How to develop a valuation for your real estate brokerage?

I am often asked, “what is the multiple for valuing my company?” Most are generally surprised and somewhat annoyed when I respond simply with — “it depends.” There are numerous factors that impact value, no single, simple and accurate multiple is applicable. Even within the same market, comparable brokerages may vary greatly in value. Multiples provide ranges for establishing pricing and they are driven by the true profitability of earnings or cash flow. 

Reconstructed cash flow is similar to EBITDA, it includes the net profit or loss, owner and management compensation, personal fringe benefits, non-recurring expenses, depreciation, interest expense, etc. While many will provide broad estimates of multiple ranges from 1.5 to 5 times earnings (and higher in some markets) the reality is that numerous factors drive the pricing including:

Pricing package – The structure including cash, payments, earn-outs, management contracts, non-compete agreements, etc. all drive the pricing package. BTW – I’ll take terms over the price almost every time.

Company dollar – What is the gross profit after commissions are paid to the agents?

Business model – Some brokerage models have much more value than others.

Composition of the income – How much of the business is the owner/broker, family or a small number of agents?

Metrics – Your listing base, average sales price, pendings, 12-month trends.

Per Person Productivity or (PPP) of the agents – How productive are your agents overall?

The local market – Your market size, economics and local market conditions.

Timing – Most brokers are busy now and some feel their company’s value is through the roof – surprisingly, that is not always the case.

Availability of funding –Sufficient funding to facilitate transactions has a strong impact on both the value and viability of firms being acquired.

Management plans – What is the continuation of management’s involvement in the business?

Local M&A activity – What’s the activity in the market and are major players buying?

To make the best plans, you need “a real value”. My suggestion is rather than depend on a multiple “guesstimate,” talk to a real estate M&A professional who knows your market and can give you some direction in terms of what is happening locally.

If you would like to learn more and explore what a valuation looks like for your company, click here to contact Rick Ellis today.

“I’m constantly amazed at the number of brokers I meet who would like to explore different options with their real estate brokerages but don’t have a strategy or plan for doing so. My role is to help the brokerage owner find the options that make the most sense.”

Rick has an MBA in Digital Technology and is a licensed real estate broker. He is a business growth consultant and a regular speaker at real estate industry events. Rick and his wife live on the Georgia coast on St. Simons Island. He is available for consultation with brokers who are looking for options.