A major element of owning a business is creating and growing value. It doesn’t always need to be the driving force of every tactical decision, but it should be considered as part of every
real estate brokerage owner’s long-term strategy.
There are numerous factors that can drive value, but from a purely financial standpoint, increasing profitability is typically the most direct path to boosting value. The numbers don’t lie, so whether it’s padding the bank account or positioning for an acquisition, there are certain things owners can do to boost profits and enhance their value.
General ledger scrub
Get together with your CFO and run through your general ledger to see if there are areas where you can cut spending with minimal impact. Pay close attention to non-recurring and one-time expenses. Identifying those expenses during the valuation process is critical. As part of this scrub, also examine your vendor contracts.
Whether it’s technology, marketing, training, coaching, etc., are you getting the value from this vendor that you originally hoped? If not, look into concluding the contract or renegotiating it to a level that seems more economically feasible. Overall the general ledger scrub should be an annual event regardless of your posture on value creation. There’s no reason to spend money where you don’t have to!
Are you in a position to increase your fees? Interestingly, we find that most firms don’t adjust their fees for the increased cost of running their business. Restaurants, car manufacturers and even the Girl Scouts all pass on their rising input costs, so why can’t real estate brokerage firms?
This fee increase doesn’t need to be big, just incremental. If you don’t have a transaction fee, add one, and also consider writing into your ICAs and corporate manuals the right to adjust fees periodically to keep up with inflation. For example, tie the increase to the Bureau of Labor Statistics’ Consumer Price Index.
In general, fee increases drop right to the bottom line, so every dollar you add here has the potential to increase your value by a factor of two to four times that dollar.
While there’s still a place for brick-and-mortar offices, our increasingly high tech virtual world has alleviated the need for robust physical footprints. As such, it’s important to periodically examine your footprint. Are you in a position to consolidate offices or reduce square footage? While timing is slave to your lease commitments, plan accordingly when renewal is nigh.
Additional revenue streams
Brokerage is often a great feeder for affiliated services like title, mortgage, escrow, home warranty, insurance and even property management. Some of these may require certain scale and there may be jurisdictional restrictions, but if you can tap revenue stream diversification jump on it.
Full blown acquisitions can be costly and are not always accretive right away, but it’s a different story for roll-ins. A roll-in, also commonly referred to as a tuck-in or walkover, is a simple absorption of agents.
Occasionally, you’ll come across smaller brokerages or teams that are looking for a greener pasture, or a place to land if they’ve had struggles. In a roll-in you aren’t taking on any liabilities and there’s very little, if any, upfront payment. The owner/leader that rolls in is typically paid solely on an earn- out/override. Since you typically aren’t taking on leases, equipment contracts and employees the production of your newfound agents drops right to the bottom line. Keep your eyes peeled for these opportunities!
These factors and more can really drive profitability and ultimately value.
Scott Wright is a partner with RTC Consulting, a firm that specializes in real estate brokerage consulting, valuation and mergers and acquisitions.