Valuations: Valuing Small- to Medium-Sized Brokerages
It’s no secret that the housing bull market is in the rearview mirror — years of sharply rising home prices driven by a lack of inventory already created affordability issues. When you factor in rising interest rates and economic fears driven by tanking stock markets and political turmoil, the housing market is no doubt going to feel it. As existing and new home sales continue to slide, the residential brokerage industry is indeed feeling a bit of a pinch.
This cyclical activity, mixed with the sharp and steady structural decline of retained company dollar, has put the heat on firms of all sizes. Smaller firms though are feeling especially vulnerable given their lack of economies of scale. There are many excellent smaller brokerage firms able to maintain top- and bottom-line margins, but countless more are finding it harder to repel the relentless assault on their businesses.
ACQUIRING AND SELLING SMALLER FIRMS
The inquiries we’re getting are from both buyers and sellers. Buyers want to understand the mechanics of acquiring smaller firms—what to look for, how to value them, and what kind of terms they should be offering. Sellers, depending on their state of urgency, want to know some of the same—what’s their value, what are reasonable terms, and how do they increase their value if they decide to stay the course?
These questions and more prompted REAL Trends to develop the e-book mentioned above that focuses on smaller-sized firms. This book is free for download on our website, and below are some highlights:
1. Approaches to Value. Learn about the two most common strategies that are used to value residential real estate brokerage firms. Understand how to normalize earnings, which expense and income items are included and excluded? How do we treat earnings when the owner(s) is a material producer? We dive deep into these topics and more and provide worksheet examples to tie it all together.
2. Deal Terms. Once a value is established, what are reasonable terms that buyers and sellers can expect? Most commonly, only a portion of the purchase price is up front, with the balance paid via a contingency-based earnout. With the primary asset in this industry being an independent contractor who can come and go as they please, the risk needs to be spread between the buyer and the seller. We provide examples of standard terms and how earnouts are calculated.
3. Key Factors That Influence Value. Numerous factors influence value, some more important than others for smaller-sized firms. How does the role of the owner affect value? How does the concentration of sales across the agent base affect value? Do synergies matter? How are things different if we’re dealing with firms affiliated with national or regional franchises?