Many agents looking to get out of business have one major question: “What is the value of my business?” Of course, the answer to this question is usually, “It depends.” Yes, business profitability is important, but there are other factors that go into determining what a buyer will pay for your real estate agent business.
Agent Business Evaluation Factors
he won: The best term for profit in the context of valuing an agent’s business is “discretionary earnings”. It is called discretionary earnings because the seller has the discretion to do anything with that money he wants, and dividend is the company’s profit after operating expenses are deducted from operating income.
The profit figure is just the starting point for managing discounts or adding refunds, with the final figure – after all this addition and subtraction – being the seller’s estimated profits on which we will proceed with the next steps of business valuation.
Rebates from profit: The buyer should look in the revenue section of the profit and loss (P&L) statement for any single, non-recurring, or non-operating income. Here are some examples:
- The first example that comes to mind regarding non-operating revenue is the Paycheck Protection Program and other federal support payments related to COVID-19. If the seller includes these payments in business profits and losses, they must be deducted from the profit, because these funds were not generated from actual business operations.
- Non-recurring revenue can be commission money received from a purchase reason arbitration when an event closes in 2020, but judgment received from commission and funds in 2021. This is called non-recurring because we do not expect a business agent to generate ongoing revenue from association arbitration.
Why do we do that? Because we are trying to find out exactly the actual revenue figure that the buyer would have generated from the business operations, because that is the only number that can help us in evaluating the business from the revenue side.
Add backs. Addition Payments are expenses that are “added” to the business because they are payments made by the business to cover personal expenses of the seller, or often his family, that the buyer would not have incurred.
These expenses can include health insurance, a child’s mobile phone expenses, personal meals, or auto repairs. Adding expenses back into the business increases profit (on paper at least), and thus increases the value of the business with the purchase.
Additions can sometimes include expenses that the buyer may perceive as savings, although the buyer may decide not to formally add them to the analysis to avoid paying the seller extra money. For example, if a seller pays $2,500 per year to store documents, and the buyer has zero marginal cost on that item as all of their records are kept digital, that cost may be an plus again because the value of the work is now an increase in the cost savings for this specific buyer.
By marginal cost I mean an expense in excess of what the buyer is now paying for the same item. If there is no additional annual cost to the buyer for digital storage of the amount of documents created by the seller in the past year, then the marginal cost is zero, and the entire expense is an additional return.
Revenue enhancers and cost savings. When the buyer examines the marketing and subscription expenses of the seller (Facebook advertisements, Zillow leads, etc.), they may find that the seller is not making a return on investment (ROI) that matches what the buyer generates from the same avenues.
If the buyer believes that he can use his strategies successfully (for example, changing titles or keywords on Youtube Videos, using different interests on Facebook ads, etc.), they can keep the same type of business and improve revenue with little or no additional expenses (increase revenue).
This particular buyer may place more value on this business than another buyer who was not able to implement the previous strategy. The business essentially contains unrealized revenue that this particular buyer may get for free.
balance sheet. Most agents will never keep a balance sheet for their business. Large teams may maintain a balance sheet if they incur debt to fund business growth, or begin acquiring equipment to service employees and agents.
I usually recommend that teams doing more than 100 units maintain an operations balance sheet, as they begin to have the right amount of assets at that time.
The balance sheet tracks the current values of assets (equipment, accounts receivable, cash, moving truck used by customers) and liabilities (loans, accounts payable, rents, property management inventory insurance deposits), with the difference between these two numbers how much the seller’s equity is on their team.
If the buyer does not have balance sheet experience, he should consult with his accountant to determine any questions to ask the seller based on the amount of work obtained and the numbers provided.
Hank Sorensen is the Pinellas County Area Manager for RE/MAX Realtec Group in Palm Harbor, Florida.
This content should not be considered as accounting or legal advice. You should consult your local or state legal tax professional for appropriate strategies.
The second part of this article will review how to determine the appropriate multiplier, selling structure, and determining the actual numbers of the hypothetical sale.
This column does not necessarily reflect the opinion of the editorial department of RealTrends and its owners.
To contact the author of this story:
Hank Sorensen at [email protected]
To contact the editor responsible for this story:
Tracey Velt at [email protected]