Ep8: Granting the golden handcuffs — with Kristen Porter

“One of the things I always look at is do their strengths complement yours? You know, have you done a team profiling session? Do you know what each other's strengths are? Because obviously like can attract like and we don't want to be building a team or building ownership around the same type of people.” 
— Kristen Porter

This episode features practical tips from Kristen Porter, O*NO Legal and Kate Sunol, PropertyMe on how to know when it's right to lock in the golden handcuffs, and setting up partnerships to succeed.

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Transcript

Transcript - Kristen Porter

Kate:

 Hi and welcome to Property Management and Me, a series from Property Me bringing quick tips and insights that will make a difference to your everyday property management practice.  I'm your host, Kate Sunol. And today I'm joined by Kristen Porter from O*NO Legal. Kristen is the founder and legal strategist at O*NO Legal, and with 15 years of experience in private practice, and born third generation into the real estate industry, it's not surprising that when she started her own firm, she dedicated it to providing innovative, tailored and all-encompassing legal services to real estate agencies.

But moving away from the traditional strong risk management focus, Kristen really excels at helping agencies grow. Welcome, Kristen. It's so great to have you here. 

Kristen:

Thanks so much for having me, Kate. I'm really excited to talk about our topic today.

Kate:

Yeah, I'm actually really excited about this one as well because we're chatting on the golden handcuffs, which I know a lot of people in the industry often wonder about the ins and outs, but don't really know and it's really becoming quite considered and popular that benefits both agencies and property managers or BDMs. So can you unpack a little bit about what we're referring to when we say golden handcuffs? 

Kristen:

I might start with what golden handcuffs aren't. So golden handcuffs are not a rich person trying to get out of jail, it's not something from 50 Shades of Gray. It's definitely not reactive HR and as a business owner, you should never be looking at this coming from a place of fear, if that makes sense. But we'll talk about that in a little bit, but what are golden handcuffs exactly? Golden handcuffs are used for a strategic HR reason mostly for retention and also for succession planning for the principal. And Gglden handcuffs are becoming more and more popular, especially given the retention rates in the industry. I thinkyou've seen it, Kate, we've seen it, you know, like all the different Facebook groups and everyone's always talking about it, just how many people are leaving the industry.

And so. Golden handcuffs are a really good way of locking in that gun team member that you have into your business by giving them equity in the business. 

Kate:

Yeah. Okay. So when we talk about equity in the business how does that differ say from possibly commissions or a profit share from what they're bringing into the business?

Kristen:

Yeah. And actually that's a really, really good question because you don't always have to give up equity in the business to retain someone if that makes sense. And I think it's always really, really important to work out what actually motivates our team members, and I know for me, what motivates me over time has changed.

Like when I was a junior lawyer I would have taken extra annual leave over any kind of profit share because I love to travel however in this context, what we're talking about is having them actually have an ownership stake. So they feel super invested in the business. And also as the business grows and the share value goes up, they participate in that growth in that equity value, if that makes sense.

Whereas if it's just a profit share, it's just kind of extra cash into the bank account, rather than that real investment into the business. 

Kate:

Yeah okay. So the profit share being the more temporary sort of incentive, similar to a bonus or a commission, whereas equity has that long-term strategic alignment attached to it.

Kristen:

Yeah, absolutely. And it could also be used, I mean we spoke about just retention right now, but it can be used as part of the succession plan for the business. There are a lot of ways an owner can exit the business such as, you know, selling, selling the rent roll, or selling the agency to a third party. However, you could have someone really hungry in your agency for ownership and over time, you could sell down to them. So you might bring them in to start with at, say, 5% with the long-term view that perhaps they'll eventually take over the business.

I suppose it's a little bit like an internship, I suppose. You bring them in and you can teach them the ropes and have them buy in over time. What we find often is that gun team member, especially if they're younger, not everyone, but especially younger people they may not have the finance to buy in at say 50% straight away. So that's why that sell-down over time can actually be quite a valuable tool to use. 

Kate: 

Yeah. So it's like they’re interning to be the owner of the business essentially. Yeah, of course and then what you do, and every arrangement is different. That's why, that's why I love these. They might buy in at 5% and they might be able to have a say in certain things in how the business is run. But what you can do in a shareholder's agreement and say look these are the big decisions that everyone needs to agree to, but generally the Principal who still has generally speaking, the higher equity share, so they get higher voting power, generally the decisions are still made by them, except for the really big things like, are we selling the agency? Are we borrowing a heap of money? Are we bringing in another shareholder? 

