To Sell or Not To Sell?

Like some of the great rivalries in the movies, there are a few debates in the real estate industry that never die. One of those is the contention around whether you should focus on being a selling or non-selling principal. John Knight looks at the pros and cons.

Some say that if you are ‘working on the business, not in the business’, then you cannot be a selling principal. I disagree. Selling-principal businesses are still a ‘business’ that you need to work on – they just have a different business model behind them.

When I analysed the data, I found that selling-principal businesses typically make more as a percentage of income than non-selling principals. Yes, this is a result of leaving commissions in the business, but the dollars speak for themselves.

From observing the results of these rivals over many years, you can also say:

  • Selling-principal businesses tend to be smaller in size, both when comparing team size and total income
  • Non-selling principal businesses need to be bigger, but bigger teams mean a bigger cost base
  • Selling principals have very few variable costs on their personal sales so they keep a greater share of every dollar that comes in the door – more money to the bottom line
  • Non-selling principal businesses need bigger rent rolls – bigger costs need bigger rent rolls to take the risk out of the business
  • Selling-principal businesses spend less on marketing and advertising; they rely on the profile of the principal and often are better at getting VPA
  • Non-selling principal businesses benefit from referrals from the larger rent roll, but this only happens when the divisions are working together as one.

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 is the ‘Principals’ division. This is so we can see how much of the profit (or loss) is the result of the principal’s selling efforts.

Often people are surprised when they see that without the direct profit contribution from principal sales the business would hardly make anything at all. A simplistic view of this would imply that no business exists without the principal selling. That is not the case – it’s just a different business.

The biggest of all differences, though, is simply the reliance on the principal. Although selling-principal businesses may make more money, it is somewhat of a short-term game – often principals simply cannot sustain the pace they work at and sooner or later lose their mojo.

Often what happens next goes one of three ways:

  1. They keep selling but delegate more of their roles, like PM, sales support and administrative duties
  2. They transition to being a non-selling principal and stop selling themselves
  3. They shut up shop and maybe get a job as agent for someone else again

There is no right or wrong answer, but selling principals absolutely must get the balance right sooner or later. This may mean sacrificing some profits to keep their sanity.

The question as to whether you should be a selling or non-selling principal has no black or white answer. We see both models work very successfully, but the drivers of what is right for you are probably more internal than anything. 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 burn out and struggle to grow.

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 break even. In my opinion, this is a good strategy, but where it goes wrong is when you lose sight of the big picture and get stuck selling.

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John Knight

John Knight is the Managing Director of businessDEPOT, a team of energetic accountants and advisors.