How much is my business worth?
“How much is my brokerage worth?” It’s a question I hear almost daily and brokers are generally surprised when I tell them, “It depends on why you are asking.”
There are many reasons for establishing a brokerage’s value such as financial planning, growth options, funding considerations, merger and partnership opportunities, exit strategies and more. Each have a different set of values but they have a common purpose; they are usually a starting point for strategic change planning. Often the reason for determining value is to plan an exit strategy.
Below is a list of the ten most common reasons brokers begin planning for a transition:
- Health issues**
- Succession planning
- Exit strategy
- Changing broker models
- Desire to cash out or reduce risk
- Disruptive technologies
- Increasing competition
- Financial challenges
- Avoid economic downturns
- Desire to focus on transactions
(**#1 reason owners sell – often means “sick and tired” of the day-to-day management of the business)
There is no single industry standard for valuing a brokerage because each business is unique. Even within the same market, comparable brokerages will often vary greatly in value. In essence, there are two values: the asset value and the goodwill.
Asset value is minimal, not much more than a well-orchestrated fire sale. Goodwill is the main component of establishing pricing and it is driven primarily by financial performance such as income, company dollar, expenses and true profitability (derived from reconstructed cash flow including net profit, owner’s compensation, personal fringe benefits, non-recurring expenses, etc.). Brokers need to have accurate insights into their company’s value so they can weigh their options.
While brokers may throw out values such as 1½ – 3 times earnings, the reality is that numerous factors drive the pricing including:
- Structure – Price, cash, terms, earn-outs, management contracts, non-compete agreements, etc.
- Business model – Some brokerage models have much more value than others
- Company dollar – What is the gross profit after commissions are paid to the agents
- Nature of the income – How much of the business is the owner/broker, family or a small number of agents
- Physical location
- Market size
- Metrics – Your listing base, average sales price, pendings, 12-month trends
- Per person productivity of the agents – Who within your company is producing
- Local market trends
- Economic and local market conditions
- Availability of funding
- M&A activity – What is happening in the market and are major players acquiring?
To make the best decisions, you need a real value. My suggestion is to 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 and help you understand your company’s true value. It’s never too soon to begin planning for the future.
The Big 5 M&A Deal Killers
- Legal / Accounting Advice
New findings from the National Association of Realtors® most recent Housing Opportunities and Market Experience (HOME) survey show a record-high 77 percent of Americans believe that now is a good time to sell a house.
Other findings reveal that a majority of consumers believe prices have and will continue to rise, while the quality of schools is a critical factor in deciding whether or not to buy a home. Optimism that now is a good time to buy has declined slightly from last quarter. 63 percent of respondents either strongly or moderately believe that now is a good time to buy compared to 68 percent last quarter. Among renters, positive feelings about purchasing continue to fall, dropping from 49 percent in the second quarter to 45 percent this quarter.
Click here for additional 3rd quarter NAR HOME survey results.
Housing Market Stalls Due to Lack of Affordable Inventory
Despite a strong economy and job market, homes sales are now forecast to decline from their 2017 level according to the most recent forecast by Freddie Mac. The expected decline translates to total sales of 6.07 million, compared to 6.12 million in 2017. Although home price growth is expected to moderate, weakening affordability and a lack of moderately-priced home inventory continue to present challenges to the market.
Click here to review Freddie Mac’s most recent forecast.
Broker Beware: Zillow Scammers
Scammers posing as Zillow are targeting real estate brokers by attempting to receive money in exchange for fake leads. Zillow sent emails to brokers who use Premier Agent, reminding them that Zillow does not ask for PayPal or wire-transfer details, according to Inman News. It identified multiple look-alike emails, websites and phone numbers that could dupe brokers into believing they are dealing with Zillow.
Click here for additional details on The Real Deal.
Will Technology and Apps Replace the Real Estate Broker?
Over the past decade or so, we’ve witnessed massive shifts in how consumers purchase products and services. Whether it has been in travel, consumer goods or legal services, technology has enabled the consumer to work more in a self-service mode, as well as save on costs, fees and expenses.
We are seeing rapid advances in technology that are changing the industry such as:
- Zillow’s direct buy model, there may be circumstances where a home is purchased in an online shopping cart.
- Tools that are trained via artificial intelligence (AI) to assess and outline the value and desirability of neighborhoods and properties.
- Blockchain technology that will put the parties together in real time, enabling the signing of contracts, escrowing of funds and filing of government documents to be easy, direct and hack-proof.
But, will we ever see the day when real estate brokers are no longer relevant? I don’t see technology ever disintermediating the broker from the transaction. Buyers and sellers cannot get the validation they need from an inanimate algorithm, but if you are not following the trends and adapting your business model to the latest technology, then your business is most definitely at risk.
Read the full story on Forbes.