Given the current situation in the real estate market, there is an uptick in real estate agency valuations. Many brokerage owners want to know what the agency is worth should they decide to put the business up for sale.
When it comes to valuing a business in this industry, real estate brokerages are quite similar to professional practices:
- Hard asset base is relatively low.
- Revenue generation depends upon the skill of professional real estate agents.
- Business goodwill, especially for established agencies, is very important. At least a part of business goodwill is personal in nature, which may complicate its transfer to the new business ownership.
- Licensing requirements create a barrier to entry, reducing the available pool of business buyers.
Business valation approaches and methods
A real estate brokerage can be valued under all three standard approaches to business valuation:
- Market – based on comparison to similar real estate business sales.
- Income – factoring in the real estate agency earnings prospects and risk.
- Asset – by accounting for the values of the real estate agency assets and liabilities.
Asset-based business valuation methods are less common in valuing a real estate agency. The hard assets are typically concentrated in the office furniture and fixtures, computer equipment and productivity software tools. Their market values can be easily determined. However, valuing the business intangible assets, such as client lists, is far more difficult.
One asset-based business valuation method that is useful for valuing a real estate brokerage is Capitalized Excess Earnings. This well-established business appraisal technique lets you calculate the value of business goodwill based on the so-called excess earnings – those over and above a fair return on the business tangible assets.
Business valuation using market comps
Market data on real estate agency sales is a frequent source of comparables. Just as in the real estate sales, market comps offer a way to estimate the fair market value of a real estate brokerage.
Typical business valuation multiples for real estate agencies
The most reliable valuation multiples are:
At ValuAdder, we analyze recent private business sales in all types of industries. To offer you an accurate business market value estimate, we calculate over 40 valuation multiples – relating the business selling price to its revenues, profits, EBITDA, EBIT, cash flow, and assets, among other measures.
This statistical analysis shows that accuracy of business valuation multiples varies by:
- Company size.
- Over time.
- Selected measure of business financial performance.
The best valuation multiples tend to give you business sale price estimates with low variation that tend to cluster tightly around the average.
This basically means that business buyers and sellers rely on these valuation multiples when pricing a business for sale in your industry.
Valuation of real estate agencies on income
Business values of established and young real estate agencies are very often determined using the income-based business appraisal methods.
For mid-market real estate brokerages, the discounted cash flow is the preferred valuation method. For smaller, owner-operator managed agencies, the multiple of discretionary earnings method offers a great way to directly capitalize the business value.
Business selling price and market value
Your business valuation number does not necessarily equate to the business selling price. When offering a real estate business for sale, both price and terms affect the “cash value” of the deal.
Just as with other types of professional practices, an earnout is a frequent element of the deal. This makes part of the contract business selling price contingent upon its future financial performance, such as achievement of a certain level of sales.