Transaction Due Diligence: Advice About Selling Your Firm

Advice About Selling Your Firm

How to clean up your financials and other data to facilitate a profitable sale.

Throughout REAL Trends’ 31 years, we’ve brokered and advised on nearly 800 transactions in the residential real estate industry. We usually represent the sell side of the deal and work with firms that range in size from small, one-office five-agent shops to the largest in the industry. We’ve learned a few things along the way. One important thing we’ve learned is that if you’re thinking about selling your firm, whether next month or five years from now, you must have clean data.

By data, I mean financials, organizational documents, operating metrics, third-party contracts, employment agreements, insurance documents, and more. This information becomes essential at various stages of a transaction, and when it’s time to produce it, the process is radically easier if it’s clean and organized.

If your data is not clean, then it’s dirty. Dirty data is essentially unorganized, incomplete, and missing information that is required at the various stages of the transaction process. Plus, dirty data has prolonged, complicated and, in some cases, killed more transactions than we can count.

Three Stages of Information Gathering

When it comes to information gathering and analysis, the transaction lifecycle can be parsed into three stages; valuation, preliminary due diligence, and due diligence. The amount of data required at each stage increases up as you run through the process.

In the valuation stage, we want to understand ownership structure, corporation type, operational metrics, lease information, employee information, information on affiliated services, market share information, and most importantly, financial information among the comprehensive list of data we request from our clients.

Once the initial valuation is completed, potential buyers are engaged. At this time, the preliminary due diligence phase begins. Buyers will perform their analysis and modeling to support a potential offer to the seller, usually in the form of a Letter of Intent (LOI). This preliminary due diligence typically looks at the same information that we do on the valuation front but may get more granular.

For example, many buyers like to have the income statements in Microsoft Excel and broken out monthly by office. They will take a closer look at the concentration of sales and trends in recruiting and retention. They’ll also receive a close look at adjustments to EBITDA (earnings before interest, taxes, depreciation, and amortization) and will seek to normalize run rates for payroll and occupancy costs. To keep the flow of information timely, sellers must have such items as historically accurate financials, detailed agent productivity reports, employee rosters, and office lease agreements.

Full Due Diligence Stage

Once an LOI is executed, the transaction enters into the full due diligence stage.  Sellers must be prepared for complete transparency, to provide the intimate details of their company. In addition to what’s already been offered in the first two stages, buyers will ask for such items as company operating manuals, agent level commission, fee breakdowns, tax filings, detailed descriptions of real property and fixed assets, all agreements and contracts, intellectual property information, litigation information, loan and bank information, and more.

Whether you’re a broker-owner of a small firm, who does everything themselves or the owner of a larger firm with support staff, ensure that your data is clean, organized, easily accessible, and as accurate as humanly possible. Data cleanliness can make or break a transaction.

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