Those big decisions generally get made by everyone. But a principal that might be a little bit of a control freak, like I'm a little bit of a control freak, would find the sell down over time probably more comfortable, so you can still make the decisions, steer the ship in the right direction, and like you said, have them come in a little bit. So they are an owner, but you train them up to be able to take over completely at some point. 

Kate:

Yeah, of course, and then that transition for the clients and the staff and everything just really flows on because it's essentially just a continuation of how things have been operating. 

Kristen:

Yes, exactly. And one of the big things we do a lot is in the buying and selling rent role space and, you know, most of the listeners that are owners would have heard of the concept of lost management center retention period when you sell your rent roll it can be leakages in the sale price. So, especially if it's to a third party, whereas like you said, if you bring that person in and everything pretty much stays the same, that person already has a relationship with your clients when you do sell down over time, you're probably not going to have that leak in price as much as you would if you sell to a third party.

Kate: 

So what sort of things would you want to be looking for in an employee or when would be the right timing to start having these conversations with someone in your team? 

Kristin:

Yeah. So I think the first part of that is who's the right fit? So sometimes it's identifying a key role in the business, it might be one that has generally high turnover maybe or it's some, a position that you can't live without, or you can't see yourself living without that person. I think obviously cultural fit is super important. I think it's important anyway with our teams, but especially if we're bringing them into ownership, cause they'll be in even more of a leadership position. 

One of the next things I always look at is do their strengths complement yours? You know, have you done a team profiling session? Do you know what each other's strengths are? Because obviously like can attract like and we don't want to be building a team or building ownership around the same type of people.

You do want to bring in different strengths that do complement yours. I think it needs to also be looked at as part of your broader exit strategy to make sure this is the right fit for you. And sometimes not just based on strengths, like I just mentioned but it could be that you do bring someone into the business and then let them buy-in and you're bringing them in because. Perhaps you want to expand into a different service area. You might be, might be a property management only business and you want a sales division. So you might actually bring a salesperson in with maybe some KPIs or some milestones to say if you hit these things. then you can buy in. So there's a lot of different things to consider when you're thinking about who is the right person.

In relation to timing, anytime, really, if that makes sense. This, this time of year we're recording this session coming up towards the end of the financial year, this time of year, everyone wants everything done by 30 June, so it's a clean set of financials for the 1st of July, so often these things are done near the end of a quarter of financial year, but it doesn't, it doesn't really matter.

Kate:

Yeah, 

so looking at this as a retention piece as well, not just for succession planning. If you were looking at this person being a long-term part of your business, are there other things that you would look for in that instance? Or is it very similar sort of planning? 

Kristen:

Yeah, I think. Both of them are similar planning. I think it always goes back to you start with the why, like, why am I doing this? I mentioned earlier that place of fear. there's, I have seen agents out of fear or desperation that they're going to lose someone to bring them into ownership and when it comes from that place of fear, I think things can go wrong. Even when I was starting O*NO Legal, I had run a business before, not a law firm, though. And I think that imposter syndrome was starting to come in, young, female, all those things, even though I've been a lawyer for 15 years. I almost took on a business partner right from the beginning. And my business coach really challenged me on that and said, It's all of your intellectual property. It's all of your idea. Why are you thinking of essentially giving 50% away to this other person? And when I really sat with it, I realized it was coming from a place of fear that I had not run a law firm and I'm really glad my coach at the time challenged me on that because I didn't end up bringing the business partner in at that point. We still get along really well and they have their own firm, however, looking back, I'm glad I didn't give away 50% of what I had been starting to build if that makes sense.

And so that's why I like talking about, let's not do this from a place of fear, let's do it for a strategic reason. 

Kate:

Yeah, so steps that you would be taking to implement the strategy really would start with that why, and then where would you go from there? 

Kristin:

Yeah, so definitely start with the why, and then obviously, who is this person going to be?

You might already have your eye on someone in your agency, or you might have your eye on someone at a different agency to bring in. 

Let's just focus on the, they're already in your agency and you want to offer them some kind of ownership. The first question that, that employee is going to ask you, well, In my experience, that first question is, Oh yeah, that sounds really good but how much is it going to cost me? Like how much to buy in? 

