The last two years have seen significant changes in the way residential brokerage firms and their related businesses have been valued. Perhaps the most significant change took place in the first quarter of 2021, when most — if not all — major investors and purchasers of brokerage firms shifted from a valuation based on the trailing 12 months results to one that’s based on the average of the last two to four periods.
This radical shift resulted in most purchasers considering EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) results from 2019, 2020 and the trailing 12 months (TTM) and averaging those three periods’ results.
The use of trailing 12 months (TTM) as the basis for a valuation had been the practice for most purchasers for over 20 years; however, purchasers have become resistant to paying premium multiples for a 12-month period that was most likely anomalous and unsustainable for most firms.
How the shift came about
As we moved through 2021 and into the first quarter of 2022, the market was still looking at an average of least three periods of EBITDA results as the basis for valuation. Valuation analysis that normalized results continued as before, with such items as adjustments for owner contributions, occupancy normalizations, personnel normalizations and non-recurring and one-time adjustments continuing to factor in.
Despite the shift in basis, prices and terms, throughout most of 2021 and moving into the first quarter of 2022 were at near-record levels when compared to the previous 20 years. The depth of the market was as good for sellers as it had ever been, with up to six to eight interested parties for many brokerage firms going to market.
Many of the investors and purchasers were well known, including firms such as Compass, Berkshire Hathaway HomeServices, Hanna Holdings, United Real Estate, HomeSmart and Peerage Realty. Each of these firms was very active in 2021 into the first quarter of 2022. There was also considerable activity by large regional firms such as Windermere, Latter & Blum, and @properties.
Everything changed Q2 2022
This all changed by the end of the second quarter of 2022, when investors and purchasers noted that many brokerage firms were seeing measurable declines in resale business units. They — and we at RTC Consulting — noted that this was also having the same impact on profitability, both in brokerage and in their affiliated services businesses.
As a result, by the third quarter of 2022, most investors and purchasers have paused their acquisition activities to wait and determine where the floor of residential sales and brokerage results will land.
Many have communicated with us that their intentions — at this point — are to wait to see the final results from 2022, and what the first quarter of 2023 brings to the United States housing market.
As such, multiples have somewhat softened, terms are favoring purchasers, and we expect that valuation basis will continue to use a multi-period average into early 2023.
Scott Wright and Steve Murray are partners in RTC Consulting, a residential real estate brokerage consulting firm specializing in brokerage and team business valuations, mergers and acquisitions and business planning.