Valuation, sale and merger activity is running at twice normal levels. Read on for more trends.
Written by Amy Broset, REAL Trends director of business analysis and Jaime O’Connell, REAL Trends real estate analyst
After a two-year run-up in units and sales volume, many markets appear to be leveling off. However, valuation, sale and merger activity is running at twice the normal levels. After surviving the downturn and seeing a return to solid profitability, many owners are seeing this as a prime time to either exit the industry or grow through acquisitions. Some of the items we have noted over the last year include:
- A fall in the percent of gross margin retained as agents hit their caps or move to the next split level;
- Decreased spending on occupancy as brokers have cut excess space to conserve;
- Agent counts on the rise;
- The end of the mortgage joint ventures under the new regulatory environment; and
- A corresponding rise in marketing service agreements.
Increase your Value
Given that information, what is the No. 1 thing you can do to increase the value of your firm? Increase your bottom line. Most valuations are based on a multiple of EBITDA, or earnings before interest, taxes, depreciation and amortization. Companies without substantial net income will be valued on a percentage of the gross margin, much less common in this environment.
In either case, beware of having too many commission plans as that can cut into your percent retained. Instead, offer standard plans and stick to them.
When the time to sell arrives, there are several things to consider that may increase your value to potential buyers:
- Don’t demand an all-cash deal at the time of sale. All-cash deals reduce your value by up to 40 percent. A normal deal would be based on a percentage of cash at close, ranging from 60 to 70 percent for an outside purchaser, along with a two- to three-year earn-out on the remainder, based on the gross income of the company.
- Keep long-term debt low. Buyers rarely assume long-term debt, and when they do, the amount is deducted from your fair market value to arrive at net value. A three-month cash reserve is sufficient. The rest can be distributed or re-invested.
- Be prepared to stay on for a year or two to assist with the transition. If you are selling the entire company, even a leader that stays on as a figurehead only adds to the value of the company, as you are likely to have less agent breakage.
- Most deals are done as an asset purchase. Stock purchase deals tend to reduce the offering price due to the negative tax consequences to the buyer and the possible assumption of negative liabilities for past actions of the company.
The most important part of any sale, the one item that can push that multiple, is terms. If you want a higher price for your company, be prepared to give better terms. This means a longer earn-out, less cash down and more assumed risk on your side to achieve that price in the earn-out years.