS technology companies have directors skilled at providing oversight and counsel in finance, technology, security, marketing, strategy, business models and HR on their board of directors. Most MLS Boards today are made up solely of practitioners, many of which do not run their own businesses.. They bring a depth of knowledge of the nuances of the real estate industry, but not the corporate skills or technical acumen needed to run multi-million dollar technology organizations like MLSs. 

To get back to understanding how a sale to private equity might work, we have included a few definitions below:

Stock Sale vs. Asset Sale

Generally, there are two ways of liquidating interest in a company. In a stock purchase, the liabilities of the corporation transfer from one stock holder to the purchaser. In an asset liquidation, the company is terminated and the purchaser does not inherit any of the liabilities of the old company. In today’s litigious environment, asset sales are popular.

Shareholder Buy-Sell Agreements

A significant right or limitation of shareholders are buy-sell agreements. Given that shareholders may have rights to control the CEO or Board of Directors, corporate governance outlines the process that is triggered when a shareholder wishes to sell their shares. Often, the other shareholders or the corporation itself has the first right of refusal to acquire the shares. Because most regional MLSs do not own any of their own stock, the shareholders of the organization can make these types of decisions without them like the one in the works in Colorado. Most MLSs I have worked with do not have even have a first right of refusal to buy back the company from the association shareholders if they so choose.

Valuation

There are best practices that influence the value of shares in privately held companies. Growth companies are valued differently than Value based companies. Growth companies invest profits in growth and do not return dividends to shareholders, while value based companies return profits to the shareholders each year in the form of dividends. 

MLSs are largely value based companies. The shareholder value is calculated as a reflection of the dividend return to shareholders and risk. Before the anti-trust claims against MLSs, the risk of owning shares in an MLS was very low. MLS subscriber income and profits are generally very consistent and predictable. Customer retention rates, a core component of valuations are very high.  MLSs responsibly retain significant reserves of at least 6 to 12 months or more of operating capital needed in case of emergencies. Some house significantly more cash and other reserves than that. Their cash position and the predictability of the income stream can make MLSs interesting acquisition targets.The calculation of the value of shares is based upon the rate of return on capital. Some MLSs operate on very thin, single digit margins to keep the price of services low for the agent and broker subscribers. Others elect to return double digit percentages of dividends to shareholders and drive up their own cash position to allow them build/buy technologies as they see fit. A focus on storing significant reserves drives up the subscription costs to agents and brokers. The dividend rate paid to shareholders plays a significant role in determining the value of the company shares of MLSs.

Political Realities

If brokers and agents are not satisfied with their MLS or Association, they can vote with their feet by joining another MLS or Association of Realtors, but today most stick close to home. The lack of cooperative data from fellow brokers in their market and the onboarding process to learn new technologies and aggregate new data feeds slows them moving around too much. This could be perceived as anti-competitive in today’s environment.  

The Colorado Associations involved in the sale do not retail MLS services to our knowledge. It will be very interesting to see the implications for the Realtor Associations in Colorado as a result of their intention of selling their stock in the MLS. In the REColorado MLS, and selected states around the county, Realtor Association membership is not required to join the MLS. In landmark cases in California and Florida/Alabama/Georgia in the 90’s, the courts ruled that requiring membership in the Realtor Association to subscribe to the MLS is an antitrust violation called “tying.” 

It is unknown what impact he actions by the Realtor Association shareholders in RE Colorado will have on their own membership and financial viability of REColorado moving forward. We know too little to be able to predict any of those outcomes yet. The fact is, though, Associations can share or abandon their shares in an MLS and form a new one, or join another MLS. Again, these decisions ideally consider or even require the support and importantly, the committed action of local brokerages and their agents, but that is not always the case. Association Shareholders have a lot of authority to control the destiny of their MLS, even though most Association board members do not understand technology or the depth of services and market administration and support  handled by the MLS. 

The Problem of Data

A major value of the MLS is its historical data. Property transaction history is the indicator of current market value of homes. Real Estate professionals rely on data from recent, pending, and active listings to create CMAs – comparative market analysis reports. This data is used in discussions with buyers and sellers. Brokerages also using historical compilations for their own brokerage financial analysis and market evaluations as well. 

An Association separating from an MLS does not mean that the organization can take its members’ historical data with it unless those data rights have been outlined in the stock purchase agreement and governance documents. We often see provisions in MLS mergers that give each party the right to a full copy of the data in the event of a dissolution, but not always. 

Recommendations

Plan for the worst and hope for the best. The shareholder rights and governance of an MLS is very important. If you have not reviewed your governance against potential scenarios that may involve a major stock sale, do it right away. WAV Group is here to help you evaluate your governance documents and by-laws to ensure you are fully aware of the unintended consequences of your organizational structure, authority for board placement and leadership and decision-making authority of Association shareholders versus MLS Board of Directors.