EasyProperty & The Guild
An unholy alliance or a godsend?
Two weeks ago, established property company The Guild of Estate Agents and PropTech business EasyProperty announced that they were to merge in a deal that would “allow independent agents access to [an] online sales and lettings platform.”
As the dust settles on the deal (although we note that completion is scheduled for July 2017) we examine whether it is likely to provide the Guild with a kick-start to a digital transformation strategy or if EasyProperty will find their business model and – whisper it – profitability.
This article will look at background to the deal, why it happened in the first place and why it could eventually be seen as one of the worst knee-jerk responses by a traditional firm to the threat of digital transformation.
We chose to allow some time to pass before publishing this article because the deal generated so much discussion across the industry, much of which we incorporate below. It certainly got many people, from both sides of the traditional and online business models, talking and so we have taken stock, sought a thorough understanding of the deal and now produce a wider reaching article.
One influential commentator told us that they found “the fact that two such different organisations teamed up [to be] super exciting”.
Let’s explore in more detail.
The Guild is “a membership organisation with a national network of approximately 800 independently owned estate agents” according to their website – though we hear it is more like 450 to 500. Each of the ‘800’ independent agents are the only (or nearly the only) Guild member in their respective area and pay a fee to be a part of The Guild. We are informed by a well-placed source that these contracts are primarily on a month-to-month basis, with no tie in.
The Guild also operate the Fine and Country brand which “was born out of a request from the members, for the Guild to create, design and implement for them a premium brand which would assist them to list more upper quartile properties in competition with the established “big name” brands.” This is a franchise type relationship.
EasyProperty is an online estate agent, charging a flat fee of £825 + VAT to sell your home or £99 + VAT for a tenant find service. Incorporated in Autumn of 2014 it was set up promising big things; firstly stating it would make a profit of £2.9m in the year to September 2016, on a turnover of almost £24m. However, it recently announced a turnover of just £875,000 on an operating loss of £11.3m.Mr. Ellice, the CEO, is quoted as saying the company expects to be listing 4,000 to 5,000 properties each month by 2016. Two years later, the reality is around 80 properties per monthClick To Tweet
To quote a point made by Mike Delprete about those same results “back when the business launched, Mr. Ellice, the CEO, is quoted as saying the company expects to be listing 4,000 to 5,000 properties each month by 2016. Two years later, the reality is around 80 properties per month”
These weren’t the only public proclamations that were put out there by EasyProperty. In a PR stunt which looks like it has come back to haunt them, they paraded a funeral cortege for “The Death of Estate Agency” through London with an old fashioned hearse and horses. Whilst it was tongue in cheek, we wonder what the Guild members make of it.
In any event it seems fair to say that the evidence shows EasyProperty has underperformed against its own criteria for success.
We have it on good authority that the deal rests on the release of approximately £15m cash by Tosca Fund (one of the main backers of EasyProperty.) Of this, we are told that the vast majority has been used to buy out Guild shareholders, leaving a smaller proportion available for operational or marketing costs associated with EasyProperty
This begs the question – why is the transaction being described as a merger if it is in effect a purchase of the Guild by EasyProperty’s main funders? The organisation structure put forward by the Guild certainly shows this to be the case.
We also must look at the question of the valuation of the combined businesses. Back in 2015, the last time EasyProperty raised significant funds (£25m), it was valued at nearly £100 million.
To quote someone close to the deal:
“What’s interesting is that this deal for EasyProperty is at a substantial down round. Their valuation when Tosca invested was £78m pre-money. That’s almost £90m post money.
Therefore this deal has slashed 70% from its ‘value’. Astonishing.”
Down-valuations are an anathema to venture businesses. However, even at this lower valuation, what rationale can be used to justify it? Only an understanding of why the deal has been done could offer some insight on this.What's interesting is that this deal for @EasyProperty is at a substantial down round. Their valuation when Tosca invested was £78m pre-money. That's almost £90m post money. Therefore this deal has slashed 70% from its 'value'. Astonishing.Click To Tweet
Let’s look at the deal from the perspective of each of the main players and try to understand what has motivated them to do it. There are four main actors in this play.
As a business, EasyProperty has a brand but its financial performance suggests it doesn’t have much more than that.
It is not controversial to say that “Easy” has brand value. It is also not controversial to point out that this brand value, whatever it is, has not yet translated very well into the world of property.
While we can’t be absolutely certain why that is, we can see from the city’s reaction to PurpleBricks that the distribution of their product through LPE’s is considered highly valuable.
