12 FACTORS THAT IMPACT THE VALUE OF YOUR BROKERAGE

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Real estate brokers who are considering retirement may want to monetize their brokerages by selling them. There are twelve specific factors that impact the value of a real estate brokerage, and understanding these factors can help brokers maximize the value of their businesses when it’s time to sell.

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Valuing Your Real Estate Brokerage

Many real estate brokers are considering retirement. As they retire, they often want to monetize their brokerages. Real Estate Brokerages are typically valued based on a multiple of Earnings before interest, tax, depreciation and amortization, called EBITDA.In essence, a purchaser pays for the free cash flow for a period of time after purchase. The most common question posed by real estate brokers looking to sell their businesses is about the multiple.

Understanding Multiples in Real Estate Brokerages

Multiples typically range from two to four times annual earnings. This means that if a brokerage earns $500,000 in EBITDA per year, being its free cash flow, it should be worth between $1 and $2 million in value. Obviously the difference between these two numbers is significant, so the next question is usually what makes the difference between two and four times. The multiple goes up or down based on myriad factors.

The multiple goes up or down based on myriad factors. Below are twelve specific factors that impact the value of your real estate brokerage:

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1-Growth:

If your brokerage has grown at a good clip consistently, that will increase the multiple and thus the value. This is particularly relevant in the immediate three years just past;

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2-Gross Margin per Agent:

If your gross margin per agent is higher than the industry average, that will increase your multiple;

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3-Market-Specific Forecast:

If your specific market is forecasted to grow, that will increase the price, because if you are in a community that is attracting new arrivals, that will improve market outlook for your business;

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4-Agent Tenure:

If your agents tend to stay with you a long time, higher than the industry average, that will increase what you can expect from a sale. Buyers are looking for how “sticky” your agents are to your brokerage;

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5-Reputation:

Your reputation in your geographic location will impact the multiple, up if positive, down if negative. If you are an industry leader, sitting on association boards, or have a stellar reputation in town, that will increase your value;

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6-Recruiting / Agent Attrition:

Your recruiting growth history and agent attrition rates will be considered as well. If your agents consider yours a good place to work, that increases value, whereas if your current agents never refer new agents to you, that will decrease the multiple. If your agents tend to leave you more quickly than the industry average, that will decrease price;

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7-Stability /Predictability:

The more stable your income stream and your income per agent, the higher the multiple whereas wild swings year over year will decrease the multiple. The buyer is trying to predict future free cash flow so the easier to predict, the higher the value;

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8-Number of Offices:

The number of offices you maintain can cut both ways. More might increase value due to broad geographical reach although if there is unnecessary overhead, it may decrease the multiple;

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9-Owner’s Involvement:

High reliance on the owner / seller will decrease value. The buyer is envisioning life without the owner after closing, and the more critical the owner’s presence is now, the harder it will be to transition;

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10-Strength of Administration Team:

An excellent administration team will increase value because in keeping with the above, if the buyer can rely upon your strong CFO or Deal Clerk or General Manager, it makes the transition smoother and thus increases value;

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11-Specialty Areas:

If you have a specialized area, like beachfront properties or multi-residential apartments or storage buildings,for example, that typically increases the value.

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12-Deal Structure:

This by far and away is the biggest driver of total price. The more cash up front, the lower the overall price, whereas the less cash up front and the higher the earnout, the higher the overall price. This makes sense because it speaks to risk. The risk is higher on the seller if they are dependent on broker performance after closing of sale to secure their full payout. The risk is higher on the buyer if they are paying all or most of the money up front independent of performance.

Moving Forward with Your Plan to Sell

As you can see, the many factors that impact price make it impossible to know for sure what your brokerage is worth, but havinga range helps you begin the planning process around selling. The next steps, once you decide you want to sell, are typically hiringan advisor to value your brokerage while at the same time looking for a buyer. That is how you move forward with your plan tomonetize your brokerage and determine your multiple.

Frequently Asked Questions

What is the typical multiple used for valuing brokerages?

Typically the multiple is anywhere from 2 to 4 times Earnings before Interest, Depreciation, Taxes and Amortization, although the multiple will be influenced by a number of different factors.

What factors make a brokerage more valuable?

There are numerous factors that influence the value of a brokerage:

1. deal structure (the more money up front, the less the multiple);

2. geographic location of brokerage (bigger typically means higher value);

3. size of brokerage (again, bigger typically means higher multiple);

4. specialties (a brokerage with a specialty, if lucrative, typically means higher multiple);

5. gross margin per agent (the higher, the higher the value);6. agent tenure, attrition rates and attraction rates (the longer agents stay with you, the higher the value);

7. broker’s status within industry and within town/city (the higher the status, the higher the value).

What is the sales process?
  • Obtain a valuation of your business to determine what it is worth;
  • Find a prospective buyer;
  • Enter into a Letter of Intent and Deal
  • Terms with the buyer;
  • Have your attorney and accountant work together to prepare legal documents;
  • Roll into due diligence;
  • Close the deal.
Where do I find a prospective buyer?
  • Your competitors are typically your best buyer;
  • Your children;
  • Your motivated agents;
  • Large real estate companies looking to buy brokerages;
  • Private venture capital companies; and
  • Local business people in your community.
How do I start?

The easiest way to begin is to schedule a free 45-minute call with one of our Mergers and Acquisitions experts.

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Broker/Owner, RE/MAX Select Group, New Jersey, Virginia, Florida

"Over the past seven years, we have grown our brokerage from five agents to 100 agents.  Completing Mergers and Acquisitions with BVMA was a key part of this strategy, and we continue to execute and acquire."

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Broker/Owner, RE/MAX Revealty, Columbus, Ohio

"Over the last twenty years, the professionals at BVMA have helped me execute multiple acquisitions successfully resulting in the addition of hundreds of agents to my company."

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Broker/Owner, RE/MAX Premier, Vaughan, Ontario

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