There is a popular perception in Australia that the value of a real estate business is limited to the value of its rent roll. Michael Davoren, head of RE/MAX Australia, says this kind of thinking needs a shake up.
It is time we changed industry thinking on that matter and recognised the true value of the sales division in relation to the value of the overall real estate business. In many cases the sales department means one thing to a business owner – cash flow.
In many other parts of the world, a well-structured sales division is considered valuable in its own right.
‘Well-structured’ is not a glib term: being ‘well-structured’ becomes imperative when the business of sales is measured for its financial value.
A well-structured real estate sales business can be identified by:
- Proactive personal and professional development
- Proactive recruiting systems
- A business owner who does NOT bring in the greatest percentage of sales income, where the income would remain the same should that owner cease selling or sell the business.
- A business of a viable size. The more quality sales people the more valuable the business is.
Typically in a business broking model, a business is valued by the product of ‘earnings before interest and taxes’ (EBIT), a measure of a firm’s profit that excludes interest and income tax expenses, or for ‘earnings before interest, taxes, depreciation and amortization’ (EBITDA) and a recognized multiplier for that type of business, taking into account size and location variables. The multiplier approach is similar to the ‘comparable sales’ method commonly used in real estate.
This formula is rarely, if ever, applied to a real estate sales business.
It should be.
Let’s take the case of the owner of a real estate office where the sales side of the business delivers an annual profit of $400,000. Using a conservative 2.5 multiplier, you have a $1mil business asset.
And in an office with both sales and property management activity, where the sales division is in effect attached to a rent roll, that sales division is worth even more than a stand-alone one because of the ongoing business that a rent roll can direct into the sales business.
It is time the real estate industry, business brokers, financial institutions and the public changed the way they view the real estate sales business and see it for the financial asset that it is
I am taking action now, putting in systems and strategies to help RE/MAX broker owners to structure their sales departments to be an asset rather than merely cash flow.
Michael Davoren is the Managing Director of RE/MAX Australia.