Selling the Business
Not every agent has family members who want to be involved in real estate, much less at the time the agent considers retiring or scaling back involvement in day-to-day operations. In those cases, selling the business may prove the best route.
Unfortunately, determining the value of a real estate business can be difficult.To that end, the National Association of Realtors (NAR) lays out five ways of calculating value, both in terms of concrete assets and more intangible qualities. While physical property is easy enough to price, assets — such as the inventory, listing rights, lists of clients, management and staff, and the brand itself — are more subjective.
Following NAR’s advice, agents can look at the total accumulation of assets. This valuation method doesn’t take economic conditions and other factors into account, but it is one of the most common means of valuation nonetheless.
Meanwhile, the replacement value method considers the capital needed to start a new business, one that would mirror the success of the existing firm. Variables taken into account using this valuation tactic include the cost of staff recruitment, training, marketing expenses and day-to-day expenses. NAR recommends this method for offices that are looking to be bought out by — or merged — with regional or national companies.
Another option, the income valuation method, evaluates the office’s current and expected future income by using a mathematical formula to project future earnings based on current net operating income. Similar to the income valuation method, the discounted cash flow method is based on the notion that the true value of a real estate business lies in its future earning potential. Therefore, tangible assets are not factored in. The current value of projected future income is calculated using a formula, and future earnings are discounted individually year by year.
The market comparable method performs exactly as it sounds. Values are determined by making a direct comparison to the value of similar businesses. A rough price range can be determined by setting guidelines, regarding which brokerage services are the most appropriate for comparison, with adjustments made for the firm’s individual attributes and drawbacks.
Jennifer Mills Klatt of Berkshire Hathaway Koenig Rubloff Realty started Home Discovery 27 years ago as a rental agency, eventually developing it into a full-service, boutique brokerage with three offices. After five years, she had grown the business significantly and developed robust brand recognition.
“People recognize why I do what I do and come to a name they can trust,” Mills Klatt said. “Establishing a quality brand includes living up your reputation and, then, delivering results.”
She affiliated Home Discovery with Koenig & Strey in 2008, after entertaining offers from another brokerage. Klatt liked that Koenig & Strey gave her the flexibility she wanted, and greater control over her branding. Two of her offices closed after Koenig & Strey was bought by Berkshire Hathaway Home Services, but she still owns the third, and leases it to Berkshire Hathaway.
“I have such a strong team that each broker could take a role based on locations,” she said. “They have all been trained to deliver the finest results, so there is peace of mind knowing clients are always in the best hands. But this transition won’t happen for quite awhile — I’m in my prime!”
Completing the actual sale can be as simple as receiving a lump payment – essentially turning the keys over and walking away – or a complicated, extended process. Accepting an up-front cash payment has the advantage of allowing the agent to separate instantly, but it also has some drawbacks. Asking for cash up front can limit the number of potential buyers, resulting in a lower sale price. There are also tax considerations. Accepting a single lump sum may result in having to pay higher taxes on the transaction.
Accepting payments in installments could allow the agent to pay a lower percentage in taxes. Of course, this method presents its own hazards. There is always the possibility that the new owner fails to keep up with business; if it fails, future payments would likely dry up. Agents who plan a gradual transition away from the business can mitigate that risk by staying involved and helping to navigate the transition.
Next: Staying Involved