Succession Planning for Brokerages

Imagine you have two deals heading towards closing, and another offer pending.  Suddenly, your firm’s managing broker becomes incapacitated or dies. Can you close the pending transactions? Will you receive your commissions?

In this month’s Window to the Law, we will discuss how a brokerage can create a plan to prevent such a disruption in its business. In addition, we will touch on the best practices for a planned transition by a firm to a new managing broker.

Emergency succession plans are something that every firm should adopt to not only avoid disruption of its business but also to protect its assets and clients.  If the licensed entity is a corporation, the process for making a transition to a new managing broker could be addressed in the corporation’s bylaws, and may be as simple as appointing a new managing broker and filing the necessary paperwork with the real estate commission.  However, in states where a corporation does not hold the real estate license or if the firm is a sole proprietorship or single member entity, a more elaborate plan is needed. A well-designed emergency succession plan will contain the following elements:

The name of a successor to the broker or a hierarchy of individuals to succeed the broker. Providing the appointed successor with a power of attorney will give the individual the ability to administer the winding up of the firm’s business activities and may allow the individual to close transactions, depending on the state law.

• Instructions about the location of current client files, escrow accounts, and the brokerage’s licensees;
• Information about former client files, bank accounts, contracts, insurance policies, and association/MLS membership information;
• Information about current liabilities;
• Information on how to access computer accounts, voicemail, and other important passwords.

The way in which pending transactions can be closed when the managing broker of a single member entity or a sole proprietorship dies or becomes incapacitated will vary by state. Many states have laws that allow for the appointment of an individual on a temporary basis to close transactions that are under contract or have offers pending and to terminate all other listings or buyer representation agreements. Brokers should review their state’s law and address the requirements of state law in their emergency succession plan, as some states allow the broker to pick the successor or list potential successors.

In states without a statute, closing pending transactions may be more difficult. In some states, giving power of attorney to an appropriately licensed individual may be sufficient to allow the substitute broker to complete the transactions.  However, not all state real estate commissions will recognize another licensee taking over the clients of the former managing broker.  In those instances, the new broker may need to have the clients transfer their listings to complete the transactions.  Brokers should discuss their options with their attorney when creating their emergency succession plan.

Of course, most brokerages will not need to utilize an emergency succession plan when transferring its leadership from one broker to another.  If the firm is having one broker succeed another at the firm instead of selling the business, here are some best practices in succession planning. First, the firm should identify the individual or individuals who have the skills to lead the firm forward and confront the future challenges that the firm will face.  The individual or individuals may currently work for the firm but external candidates should also be considered.  Once the possible successors are identified, the candidates should be exposed to all aspects of the brokerage’s operations so the individual has a good understanding of the firm’s business.  Finally, the successor should be introduced and become familiar to all important individuals who are involved with the firm, whether it be the firm’s directors or other business partners.

Succession planning is an important issue for all real estate brokerage firms to consider.  A list of resources to help in succession planning are listed on the screen.

Thank you for watching this edition of Window to the Law.