Get out!

Selling your brokerage can be lucrative if you prepare and have realistic expectations.

by Scott Williams   You’ve worked hard to build a successful real estate brokerage and now it’s time to sell. So you put your business on the market and soon have eager buyers vying for the privilege of becoming the new owner.

After a lengthy bidding war, the winner signs a fat check for the full asking price and suddenly you feel like a lottery winner. You can retire or move on to another endeavor flush with cash.

Sound too good to be true? It is

"Most real estate companies sort of die on the vine," says Jeff Jones, president and CEO of Certified Business Brokers of Houston. "They start with losing their agents, then they start losing their listings. By the time the guy realizes he’s got a significant problem he’s got nothing to sell."

Jones, who has been selling businesses for 25 years, contends that even in the best of times, owning a real estate brokerage isn’t the cash cow that some might think. Starting a brokerage is relatively easy, and name and reputation–among the most valuable assets of a brokerage–dissipate quickly.

So, what can you do to maximize the value of your business and find a buyer? Consider getting help from a business broker.

A striking resemblance

Hiring a business broker doesn’t guarantee your brokerage will sell, or that it will sell for more money–just as hiring a real estate agent doesn’t guarantee a house will sell for full asking price. However, business brokers perform services similar to those you perform for a client listing his house.

You offer a client an objective look at his property, knowledge to price it according to area sales, and expert assistance with negotiations and the sales process. Business brokers let you know what price the market dictates for your brokerage, what appeals to potential buyers, and eliminate the need for you to screen interested parties.

They let you focus on maintaining your successful business, instead of wondering how to attract a buyer.

A broker for your brokerage

"A business broker serves as a facilitator to help the parties learn about each other and help the deal get struck," says Laurel A. Johnson, owner of Sunbelt Business Brokers of Austin, who has been a business broker for the past three-and-a-half years.

Johnson, like most business brokers, represents the seller, although she works with the buyer to help the two sides come to an agreement. Her typical fee is based on a percentage of the sale price, with a minimum fee starting in the low five figures.

Some real estate brokers might balk at the suggestion that they hire a business broker to help sell their business. But according to Don R. McIver, a business broker for Associates Business Xchange in Dallas, most real estate brokers are too busy running their business to market it, screen potential buyers, and handle the negotiations and due diligence needed to complete a sale.

One of the first and most important things a business broker can provide to a prospective seller is confidentiality. "You would not want anyone to know the company is for sale because it could affect their continuing operation in the business," says McIver, who has sold businesses for the past 31 years.

Agents who find out the business is for sale might jump to a competing broker, clients might assume you’re in financial trouble, and competitors might use your impending sale to lure clients and agents away from you.

Business brokers also provide an accurate evaluation of your business’s worth, which is important because McIver claims even the most-savvy real estate broker often doesn’t have a clue as to the true value of his business. "They either price it too cheap or they’ll price it at such a high price that any sophisticated buyer is not even going to make an offer on it."

Johnson describes the latter phenomenon as "trying to win the lottery." "It’s amazing to me how many times I hear business owners say, ‘If you find someone who has more money than sense, let me know.’ They laugh about it, but I know they’re serious," she says.

Johnson recommends hiring a certified business appraiser, such as one who belongs to the Institute of Business Appraisers, to determine the value of your brokerage. "Part of assessing value is knowing what other practices of that approximate size are selling for around the country," she says.

She claims one of the best services a business broker can provide is to screen out "tire-kickers" and unqualified buyers. It’s not uncommon to have as many as 100 people express an interest in a business. Four or five of those will have enough interest and qualifications to meet the buyer, and one or two will actually make offers.

What’s your motivation?

The first thing Johnson does when approached by someone selling his business is to find out why that person wants to sell. "Most of the time the buyer is more interested in why the seller is selling than he is the price," she says.

From a buyer’s standpoint, good reasons for selling a business are retirement, health concerns, getting capital to fund another business venture, and wanting to be closer to family members. Buyers don’t want to hear you’re selling because the business is doing poorly and you want out.

Former San Antonio broker and 1983 TAR president Guy Chipman had a good reason for selling his real estate brokerage, The Guy Chipman Company, in 1996. He wanted to retire. Chipman sold his business to his two eldest stepsons, John and Harry Drought, who had worked with him for more than 20 years and owned stock in the company.

