How To Determine The Value Of A Real Estate Sales Office? – Many Factors Must Be Considered In Valui

Question:

How can a value be reach on an independently owned real estate sales office? What should be the main factor?

Answer:

It is important to understand that establishing the value of any business is an art, not a science. In service businesses where there are no hard assets (i.e. equipment, machinery, etc), the valuation will typically be tied mostly to goodwill. In a real estate office this is especially important since all they are really selling is the reputation they have established for themselves. That being said, there are really three main components to consider in valuing a real estate sales office:

1. The total potential profit from existing listings
2. The place this office holds within the marketplace
3. The impact that a change of ownership may have on securing future listings

Before we get into the nuts and bolts, let’s discuss some of the potential “issues” in this type of acquisition.

Does the agency/office carry the name of the seller (i.e. Bob Jones Realty) versus a generic name such as Rainbow Realty? If it is a person’s name, one must seriously consider how the business may trend should Bob Jones no longer be there. This is especially important where the seller has built this business through years of networking in the community. In other words, is this business a case where when out the door goes the seller, so too can go all the clients, current and future?

Are there any local/state laws that prohibit the transfer of the listings from the current owner to a new one? Will the independent agents remain on board after the transaction?

These are just a few of the key considerations and there are more. The point being that there is a lot to consider in determining the valuation.

The value of the business, at least in the immediate future is what revenue/profit the existing listings will generate. Plus, you as the buyer would want some assurance that prior listing to sales ratios will continue. One must also consider what the average agent can be expected to generate in listings and commissions. So, what’s an “asset light ¬ñ goodwill heavy” business worth? In this particular case, I believe that one must rely somewhat on industry Rules of Thumb although I am generally not a fan of these. I also believe that a substantial earnout and/or performance based terms package makes the most sense. Notwithstanding this, a business’ valuation MUST be based on historical profitability or what is known as Owner’s Benefit.

With all of this said, there are a few general guidelines to be used:

1. If you calculate the value based upon revenues, then you can factor in around 25% – 50% of average annual commissions.
2. If you use a multiple method of Owner’s Benefits, which is the formula I prefer, then an average real estate sales office should trade around 1 -2 times this figure.
3. There is one valuation formula that I was presented a number of years ago in this business which was attaching a dollar figure of around $10,000 per agent. Personally, I would not use this at all since agents move around quite a bit in this industry, with a high degree leaving the trade and the number of “bodies” has no bearing whatsoever on the profitability in these types of businesses.

I would also recommend that part of the purchase price be based upon an earnout whereby the seller can get their price as long as certain trends such as the average annual commissions remain consistent for the first 12-24 months after you take over.