Given the current situation in the real estate market, you may spot an uptick in real estate brokerage valuations. Many owners want to know what the agency is worth. You should get the answer especially if you decide to put the business up for sale.
When it comes to valuation, real estate brokerages bear strong resemblance to professional practices:
- They have relatively low fixed asset base.
- Revenue generation depends upon the skill of professional real estate agents and brokers.
- Business goodwill, especially for established agencies, is very important. At least a part of business goodwill belongs to the key people in the company. This may complicate its transfer to the new brokerage owners.
- Broker license requirements create a barrier to entry, reducing the available pool of business buyers.
Real estate company valuation approaches and methods – best practice
You can value a brokerage using these 3 approaches:
- 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.
You will rarely see the asset-based methods in real estate agency valuations. That’s because the fixed assets don’t tell the real story about the company. You are talking basic office furniture and fixtures, computer equipment and software. Figuring out the individual asset values is easy. However, valuing the business’s crown jewels such as market knowledge, new listing generation and the like is far more difficult.
Blue sky or business goodwill? Find out!
Blue sky may sound like a putdown. But you should expect goodwill in a successful real estate brokerage. If so, it’s time for the Capitalized Excess Earnings number crunching. Use it to calculate the value of business goodwill based on the so-called excess earnings. Not excessive earnings, mind you. Just those over and above a fair return on the business tangible assets.
You get these by studying recent sales of real estate agencies. Just like the comparable property sales, business sale comps here give you a way to figure out the value of a real estate brokerage.
Typical valuation multiples for real estate companies
You will likely see these valuation multiples:
You would do well to check recent brokerage sales. This would give you the ammo to calculate quite a number of valuation multiples – relating the business selling price to its revenues, profits, EBITDA, EBIT, cash flow, and assets, among other measures.
The best valuation multiples give you a business sale price estimate that checks out against the actual market data.
This basically means that business buyers and sellers prefer these multiples when pricing a business for sale.
How to value a real estate brokerage on its income
You will surely run across valuation of both established and young real estate companies based on earnings.
Brokerage selling price and market value
Your 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.
Earnout – sweetening 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.