Although he might have found a better deal from an outside buyer, Chipman never considered it. "I wanted them to have it. I wanted somebody that I had confidence in to take it over, and I wanted to reward them for working for me for over 20 years," he says.

Midland broker Kay Sutton sold her eight-year-old brokerage to Coldwell Banker because she wanted to return to selling. "I think selling was my first love, and although I enjoyed having the company … I really got tired of sitting behind a desk," she says.

This could take a while

"The time to go to market is when your revenue is on an upward trend, the business is rocking and rolling and doing really well," Johnson says. "The paradox is the seller doesn’t usually want to sell then."

McIver recommends interviewing business brokers a year or two before you plan to sell. That gives the broker time to evaluate your business and give you strategies for increasing its value.

McIver says the most valuable part of any business is cash flow. "People buy with the expectation of getting a return on their capital investment," he says, "and cash flow is a good indicator historically of what’s happened."

Jones, who has sold three real estate brokerages, also looked at several that had nothing to sell. The business retired before the owner did. "The key ingredient to selling a real estate company is to have agents–and to have active agents. Without that they become virtually unsalable."

Johnson says intangible assets often are the most valuable part of a business. "The goodwill is usually the largest element of value," she says. "The hard assets, the stuff you can see and touch, usually don’t have much value except for the fact that they’re deployed in creating revenue."

In order to build a valuable business, a real estate broker not only has to maintain active agents and keep listings up, but has to be careful not be responsible for too large a percentage of annual sales.

Johnson agrees. "The higher the percentage of the revenue is produced by the owner the less valuable the business is, because when the owner goes, that revenue will go with him."

Paying the buyer

Johnson says it’s rare to sell a business to an employee, because a buyer usually needs 30%-50% of the purchase price as a downpayment. It’s also difficult to find third-party financing for real estate brokerages, forcing the owner to finance the purchase himself.

"That’s also the best way the buyer feels confident the business is real," Johnson points out, "because the seller won’t finance it unless he knows the business is real, because he doesn’t want to take it back."

Sellers usually get a higher price for the business using seller financing than in an outright purchase and can defer their tax consequences, because the income is received over several years rather than all at once. Annual interest rates on seller-financed loans run around 7%-9%, according to Johnson, and terms generally run no more than 60 months.

It’s common to amortize the purchase over seven years or so to lower the payments, with a balloon payment due in three years. By that time, the new owner can probably arrange for third-party financing on the remaining balance.

Getting at the bottom line

Charles de Wetter, an El Paso broker, formed a partnership that purchased Sutton’s company, among others. When evaluating a real estate brokerage for purchase, he examines several aspects of the business.

He looks at the company’s culture. Do employees enjoy working there? Is the company considered honest and ethical? He also checks to see if sales are spread out among several agents rather than one or two.

De Wetter then determines if the company has unrealistic lease obligations. Does the company have a huge office it can’t fill? Do they have equipment they can’t use? And does the company have a history of lawsuits? Even though the new owner may not assume liability for those prior acts, de Wetter says most buyers will avoid a company where lawsuits are considered just another part of doing business.

He also examines a company’s tax returns, profit-and-loss statements, agent-production information, and a breakdown of expenses. Of course, the most important question is whether the company is making money, and de Wetter says some companies have no idea whether they’re profitable or not.

"One of the things you have to be careful of when acquiring a company is to look at the commission structure in place and see if it can work," de Wetter says. "If not, can you implement a new one, and if you do, what is the effect on salespeople?"

De Wetter strips personal expenses from the books in order to get a true picture of what the company is worth. The figure he looks for is earnings before interest, taxes, depreciation, and amortization, known as EBITDA. He says that in his experience, real estate brokerages are now selling for between two and three times this figure.

Jones puts the figure even lower. He says a high-risk business such as a real estate brokerage might sell at between one and two times earnings.

Reality isn’t so bad

If you decide to sell your brokerage, seek out advice from professionals like business brokers. Time the sale well and ensure your brokerage appeals to buyers and is priced correctly.

Maybe you won’t win the lottery. Maybe selling your brokerage won’t incite a bidding war. But that doesn’t mean you can’t earn a fair price for all the hard work you put into building your business.

Scott Williams is a full-time freelance writer based in Corpus Christi who has spent the past two decades reporting and writing for newspapers, magazines, books, Web sites, and trade journals.

Photo © PictureQuest.

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