One of the hottest topics among teams today is how they are valued and how they are sold.
By Steve Murray, publisher
REAL Trends entered the team valuation segment of the industry within the last three years and is currently handling the valuation of two to three teams a month and the sale of about four teams a month. REAL Trends has completed several sales of teams thus far.
There are several keys to understanding how to value and successfully sell a team. They are:
- Separate. First, you must separate the personal or sphere of influence segment of the business from that which is generated from the team’s business system, such as online, direct mail, TV or radio. Both the revenue contribution from each and the costs associated from each segment must be identified. This enables each segment to be valued separately.
- Multiple Years of Results. The team should have at least two and preferably three years of results so that trends lines can be demonstrated.
- Comp and Benefits. The compensation and benefits paid to the owners need to be segregated, both in terms of commission earnings and those costs that the company has paid on behalf of the owner through the company’s expense categories.
- Leases and Contracts. The terms of any leases or contracts should be clearly outlined and disclosed.
- Business Systems. The business system results should also be documented, i.e., what was done, what were the results, any special agreements, contracts or software that is used should be outlined.
- Personal business. The personal business and the business-system-generated businesses are valued separately from each other in the valuation of a team practice. The ultimate valuation may also be determined by how the owner of the team is employed. Is the owner of the team in listings and sales or not? If they are, how much of the revenue did they contribute? If not, what role do they play in creating transactions, if any at all?
The business is valued based on the income each segment generated and is multiplied by a factor that is based on the location of the business, the market for that business, how much business is generated from a business system and how much is personal, the size of the business and a few other factors.
The Sale of Teams
Now, let’s talk about the sale of teams. The value of a team is only one-half of the equation. The terms of a sale, like with a brokerage company, require the seller and buyer to understand that there is a certain amount of risk that both must take to make a deal work.
In the many brokerage sales REAL Trends has handled over the years, we have a saying, “My price, your terms; your price, my terms.” The goal is to balance what the seller wants to achieve with how much risk the buyer is willing to take. For example, the lower the amount of cash or guaranteed money a team is willing to take, the lower the risk for the buyer. Thus, the buyer should be willing to pay more for the business. The more the cash or guarantee the buyer must take on, generally the lower the price will be for the buyer.
Teams are no different than brokerages in this regard. In some cases, there may be more risk in buying a team than in buying a large brokerage. In our experience, this is reflected in slightly lower multiples for teams than for brokerage firms. In some cases, this is also a factor of size.
Structuring the Sale
One of the biggest factors in structuring the sale of a team is the desire of the team owners to depart the scene and the desire of the purchaser to have the team owner stay on for a period. This is also true for brokerage sales. Team owners who plan correctly will, for example, need to plan to stay for one to two years after a sale to gain the highest price and best terms. The risk of the transaction is lower when they stay around as opposed to leaving quickly after a sale. This is true whether it is primarily a business system team or a personal sphere-driven team. This may also be true for other members of the team, particularly if those members are critical key players on the team.
Generally, each deal is customized to each team. There are varying amounts of cash, guaranteed notes and earn-out payments paid in these transactions. Earn-out payments are generally a percentage of future commission income, gross margin or earnings for a period after the close of a sale.
There is a market for well-run teams. Those with a higher percentage of business-system-driven results are generally worth more than when a team is primarily a personally-driven-results team.