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Understanding The Basics of Brokerage Valuations

There are many reasons why real estate brokerage owners request a valuation. The sheer number of companies we’ve worked with show why we’re the experts in valuing brokerage companies.

At REAL Trends, we’ve performed over 3,000 valuations for residential real estate firms over the last 30 years. If we use simple math that averages out to about 100 per year—some years less; some years more. These last couple years have undoubtedly been on the more side, with our run rate currently more than 20 per month. There’s no doubt these are extraordinary times!

Not Every Brokerage is Selling

There’s a contingent of owners who are contemplating selling their firms, and valuations are naturally the forerunner of going to market. But, not all of our clients are interested in selling. There are in fact a myriad of reasons why owners choose to value their firms.

Brokerage Valuations

Occasionally, we perform valuations for clients going through the process of estate planning. We also do work for family-owned businesses seeking to formalize succession planning. Other reasons are after death and during a divorce, which are mainstays regardless of what’s happening in the markets. In these cases, valuations are critically important. Beneficiaries need to know what the market is for the ownership stake that was left to them, and sometimes we’re called upon to defend our valuations in front of a judge if a divorce gets nasty.

But, Some Are

One of the more common reasons for valuations is the internal sale and transfer of shares. That means a full or majority owner selling shares to key people on his/her leadership team, a minority shareholder who wants out, or if there’s a partnership dispute, establishing the fair market value of the enterprise.

 

 

Another common reason to seek out a valuation is for business planning purposes. Some of our clients want to know what their firms are worth in today’s market. Once they establish value, they then use this information for their tactical and strategic planning.

Key Components

One of the critical components of our valuations is a benchmark report, which compares the performance of our client with its regional peers. This benchmark provides comparative analysis across various financial and productivity metrics, including above- and below-the-line margins, expense ratios, return on revenue, agent productivity and more. Our business planning clients, in particular, find this tool incredibly useful as they seek to refine their businesses better.

For those who are selling, the reasons for pursuing such endeavors are wide-ranging. One group is owners whose firms are finally performing at or better than where they were before the Great Recession. These folks are either at an age where they can’t afford another downturn or don’t want to go through one again. They’re ready to take some money off the table.

Another group is owners who are tired of the slog. Like nearly all brokerages, they’ve seen their retained company dollar continue to fall and don’t have the will or gumption to keep fighting the battle to stay profitable. This industry is not for the faint of heart, and the company dollar grind mixed with a fear of the disruptors prompts them to want out.

Thankfully, regardless of the reason for selling, there’s been no shortage of buyers. Multiples remain fair, and terms remain reasonable as brokerages seek to grow via acquisition.

Valuation demand is at record levels. These are exciting times for our industry, and I suspect things will stay busy on this front for some time to come.

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