Real estate agents, determine what your business is worth

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Part I of this article discusses what goes into evaluating a real estate agent’s business, including discretionary income, add-ons, cost savings, and revenue increases.

We determined what the profit was, made our deductions and additions, established cost savings or revenue enhancements, reviewed the balance sheet, and reviewed all documents the seller has that are relevant to the sale. What shall we do now?

Industry practice has determined that the most reliable way to establish the valuation of a real estate business is to apply discretionary earnings to a multiplier to obtain the enterprise value of the business.

What facts tell us which number to use as a multiplier?

  • Size of the company : The general rule is that the larger the team’s discretionary wins, the higher the multiplier. This is because large teams have access to capital, resources, and economies of scale that small teams and single agents do not.
  • Industry specifics: If there are barriers to entry in the field in which the seller operates (cost, education, skill set, etc.) and less competition, these lend themselves to a higher multiple. A recent high growth rate in the seller’s area of ​​interest is also good. For example, the seller may specialize in soliciting medical recruiters to relocate doctors to a city with new hospitals online. This would provide a reliable source of ongoing activity.
  • Customer focus vs one trick pony: A barrier to the sale could be that a good percentage of the seller’s business may be trapped in two to three investors, whose defection may threaten or be fatal to the business.
  • Key person/ego: When the seller is the face of the business, has all the relationships and makes the decisions (read: micromanager), it will take a long period of time for the goodwill of the business to be transferred to the buyer, and the multiplier will go down.
  • Smart growth: I included the word “intelligent” here because not all growth is created equal. Showing 100% growth in revenue over the past three years while showing a 150% increase in expenses is not growth a buyer wants to see.
  • Repeat customers: The buyer doesn’t want to see a lot of focus, but if a lot of the same customers keep coming back to the seller, that’s a good thing. It is essentially an annuity that the seller has put in place and the buyer is now buying. Any regular corporate buyer will tell you that they love buying annuities because they are generally easy to value.
  • Operating margin/profit: Agent businesses with higher profit margins and more profits (discretionary earnings) will get higher multipliers than those with lower margins and profits. In effect, the buyer can see that he will realize a higher return for every dollar invested in the business.

Many commercially savvy people involved in selling brokerages in the United States would say that when the market is “normal” they would likely see a multiplier in the range of 3x to 3.5x for the brokerage. When using a multiplier, a buyer tries to get back to the present value by a certain amount of a future income stream.

Because a medium to large sized team is essentially a small brokerage, the multiplier should be no different. However, the buyer will let a number of factors inform their decision on what multiplier they feel is appropriate in the case of a particular seller’s business. That range would have been lower during the 2008-2012 period, when every real estate company struggled to keep the lights on.

Based on the above, if we are considering buying a team that generates $500,000 in annual Discretionary Income, and based on our analysis, we believe the team is an above average candidate for the acquisition, we can assign a 3.4x multiplier to the trade. . This would establish an enterprise value of the team at $1.7 million ($500,000 x 3.4). Great! What shall we do now?

Sales structure

Assuming there will be no SBA (Small Business Administration) funding involved [I always assume there will be none], it is likely that the buyer will ask the seller to do private financing after putting in a certain amount of cash – which would usually be 10-20%. While these are generalities that can be negotiated, we might see the following as a result of our hypothetical $500,000 in income above:

Discretionary gains: $500,000

Multiplier: 3.4x

Enterprise value: $1,700,000

Down payment: $300,000

Amount financed: $1,400,000

Duration of the Note 48 months

Interest rate: 5%

Monthly payment (P&I): $32,241

One reason to like the previous sales structure for the seller is that the financing is not for an extended period. On the buy side, the average monthly discretionary earnings are $41,667 ($500,000/12 months), so there is a margin of error of more than $9,000 per month between earnings ($41,667 /month) and payment for the ticket ($32,241/month). This calculation assumes that the buyer will maintain the company’s activity at least at the same level of profit as the seller who preceded it.

This should allow the buyer to feel assured that even in the event of a bad month or a market downturn, the debt service will be covered. Understand that the $41,667 figure above is an average and not seasonally adjusted, of which there will be.

In any case, the buyer should come to the table with an already profitable business in its own right that provides him with enough money to cover all the necessary expenses for his life. Here the buyer is simply biding his time, knowing that he will have a nominal monthly income from the seller’s business for the next four years, but once the bill payment is complete, there is a business that should be producing at minus $500,000 per year. in earnings.

Security

Sometimes things go wrong. Maybe the buyer needs a temporary or permanent loan modification because the market isn’t generating enough revenue to cover the note, or the buyer’s spouse has a temporary but serious medical condition that hijacks the business buyer attention. The seller should try all possible ways to solve the problems.

Since a promissory note is issued and tangible and intangible assets are sold, the seller will typically take security over the business assets and file documents with the appropriate government agency to commemorate the relationship. Think of this in the context of a note and a mortgage on a house.

Here, the seller would effectively recover the business – the database, the chairs, the desks, everything. There is always the question of whether the seller would want to take all that back, only to re-enter the business and have to sell it (again) to another buyer. The buyer in our hypothesis has already parted with $300,000 which he is not recovering, so he is incited to take a resolution on the debt.

Before the buyer or seller engages in the process of buying or selling an agent business, they should consult their accountant and a business broker, who can and should advise on how whose business is to be valued.

In addition, for tax reasons, the accountant may recommend a separation of the cost of tangible assets from the goodwill of the business in the purchase documents. Although the evaluation is based on the previous and additional factors, ultimately the buyer should be able to form an idea of ​​the sincerity of the seller as part of the negotiation of the due diligence elements. This will weigh heavily for the buyer to have a “feel” if the valuation is too high.

The next article in this series will review the transition from business to buyer.

Hank Sorensen is the Pinellas County Regional Manager for the RE/MAX Realtec Group in Palm Harbor, Florida. He can be reached at gogetalisting@gmail.com.

This content should not be considered accounting or legal advice. You should consult your local tax or legal advisor in your state for appropriate strategies.

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