Pre-Merger Decision Guide

Note: the terms "Association" and "Member Board" refer to Boards and Associations of REALTORS®.

The following Decision Guide includes valuable information on the various aspects of a merger including (1) the potential benefits of a merger; (2) discussion of legal and financial considerations; (3) articles and other resources from industry experts; and (4) administrative procedures for processing a merger through the National Association.

For questions and additional information, contact us at (312) 329-8399.

Why Consider Merging?

Major changes are occurring in the real estate industry. The industry tends to be less localized and the number of multi-office firms and corporations is increasing. REALTORS® serve larger markets than ever before and are increasingly seeking economies of scale in all facets of their business. This has prompted many associations to investigate the possibility of merging with one or more neighboring associations.

The primary purpose of an association merger is to join association resources to create a larger, stronger organization. Because the individual association’s fundamental mission (to provide services and promote the common interests of all its Members) is identical to the association(s) with which it intends to join, the merger will serve only to reaffirm and expand upon those principles and ideals.

Some of the potential benefits of an association merger include:

Increase the association’s appeal to area Members, who in some cases would no longer be required to pay multiple association dues and service fees.
Reduce the association’s direct costs (e.g., office buildings, staff salaries, duplicate services such as MLS, etc.)
Enhance the services provided to Members including additional educational offerings, more efficient and effective professional standards enforcement, and improved MLS systems (in some cases, resulting in a reduction of MLS fees).
Increase the operating income for the association which may result in the hiring of a staff person to manage association operations and provide continuity from year to year.
A stronger association can better sustain market fluctuations and can better cope with rising costs of operations.
One larger, stronger association provides the opportunity for wider recognition within the community and organized real estate.

Formation of Joint Merger Committee/Task Force

A sound process can ease the task of merging associations.

The associations which are parties to the merger discussions should consider appointing a joint Merger Committee/Task Force consisting of an equal number of knowledgeable members from each association.

The charge of the group would be to consider the benefits of merging and resolve any issues that may be impediments to a successful merger.

Consideration should be given to actively seeking input from the membership of the respective associations early in the merger discussions to help identify potential roadblocks.

Analysis of Association Operations

The following questions may be used by Merger Committees to help assess the effectiveness of Association operations. For example, does the Association:

Adequately meet the professional and educational needs of its Members?
Sufficiently represent REALTORS® and the industry before local legislative and regulatory bodies?
Have the resources to be financially viable?
Participate in REALTOR® Calls for Action, Broker Involvement Program, and other REALTOR® advocacy efforts?
Take full advantage of the programs and services available from the State and National Associations?
Maintain complete, accurate, and ongoing membership, financial, and legal records?
Have a Strategic Plan with a road map for the future?

Association Mergers

When two or more associations have determined that merging is a beneficial move for serving their Members, there are numerous steps that must be taken which will require the service of an attorney and a professional accountant. Associations may want to consider retaining separate counsel to advise them and look after their interests. Although a merger is essentially a cooperative transaction, the interests of each association do at times diverge and it may be prudent to have separate counsel.

Financial Considerations

The essence of a merger is the joining of forces to create a larger, stronger organization. The associated financial implications should result in a larger budget and greater assets.

In the process of merging the assets of each association, some property or other fixed assets may be sold to eliminate duplication or to make the new organization more responsive to Member needs. It should be clearly understood from the outset that the new organization will receive the proceeds from the sale of any assets.

A merger is different from an acquisition (where one group will be paid for its assets). Members should not expect to receive direct monetary remuneration for their past or ongoing contributions to the association.

To deal with the financial matters:

The Merger Committee should request a current balance sheet from each association.
The balance sheet should summarize the assets of the association.
The assets of the association should include the cash, investments, and accounts receivable (net of possible uncollectible amounts), property (including building, equipment and autos, etc.).
The assets of the association should be reported at current market value.
Any outstanding liabilities also should be listed.
The liabilities of the association would include current amounts due to vendors, as well as long term liabilities such as the building mortgage.
The Merger Committee should periodically receive updated balance sheet data, since the operations of the association will continue during the period of time the committee is deliberating.
Associations should retain the services of a professional accountant to guide them through the financial implications of the merger.

Legal Considerations

The legal process for merging two or more corporations is prescribed by state law and therefore, will differ from state to state. The association(s) should discuss these requirements with legal counsel early in the merger process so that compliance with all necessary requirements can be planned and more easily achieved. Although requirements may vary from state to state, they are likely to be generally similar, but not necessarily identical to the generic prototype format which follows.

Merger Agreement

The decision to merge requires working out some details, which ultimately will result in the merger agreement. Such an agreement may or may not be required by state law, but even if it is not, it is necessary to effectively and efficiently complete the merger. The merger agreement will establish the mutual understandings, rights and obligations of the associations which are parties to the merger, and establish the "ground rules" and processes which will lead to completion of the merger. It should identify each association involved in the merger and specify which of those associations will be the “surviving” association.

A Sample Merger Agreement can be found herepdf. Although it may not be all-inclusive of the issues which you will want to address in your agreement, it should serve as a valuable guide.

Download: Sample Merger Agreementpdf

Name

The name of the corporation needs to be chosen as it is a part of the agreement. This name may be the name of the surviving association; the name of another of the merging associations, or a request for a new name may be submitted. In the event of a new name, the name must be descriptive of the actual area served by the association.

Learn more: Procedure for Approving Names of Associations

Composition of Board of Directors

Among the amendments to the bylaws of the surviving corporation is the decision of the composition of the Board of Directors. It may be most convenient for the association to make the merger effective at the end of an election year so members of the new merged association of REALTORS® may elect the new Board of Directors. Combining existing Boards of Directors for mid-year mergers can present complications. In the event of a mid-year merger, the associations may decide to have the "surviving" corporation's Board of Directors serve as Directors for the new association until the next election.

Approval

After the Boards of Directors of the associations have approved the merger, the matter must be submitted to the voting members of the respective Associations of REALTORS® for approval. Approval must be by a majority of the members present and qualified to vote at a general membership meeting called for such purpose at which a quorum is present, unless otherwise specified in the association’s bylaws or unless there are other requirements of state law. Upon approval of the merger by the National Association, the appropriate documentation, which may include the merger agreement, must be filed with the Secretary of State. Procedures for approval of the merger by the National Association are detailed herepdf.

Learn more: Association Merger Procedure

Other Matters

Other matters which are not strictly legal that should also be considered and addressed by the merging associations are:

(1) transferring the funds in association accounts to the account(s) of the surviving association and closure of the existing accounts;

(2) termination of liability and other insurance policies of the merging associations and procuring appropriate insurance for the surviving association; and

(3) preparation and filing of an application for tax-exempt status for the surviving association or advising the Internal Revenue Service of revisions to the Articles of Incorporation and bylaws of the surviving association.