“Why would I sell if I was making that kind of money,” he asked dismissively.
The broker wanted to discuss selling his brokerage and cashing out. He had just voiced his thoughts on its value, and he had a really big number in mind. The discussion was complicated by the fact that the firm was not very profitable. In fact, it was his own large team within the brokerage that provided both his personal income and covered much of the fixed overhead. Subtract the earnings of the team, and even with all of the other agents’ production, the company lost money.
As the market cooled, operating multiple offices with all the associated expenses had become costly. When I explained how much his true profits needed to be to justify the dollars he had in mind, the conversation went south… meeting adjourned.
Over the last 36 years of assisting business owners in selling their firms, I’ve seen a lot of techniques used to value companies. (My personal favorite is the “per foot method” meaning how much per foot the boat the broker plans to buy from the proceeds will cost.) The point is that establishing a true value of a real estate firm is a complex and challenging process.
The single most important asset of a brokerage is the agents, and they are free to leave at any time… which they do. The challenge is putting value on a company whose independent contractors have legs that take them out the door. While there are pricing ranges bandied about such as two to five times earnings for example as well as structures including earn-outs on future production, there are numerous factors that drive a brokerage’s value.
Math is the ultimate value driver. The math is the acid test. Basically, there must be enough adjusted income after expenses to cover debt service and still leave a profit for a reasonable return to a prospective buyer. Brokers tell me all the time “a new owner can come in and cut costs while building the sales up.” That is true and buyers will purchase with a firm’s potential in mind, but generally, they will pay a price that is based on history. Buyers typically won’t pay a premium for the privilege of having to grow a company just so they can pay the previous owner their fantasy price.
“profitability is the driver in building equity”
Today, companies are selling for strong prices, but it is all about profitability—I like to call it the “P-Word.” For the brokerage owner, profitability is the driver in building equity and company value. As the market continues to shift, there are limits to how much operational expenses can be reduced to increase profit without jeopardizing the company’s value.
Remember- You cannot save your way to prosperity– so focusing on profit drivers makes sense today.
Here are five drivers of brokerage profitability:
Finally, consider a growth partner to improve your value proposition and profits. Companies seeking to increase value often look for a growth partner to provide needed resources such as expertise, nationally-recognized branding, technology, tools, systems, training and support, referrals, relocation services, acquisition assistance, and ancillary services. Profitable growth requires proper funding, and many companies today prefer not to invest their own capital but instead, look for a partner to provide the funding needed to accelerate their value.
About Rick Ellis
Rick Ellis is a 30+ year veteran of real estate brokerage ownership, mergers & acquisitions, and franchising, As VP with The Corcoran Group, he directs real estate firms with their growth strategies and increasing their market share, profits, business value and exit strategies.
If you would like to learn more and explore what a valuation looks like for your company, click here to contact Rick Ellis today.