So you want to be ready with that answer. And yes, your accountant can do, I suppose what we call a desktop valuation or based on the P&L. However, I recommend getting an actual valuation done by someone who values real estate agencies, especially rent roles, because that's where your value mostly is.

And that way, when you go to that person you know what a fair price is if that makes sense and you can show them the valuation. So that's always the first step. 

I think, from there, you might have a term sheet between the two of you, especially if you're going to build in some KPIs to say. I'd like you to be able to buy it in the future, but you have to help me hit, you know, these growth hurdles or, or whatever the KPIs are that you really are interested in.

From there you then have a contract for sale, a bit like when you, when you buy a house, you have that contract for sale. There's then a period between when you sign and exchange the contract and settlement. What we do recommend once you do have business partners is something that's called a shareholder's agreement.

So the shareholder's agreement is what I like to call the relationship roadmap. It sets out how you're going to interact with each other, how decisions are made, how the business is valued when someone wants to leave, you know, what also happens if someone dies or becomes totally impermanently disabled. Or what, what if they've been bad or they've been naughty, like what if they've lost their license or they bring the business into disrepute, how do you get rid of them?

So whilst we've got the actual sale process. It's really important to have that relationship agreement, that shareholders agreement in place, looking to the future. 

Kate:

Yeah and that exit strategy, if you do want to go different ways in the future, can be mapped out. It doesn't have to be a forever thing, although you'd always hope, hope that it does. But you can put those things in place to sort of test the waters and see how it's going as you roll out the ownership. 

Kristen:

Yes, absolutely. Because you always do want an out, both yourself and the person coming in in case it doesn't work out. And that's why usually in that shareholders agreement, when we're all happy and we're getting along early on, we put those rules in place for what happens when someone wants to leave.

We do that early because often what I've found is when everyone's happy, even if you don't agree on something. Sometimes you're only like a very small amount apart in that decision-making is easy to come together. Whereas if something's gone bad it's very, very hard later on to get any kind of agreement on anything.

So that's why, yeah, very important to give yourself the out if you need, but also having really clear rules around it. So the person that's coming into your agency that's buying in has comfort. About that. You can't just kick them out for any, for no good reason, if that makes sense. 

Kate:

Yeah, of course. If they're, they're investing into the business and they want to know how secure that investment of their time and effort and money is for the future.

So, if you're thinking, yep, this could be a really great option for me, how would you start the conversation? 

I have a bit of a different approach to, I think, most, most lawyers. What I would start with you is about the person, if that makes sense. So, work out for yourself, and I'm actually doing this, At the moment, because we're starting to look at bringing business partners into own a legal, which is fantastic.

And it's not coming from a place of fear. Now it's strategic. We start with what our five non-negotiables are for our career, if that makes sense and getting the other person to do that, to see if you're actually aligned with what you want for yourself in the future. Really find out what motivates that other person.

Because, you know, like I said before, it may not actually be equity. That person might want extra holidays or more commission or something like that.  So really important to work those things out before going too far down the track, I'd look at both of your strengths again, to make sure you complement each other.

And then if all of that is aligned, then you can plant the seed. And so what an owner could then say to this leader or person that they want to bring into the business is perhaps something along the lines of, you know, I've been thinking about the future of our agency and I've noticed not only your leadership skills, but your dedication to the success of the business.

And given your five non-negotiables, which is what I spoke about, and your strengths and what motivates you, I'd like to discuss your longer-term place in our business, including what becoming a business partner could actually look like. I'd like you to have a think about what becoming my business partner could mean to you.

And then we can talk about it in more detail next week. So not putting them on the spot, if that makes sense, kind of planting that seed and going from there. 

Kate: 

Yeah, definitely it. And they're great questions to be asking anyone that's on your team.  Anyway, so it's really a great process that you've mapped out there to follow just to get to know that person and essentially where they're going with their career.

Thank you so much for joining us here today, Kristen, and sharing your experience in this area. If people would like to continue the conversation, how do they connect with you? 

Kristen:

You can find us on all the social media platforms, but feel free to get in direct contact with us at let's chat onolegal.com.au also on our website, the top right-hand corner, we've got our free 10 minute chat function where you can book in and have a chat with us on any of the legal topics that affect your business, but especially on these golden handcuffs, because we really love putting these in place and, and seeing the agency thrive because of them.