“Close only counts in horseshoes and hand grenades,” said famed Major League baseball outfielder and manager, Frank Robinson. While his famous phrase coined in 1973 graphically makes the point that being close to achieving something doesn’t actually provide real benefit (other than in his two extreme examples), I would argue that there is a third comparison where close really does matter:
Close counts in valuing real estate brokerages.
There are many reasons for establishing a brokerage’s value such as financial planning, growth options, merger and partnership opportunities, exit strategies, funding considerations, and more. Each of these have a completely different set of values, but they serve a common purpose: the determined value becomes a starting point for strategic change planning. In some discussions, such as M&A, exit strategies, and partnership opportunities, establishing a close starting point of value becomes the basis of discussions.
Often, no two industry experts can reach the same value concerning the worth of a brokerage so they will often use a range of value. The largest impact on the firm’s value centers around the agents who, as we all know, are mostly free to leave at any time and take their business with them.
I hear the question literally every week, “what is the multiple for valuing my company?”
Most brokers are surprised and often annoyed when I generally respond with — “it depends.” It depends, because there are numerous factors that impact value and no single, simple and accurate multiple is applicable in most instances. Even within the same market, comparable brokerages will often vary greatly in value.
As with most industries, real estate brokerage multiples provide a very basic range for establishing pricing and the multiples are driven by the true profitability of earnings or the cash flow. Reconstructed cash flow is similar to EBITDA; it consists of the net profit or loss, owner and management compensation, personal fringe benefits, non-recurring expenses, depreciation, interest expense, etc.
“It depends because there are numerous factors that impact value…”
While many within the industry will throw out broad multiple ranges that may vary widely averaging from 1.5 to 5 times earnings, the reality is that in addition to the agents, many other factors combine to drive the value. These factors include:
Recently, I was called into discussions of a brokerage’s value after a local business broker with no experience in residential real estate had made a determination of value based on the recent, two-best years in the industry’s history. Unfortunately, the expectations set by the business broker were astronomically high. Just as the residential market won’t see years like we’ve recently seen anytime soon, the disheartened real estate broker will NEVER see the price he was told his company was worth.
To make the best plans, you need a real value. Rather than depending on a “guesstimate,” of value based on an arbitrary multiple, talk to a real estate M&A professional who knows the industry as well as your market. They can give you direction in terms of what is happening locally and help you understand your company’s true value. It’s never too soon to begin planning.