Many agents looking to get out of the business have one main question: “How much is my business worth?” Of course, the answer to this question is usually “It depends”. Yes, business profitability is important, but other factors go into determining what a buyer will pay for your realtor business.
Agent Activity Rating Factors
Profit: The best term for profit in the context of evaluating an agent business is “discretionary profit”. It’s called discretionary income because the seller has the discretion to do whatever they want with that money, and the income is the profits of the business after operating expenses are deducted. operating income.
The profit number is just the starting point for dealing with any deductions or add-ons, with the final number – after all these additions and subtractions – being the Seller’s Discretionary Earnings on which we will then proceed with the next steps to assess the business .
Deductions from profit: The buyer should review the income section of a profit and loss (P&L) statement for any one-time, non-recurring or non-operating income. Here are some examples:
- The first example that comes to mind of non-operating revenue is the Paycheck Protection Program and other federal grant payments related to COVID-19. If the seller included these payments in the company’s income statement, they should be deducted from profit, since these sums were not created from actual business operations.
- One-time revenue could be commission funds received from a procuring case arbitration in a closing that occurred in 2020, but the panel award and monies were received in 2021. This is what called non-recurring because we don’t expect a company agent to derive ongoing revenue from association arbitrations.
Why are we doing this? Because we try to find out the actual revenue that the buyer would have made strictly from the business operations, as this is the only number that can help us evaluate a business from the revenue side.
Add backs. Add-ons are expenses that are “added” to the business because they were payments made by the business for personal expenses of the seller, or often his family, that the buyer would not have incurred .
These expenses may include health insurance or cell phone costs for a child, personal meals or car repairs. Adding an expense to the business increases the profit (at least on paper) and therefore increases the value of the business with the purchase.
Add-ons can sometimes include expenses that the buyer may realize as savings, although the buyer may decide not to formally add them to the analysis to avoid paying the seller additional money. For example, if the seller paid $2,500 per year for document storage, and the buyer would have minimal to zero marginal cost on that item because all of their records are kept digitally, that cost could be an add-on because the value of the business is now increased by the amount of cost savings for that specific buyer.
By marginal cost, I mean an expense on top of what the buyer is paying now for the same item. If there was no additional annual cost to the buyer for digital storage for the amount of documents the seller generated in the previous year, then the marginal cost is zero and the entire expense is an addition.
Revenue enhancers and cost savings. When the buyer reviews the seller’s marketing and subscription fees (Facebook ads, Zillow prospects, etc.), they may find that the seller is not realizing a return on investment (ROI) consistent with what the buyer is generating from the same channels.
If the buyer feels they can use their strategies successfully (for example, changing titles or keywords on Youtube videos, using different interests on Facebook ads, etc.), they could keep the same type of business and improve revenue with little or no additional expense (a revenue enhancement).
This specific buyer may place more value on this business than another buyer who was unable to execute the aforementioned strategy. The business basically has unrealized revenue that this specific buyer can get for free.
Balance sheet. Most agents will never keep a balance sheet for their business. Larger teams can maintain a balance sheet if they take on debt to fund business growth or start acquiring equipment to serve staff and agents.
I generally recommend teams larger than 100 units to keep a track record of operations, as they start to own a decent amount of assets at that point.
The balance sheet tracks the present values of assets (equipment, accounts receivable, cash, moving truck used by customers) and liabilities (loans, accounts payable, leases, property management inventory security deposits), the difference between these two numbers being how much equity the seller has in his team.
If the buyer has no experience with a balance sheet, he should consult his accountant to determine what questions to ask the seller based on the size of the business to be acquired and the figures presented.
Hank Sorensen is the Pinellas County Regional Manager for the RE/MAX Realtec Group in Palm Harbor, Florida.
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.
Part II of this article will look at how to determine an appropriate multiplier, sales structure, and outline the actual numbers for a hypothetical sale.
This column does not necessarily reflect the opinion of the editorial department of RealTrends and its owners.
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