EasyProperty never built this network out at any scale and so, leaving aside questions about the tech product (to which we will return), it seems apparent that this deal delivers the promise of distribution through the Guild’s 800 or so members, which they propose is effected under a license agreement costing £500 per 20,000 properties.
Perhaps this distribution network is seen as the elixir for the business; the missing piece of the jigsaw to leverage the EasyProperty brand.
Until this deal, EasyProperty was, in effect, the domain of one man, Rob Ellice. As the founder of EasyProperty, Rob retained almost total control of the business. However, the performance of the business as per its latest financial statements show a firm that was heading for insolvency with enormous losses unsupported by its balance sheet. In other words, EasyProperty was a bug in search of a windshield.
In the new business, Rob is presented as the Commercial Director.
In such circumstances, it is clear that the EasyProperty Founder has taken a dilution in his equity and a step back from the decision making role he previously had. This transaction could not happen without his blessing.
It can only be concluded that this transaction is a salvage operation from his perspective, in an attempt to avoid a total loss.
One caveat on this: the financial reports show that Rob Ellice earned very good money while running EasyProperty so his losses are somewhat mitigated here
We mentioned earlier that down-valuations are an anathema to a venture business. Well, the same rule applies to venture business investors. However, there is one even greater anathema and that is having to report a total loss on your investment to your limited partners.
Given the financial performance of EasyProperty, and the inevitability of a further cash call or insolvency, then this transaction is undoubtedly seen as a hail mary salvation attempt to rescue some value from the initial investment. If one can infer from the announcement associated with the deal, where the Guild state that they “can imagine becoming very valuable” then that salvation is the hope of a future IPO.
The rationale for the transaction has been put forward at length by the Guild in their email announcing it. To summarise, they see it as a “defensive” move against the rise of online agents rather than choosing to “stand back and do nothing.”
In practical terms, this means that the Guild will allow those members who buy a license to use the EasyProperty brand to offer a low fee, low service proposition which they envisage will enable their members to compete with PurpleBricks et al.
By their own admission, this transaction comes on the back of failed pilots of their own product PropertyPlatform and abortive attempts to offer white labelled solutions under agents’ existing brands.
In summary, it appears the Guild have tried everything else they can think of and are now into hail mary territory as well.
Why would this appeal? Well, there are many rumours suggesting that the Guild allegedly has flotation plans of their own. One can only assume that these flotation plans are completely flummoxed by the market sentiment towards traditional agency and a tech strategy is seen as the only viable route to still achieving it.
Taking all of these stakeholders in the round, it is likely that this strategy is the only one they have been able to identify which offers them all some potential hope of a future exit event.
So although we can identify the likely rationale behind the transaction, even if it does appear to be driven by desperation and defensiveness rather than solid opportunity and proactivity, we still ought to ask whether the plan itself is likely to succeed.
This plan rests on two huge assumptions as well as representing a complete test on systems and personnel at the Guild. This could be a rocky road.
Another influential PropTech figure stated:
“I think it’s a phenomenal deal (subject to two caveats – the franchisees buy the idea and the Easy brand is/remains accretive”
This comment gets to the crux of the matter. It could be a good deal and, on the face of it it appears that the deal avoids mistakes made by Countrywide during their own attempt at building a low-cost digital proposition.
Let’s look at these two caveats and a couple more of our own in more detail.
Franchisees “Buying” the Idea.
Firstly, the Guild have to convince the 800 current Guild members that the proposition is a good one and worth investing £500 per 20,000 properties that they currently cover.
Indeed, we hear it is a hard enough justification to increase monthly membership fees for the Guild, let alone justify an entirely different business model that they have previously steered away from.
If franchisees don’t stump up cold hard cash, the plan looks to be at serious risk as it won’t get the distribution that EasyProperty so sorely needs.
The Easy Brand
There is no evidence that the Easy brand has ever been accretive in the property sector. The lack of traction demonstrated in EasyProperty’s financial figures is the cold hard evidence of this.
Might the Guild’s members feel that, with their expertise and local reputations, the brand may be worth more to them than it was to Rob Ellice? Only time will tell on this point and the answer links directly to the caveat above.
However there is no doubt that Easy is a well known and liked brand amongst investors across a wide geographical area. This may make it possible for the business to obtain further venture financing in upcoming years, which could prove very helpful.
Furthermore, the cultural risk is amplified by a deeper look at EasyProperty’s brand values compared to those of the Guild’s other brand, Fine & Country:
EasyProperty’s brand values include:
- Great Value
- For the many not the few
- Taking on the big boys
These are totally at odds with the mentality of F&C. Their website is peppered with adjectives like:
They take it a step further advertising polo events through their events page.
