Agent

Boost the value of your real estate agent business

All real estate agents and team leaders should keep clean financials and understand them.

Whether you want to sell now, or 10 years from now, it’s vital to build an agent business that is worth selling. There are many activities that will improve your chances of selling for the price you want and need, and to maximize the probability that any seller financing given to the purchaser will be paid.

Here are some ways an agent can make their business more valuable.

What are the your goals (as the seller)?

This should be the primary question that every answer concerning the business is centered around. Understand that in a best-case scenario, the seller has at least two to three years to plan and execute the sale.

If the goal is to maximize the net proceeds from a sale, then close monitoring of the profit and loss (P&L) statement is mandatory. Every expense should have a return on investment (ROI) factor that can either be pinpointed with precision accuracy, or at least get close enough to an ROI number that can be partially supported in stating to a financially intelligent buyer.

The seller could have a goal of protecting their buyer’s agents and employees after the sale so that they’re set up for continued employment. If so, drafting a protection provision into the purchase documents would be appropriate.

However, no buyer will protect those people forever. What is more likely to guarantee that they still have work to do is to set up procedures within the team to maximize the lead flow. Everything else in the team will flow from there.

Minimize risk to the buyer

The seller should look at the business through a buyer’s eyes and identify the areas that the buyer could step into a hazard. The seller should bring the office’s broker and/or a trusted peer into this analysis as well, to get objective advice. The seller’s office broker could know that some of the team’s employees or agents aren’t so diligent in their work ethic when the seller isn’t in the office. Finding out this information prior to a sale maximizes the chance that the seller will have the full purchase price paid for the team.

Improve accounting procedures

There’s typically no area of a seller’s business that can stand more improvement than the money practices and financial statements that show how the business is run.

There are two traditional financial statements an agent business will keep: a profit and loss statement (a P&L, also called an income statement) and a balance sheet. Every agent, no matter how big or small their operation, should keep a P&L.

A P&L tracks revenues (money coming in) and expenses (money going out). A balance sheet tracks what an agent owns (assets) and what they owe (liabilities), with the difference between these two numbers being the equity they have in the business. Until they get above 100 units annually, usually the business doesn’t own much – maybe a few computers and a printer.

Many small business owners run personal expenses through their businesses. I’d recommend that the seller keep some detail to help the buyer decipher the add-backs that the seller wants to improve the value of the business.

Add-backs are personal expenses that show on the P&L as a business expense. For example, the seller could have personal meals and a home desktop computer that were run through the business. Because the buyer would not have run those meals through the business, nor would they have bought a computer for their house last year, the parties would “add back” those expenses as if they didn’t show as a line item on the P&L. This increases the profit of the business, which, in turn, increases the business value (and the price to the buyer).

What is the seller not doing?

An agent’s business will be valued on immediate past results and actual current assets. The seller should not try to present to a buyer a valuation based on the potential increase in business that the seller isn’t presently executing on.

For example, it’s fairly common to see an agent who has a few decades in the industry, who does zero outbound lead generation to their database, insist that their business has “trapped” or “unrealized” value because the buyer can initiate outbound lead generation activities after the acquisition.

This unrealized value will not increase the business value by a single dollar to a buyer. There is simply no assurance that the buyer will generate any additional closings from outbound lead generation to the database.

The seller may have also allowed the team to get soft on what they charge in commissions. The seller should look at the average commission per deal and see where there are opportunities to charge more. It may be that the team is offering past clients 2.5% on their side of a deal simply because they’ve closed deals with the team before. If so, try bumping that up and see if there is any pushback.

The seller should know their financials (and tell the buyer the bad stuff)

Not much impresses me more than to sit down with an agent and have them meticulously walk me through a rolling, 12-month P&L on their business, and for them to explain every number that presents a question.

If I see the agent initiated a Zillow leads subscription in March of the prior year, and they tell me that they realized a 4.2x ROI on those leads, I’d be impressed. If they then tell me they’re ditching the Zillow leads for Ylopo leads because the latter produced a 6x ROI, and they’re reallocating their marketing budget to the higher ROI, I’d be very impressed.  

Just as impressive is the agent that points to the movie theater ad spend and tells me it was the worst business decision they ever made. The team spent $14,000 on the theater campaign over six months with a special code in the ad (for tracking purposes) and only one person responded. What the team didn’t realize up front, but found out later, was that the ads ran so early in the movie previews that hardly any patrons actually saw them, because they weren’t in the theater yet.

Just like the buyer of a home would be more trusting of a seller that disclosed in writing a small flood in the laundry room and provided receipts of the clean-up and remediation, the buyer of an agent’s business would appreciate knowing the results of the theater marketing campaign so that they know what not to do after the acquisition.

Plan, plan, plan. Years before a seller wants to exit the business, they need to make the mental decision engage that part of their brain to either go to the next level of becoming a businessperson or become one for the first time.

What’s ironic is that I’ve seen agents clean up the financial side of their business and then decide not to go down the path of a sale, because now they are running a better business, which was more fun (and profitable) to them than the chaos they previously had.

Hank Sorensen is a team leader with Keller Williams Classic Realty in Florida.

This content should not be considered accounting or legal advice. You should consult your local tax or legal professional in your state for appropriate strategies. The next article will discuss how to value the agent’s business.

This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.

To contact the author of this story:
Hank Sorensen at gogetalisting@gmail.com

To contact the editor responsible for this story:
Tracey Velt at tvelt@realtrends.com 

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