Are you a convenience, personality or business real estate team? It matters when it comes to valuing your team.
More and more teams are coming to RTC Consulting to find out their value. When we do work with teams, we first find out what type they are, and like brokerages, they come in all shapes and sizes. After peeling away the layers, we typically find that teams fit into one of three categories: convenience, personality or business teams.
Convenience and personality teams mostly rely on leads directly generated from the personal database of the team leader. This leader is typically a rainmaker who generates so much business from personal referrals and sphere marketing that he or she needs help. While these teams can be financially lucrative, they don’t necessarily carry any more transactional value than that of an individual top-producing sales associate. The business of this team lives and dies by the rainmaker.
Business Teams Have Value
Business real estate teams are an entirely different story. Under this team type, most business is generated through a marketing system (online, direct mail or other) that is independent of the team leader’s personal database and referrals. If this system is structured correctly, leads can be generated, and business can be closed regardless of who owns it (assuming there’s a talented listing agent in the fold). The business of a business team is typically transferrable, thus giving it more transactional value.
As most in the real estate industry are fully aware, we’ve seen a big increase in the number of successful business real estate teams in recent years. Many of these teams are realizing that they have value beyond the team leader.
Value Beyond the Team Leader
In the valuation of a team, it’s critical to separate sphere and system, and thankfully most teams are good about tracking their sources of business. Since the sphere portion is considered personal goodwill, this source has minimal value unless there is a skillfully structure soft transfer over time. If a brokerage, team or sales associate acquires this business, upfront cash would be very minimal with the majority of the purchase price in the form of an earn-out over time.
A team’s business system can be valued much like a traditional brokerage firm. The most common valuation model is the income approach, which is simply a multiple of net operating cash flow. Teams aren’t yet at the point where they’re getting multiples that are as high as what brokerage firms see, but in several recent transactions, business systems are selling at a premium.
The bottom line: If you’re a team leader who operates a business system capable of generating quality leads independent of your sphere, then you likely own a business with enhanced transactional value. If your goal is to monetize this business, then continue to work to reduce your personal value to this team. Develop and build your system so that somebody else can successfully run it.