If you are looking to sell your business, we all believe the real value is in the rent roll. John Knight says it is time we challenged this notion to create sales businesses that are actually worth something too.
I am often asked ‘What is my business worth?’ The reality is that most sales businesses are worth squat; rarely do you see one sell for a material sum of money. That said, there are exceptions.
Often the rule of thumb to value a sales business is one year’s profit, but this fails to take into account matters specific to the business.
When we value businesses, whether in the real estate industry or not, the key drivers of value are:
- Future earnings (as a substitute for future cash flows)
- Risks (any risks that the earnings will not continue into the future)
- Opportunities (the opportunity for earnings to improve into
The starting point with any valuation is to work out what profit the business is predicted to make year in, year out into the future. To work out your estimated future earnings, we start by looking at past results. Adjustments need to be made to come up with a more reliable estimate. These adjustments will include for structural changes in the business, abnormal items and costs associated with financing the business, such as interest on loans.
Some of the more common adjustments are around sales team members who have come and gone, and the impact it has on earnings. You also need to allow an amount for the commercial remuneration for principals; for example, if you are not taking a commission on your sales you need to allow for one. You should allow too for roles like management and bookkeeping that would need to be replaced if you no longer worked in the business.
There are many reasons why the business may not continue to derive the estimated future earnings after it is sold to a new owner. The biggest risk, though, is that salespeople will leave and deplete the current earnings figure so much that it is difficult to put much value on the sales business at all; this is why your sales business is usually worth squat.
Review the breakdown of your sales by person to see who the business is reliant on. Are there a few key people that derive the bulk of the sales? You need to reduce this risk.
Is the business reliant on the principal? Does the principal sell? If so, when the principal leaves there is a massive risk that the business will not be able to continue earning the same amount in the future. This position is exacerbated if the business is named after the outgoing principal.
Joe Bloe Real Estate without Joe Bloe can be a real problem from a branding and marketing perspective.
PRICE VS VALUE
Price and value are two different things. One person may see more value in your business than another person because it is beneficial for them – for example, if the acquisition takes out a competitor, gives them scale quickly or provides access to new markets.
Sales to existing team members undoubtedly generate a higher price than sales to an external party. The reason for this is simple – less risk of losing that team member and disrupting the team dynamics means there is a better chance the value will transfer.
Your business may be worth squat now, but there are things you can do to improve your position. The more you think like a business, the more value you will create.
THE TOP 10 FACTORS THAT WILL MEAN YOUR SALES BUSINESS IS WORTH MORE THAN OTHERS
1. Bigger team
2. Limited reliance on key individuals or teams
3. Solid systems and procedures
4. Great brand presence
5. Great operations support
6. Great team culture
7. Leads generated by the office more than the individual salesperson
8. Key parties locked in – shadow equity agreements could help
9. Functional management team in place
10. A succession strategy that started a long time ago