This is so at odds with the Easy brand it is unfathomable as to how this can be turned into commercial branding strategy to be deployed by the same workforce wearing different hats at different times.
One commentator pointed out to us that they are just such different brands for different client bases, that there is a huge brand risk to Fine & Country agents.
Kristjan Byfield puts it rhetorically and eloquently when he asks “do Rolls Royce give away flights on EasyJet? Does an Aston Martin come with a PoundStretcher gift card? ”
We shan’t bother to answer those.
If our information is correct then the majority of the £15m from Tosca is not being used for marketing.
This is a massive problem in our view. Even if the Guild’s members sign up en masse, this distribution network is not the same as marketing. Look to PurpleBricks for evidence of what is required to support the growth of a national brand, even with distribution through LPE’s on the ground. We are talking tens of millions of pounds.
It is very difficult to see EasyProperty entering the public’s consciousness without at least a budget of £15m per annum purely for above the line marketing.
Although we can congratulate those behind this deal for creating a fighter brand, unlike Countrywide, they have totally ignored the cultural and economic difficulties of offering a low cost service through the same network of people.
How on earth will this proposition affect the incentives for the small businesses which make up the Guild’s membership base and the people they employ? Can you truly imagine a Guild agent walking through the door with a Fine & Country hat on and switching it midway through the appraisal for an EasyProperty hat?
This clearly hasn’t been thought through at all and again will link back directly to the first caveat.
What exactly have the Guild got in EasyProperty’s technology stack? Even if it has been built properly and has some protectable IP in it, how can it possibly be known if it works given the absence of any volume of customers processed through it?
This is an enormous risk for the Guild and we doubt that it is one which has had any rigour applied to it when assessing the potential downsides to the transaction. It is, simply put, a vote for the failure of EasyProperty’s technology.
It is very hard to understand why, if I were an independent agent, I would want EasyProperty’s technology, especially if someone like Emoov offer their own tech stack on a SaaS basis.
Cultural & Contractual Issues
The Guild’s own members appear to be no fans of the budget agency models.
Just have to look at comments made on Property Industry Eye after the announcement:
These comments may not be representative of the wider membership base but they are hardly encouraging. Could this deal in fact lead to a desertion of the Guild by its members, worried that their own body is attacking their core business model?
Presumably, if Guild members don’t take up the license offer on a right of first refusal basis, it will then be sold to competing businesses. How will Guild members react in this scenario – especially in light of the fact that their own website suggests negativity about online agent models?
Consider even recent articles on the Guild website that argue the case for high street agents over online agents; this was from just two months ago. Then there are quotes like this one from another article criticising the very fee structure that will need to be sold into the network:
“you pay a non-refundable sum (normally the best part of a thousand pounds) up-front, whatever the outcome. When you don’t sell or the offers secured seem very low, this may no longer look like such a good idea.”
What is most concerning, even from these articles, let alone any rumour or tittle tattle we pick up elsewhere, is that they were written by the Guild and its members against the very model they are now adopting.
Regular readers will know our view is that all of these kind of transactions are part of the wider issue of digital transformation within the property industry. A defensive move such as this, with so many strategic questions and risks associated with it, is an understandable reaction to this change but is, in our view, completely the wrong response.
There is no doubt that established brands and online offerings will increasingly work together as online and traditional models converge. However the execution and rationale needs to be more thought through than this.
On one level, the Guild ought to be applauded for trying something innovative. Digital transformation is, at its heart, about evolving a business model and the Guild seem to be trying to do this. However, much like Countrywide, if you don’t tackle the problem with the correct framework then enormous pitfalls await you.
True digital transformation can only properly succeed when a company takes a long hard look at its existing strategy, works with all stakeholders, draws up an action plan and appoints key people to oversee and implement the changes. Where is the evidence of this in this transaction? It looks like a fait accompli presented to Guild members with a “like it or lump it” approach. The message is “if you don’t buy it, we’ll sell it to your competitor.” This hardly seems conducive to good outcomes.
All things considered, we therefore doubt that this transaction is likely to deliver either outcomes of a successful digital transformation for the Guild or help EasyProperty find a sustainable business model.
One rider however. The project is under the stewardship of a well respected and experienced agent, Jon Cooke. It will take someone of exceptional ability to pull this project off given the headwinds we identify above. You can watch him explain the deal here. We hope he is ready for the task ahead.