The Real Deal New York

Acquisition lifeline: For some firms, getting bought is the difference between staying in business and going under

Without a white knight, Town Residential and Eastern Consolidated were forced to close their doors
By Rich Bockmann and E.B. Solomont | July 09, 2018 01:20PM

Mergers and acquisitions aren’t just about growth. For some firms, they are the final lifeline. And without that lifeline, the company goes under.

Such was the case with Town Residential and Eastern Consolidated, which spent a combined 45 years brokering deals in New York. In the span of just two months in 2018, both shops pulled the plug.

This spring, Town CEO Andrew Heiberger shopped the eight-year-old firm to former rivals.

Related: Real estate’s new age of mergers and acquisitions 

Sources said Elliman agreed to pay him a gross percentage of commissions to acquire all of Town’s agents. But the deal collapsed when Elliman Chairman Howard Lorber made it clear he would drop Town’s name and would not agree to assume the firm’s debt.

With no white knight in sight, Heiberger ceased Town’s resale and leasing operations, effectively shutting down and sending around 400 agents scrambling for new jobs. “It was definitely the last option,” Heiberger said at The Real Deal’s new development forum in May. “And really the only option.”

Heiberger has attributed Town’s downfall to a confluence of external factors that made it nearly impossible to turn a profit. But while other firms are seeing their margins tighten in this market, Town’s high expenses — for rent, parties and agent perks — were undoubtedly part of the firm’s undoing, sources say.

In the case of Eastern, the 37-year-old company had dug itself into a hole it couldn’t climb out of.

On TRD’s most recent investment sales ranking — a tally of closed sales of $1 million-plus in 2017 — the firm closed $622 million in deals. That was down 60 percent from the year before, one of the biggest drops on the list.

By comparison, Meridian Capital Group — which launched its investment sales division in mid-2015 after poaching Eastern’s David Schechtman and Lipa Lieberman — beat out the firm by more than $300 million, even while its dollar volume dropped by 40 percent.

Co-founders Daun Paris and Peter Hauspurg considered forming a strategic partnership with another brokerage to breathe new life into the company. But a deal never materialized, and on a Friday in the middle of last month they called a companywide meeting to tell their employees that the firm would shutter in a month. “They said it’s a tough market,” said Eastern broker Daniel Wesson. “And they didn’t see a light at the end of the tunnel.”

The brokerage’s demise, sources say, can be traced to an ill-fated decision to pivot the firm’s platform about five years ago.

Paris and Hauspurg decided to expand outside the company’s bread and butter and hired Chief Sales Officer Mark Schnurman to retool the firm’s sales process: Instead of having veteran brokers prospecting for deals, Eastern went on a hiring spree, bringing on junior salespeople to canvass for deals and pass them up the food chain, with all sharing a cut of the commissions.

Some speculate that the plan may have been to bulk up the company for a potential sale, but the playbook didn’t produce the desired results.

One of Eastern’s biggest shortcomings, sources said, was that it didn’t dominate any one sector. With income dwindling and the increased overhead, Paris and Hauspurg decided in late 2017 that the only way to save the business was to sell it off. They hired an investment bank to evaluate the opportunity.

“During this process, other opportunities arose, but they all came with terms and conditions with which we were not comfortable,” the husband-and-wife duo said in a statement.

The sale of a private company can, indeed, be a messy affair.

“The thing that’s different about a private deal and a public deal is really that the sellers are still around after the transaction closes,” said Richard Morris, a partner at the law firm Herrick Feinstein.

With a sale of a public company, one party buys the other’s shares and the two go their separate ways. But with private firms, both sides often have to agree on everything from noncompete clauses to which managers and employees will stay on. Often there are also performance guarantees or benchmarks that need to be hit for the sellers to get paid.

And obviously, they need to agree on price. Sources said the fact that Eastern was burdened by high overhead gave it a weaker negotiating hand on that front.