To value a real estate brokerage, you must consider different factors such as profit, benefits, depreciation, interests, and other expenses.
As a licensed real estate broker, I have many friends that have sold their real estate companies.
Even though real estate brokerages are in the same business, they differ in valuation.
Profit and cash flow determine the pricing for these firms depending on the market situation.
If brokerage owners decide to put up their firm for sale, they need to know their brokerage valuation to see if it is the right time.
Let’s discuss some essential ideas and tips for valuing a real estate brokerage with the right approach.
Ok, I know you’re probably clear on what a real estate brokerage is, but I need to verify so that we’re on the same page (keep scrolling if you’d like).
What is a Real Estate Brokerage?
Brokerages are firms that help customers with their real estate business needs.
They usually assist in the buying and selling of real estate properties.
The brokerage will also have contacts for lending, inspections, and real estate attorneys.
Before an individual becomes a broker, they must follow state requirements and the brokerage exam.
So they got a real estate license and then later snagged their broker’s license.
They receive payment through a fixed rate or a commission as part of the transaction they do with the client.
How to get the Business Value of a Brokerage
With all of the ways to make money in real estate, let’s look at the brokerage model.
There are three common ways to value your real estate brokerage.
These approaches are market, income, and asset.
But here are a few reasons why valuations can be difficult.
When measuring your broker’s EBITDA (earnings before that interest, those taxes, depreciation or amortization) part of the issue can be with how the broker pays themselves.
Broker owners usually don’t pay themselves out the profit share split, they usually take draws at year’s end.
So this will affect value.
Also, real estate agents are independent contractors.
This completely affects how a buyer will look at the business and the potential risks when making a deal.
Aside from these approaches, you also have to note some critical factors affecting valuation.
Knowing the different ways to value a firm is vital because not all companies will work with one.
Market
The market approach effectively identifies a brokerage value based on statistical evidence.
Most appraisal professionals think that the market should decide the value of a business, so they use this approach.
Some aspects to consider in the market approach are the appraisal value, assets, interest, and security through market prices.
Therefore, when using this method, the brokerage firm must compare its sales with other similar businesses.
Income
The income approach is the most common in real estate and brokerage.
Most investors also recognize this method as it values the business according to its current and terminal value.
Generally, an income-based method utilizes the profit of a real estate property to determine its fair value before selling.
Discounted Cash Flow
Discounted Cash Flow is an income-based approach that allows you to generate value through cash flow stream, discount rate, and long-term business valuation.
Experts and appraisers acknowledge it as the most accurate way to value any business.
One is that they base the estimation on the business earning power and risk, whether small or large.
Gross Margin of Company Revenue
For brokerages that have less than $2 million in gross revenue, the Gross Margin or Company Revenue Approach might be ideal.
It is specific in the real estate industry for smaller businesses and when owners use a part of the revenues for the firm.
Gross margin is the sum of a firm’s revenue minus all sales fees and expenses.
Once you identify the gross margin, you will use a specific percentage to assess the business value.
[This video is just a quick fun detour for you. I tend to play devil’s advocate and like to point out where I disagree with real estate professionals (I’m also a licensed agent!). Have a watch…]
Assets
Another way to calculate a real estate brokerage value is through asset-based valuation.
It highlights the company assets or their market value without the liabilities in the total.
Once you evaluate the company assets, you need to get the fair market value next.
This approach is not common in the real estate industry for selling a brokerage because assets are not significant to the company’s overall value.
For example, the company’s equipment, furniture, and software are not a big part of what drives revenue.
Factors That Affect Brokerage Value
You can’t just look at the brokerage only on paper to determine a potential value.
There are many other things to consider, such as…
Location and Size
Larger firms in a metropolitan location are usually worth more than small firms in a rural community.
If the area is a strategic location, supposedly in a business district, it’ll have a higher value.
It is because they attract more potential if they have more potential clients nearby the office.
Affiliations
A brokerage may have a higher value when affiliating with trusted regional or national brands.
Results
When a firm has inconsistent results for a few consecutive years before selling it, it will lower the market value.
It can be either because of the real estate market or a problem within the organization.
How Can You Earn From a Real Estate Office?
The real estate industry pays differently than most jobs.
Most real estate professionals earn through commission.
And this is one of the reasons it can affect the value of the brokerage and makes it tougher to calculate the value.
As an independent broker, you’ll get a direct commission when a client has a successful buy or sell transaction.
Your commission depends on a percentage of the property’s market price.
However, you can also set your fixed rate.
Earning through a commission-based job may mean you’ll have unstable profits, but your earning potential is endless.
Meanwhile, if you are under a brokerage, you still earn a commission and share it with the firm.
Related Reading: How To Find Great Real Estate Deals – Check Out Here.
Takeaways
Valuing a business can seem overwhelming with all the factors to calculate and consider.
Figuring out where to sell that business can be even harder!
However, the above-mentioned methods greatly help business owners develop their business values.
These approaches are just some of the most recommended valuation methods in the real estate industry.
If you can afford to, it is best to approach an expert appraiser, so you’ll get a fair calculation of your business value.
By the way, once you sell, go ahead and bookmark these articles, as you’ll want to read next!
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FAQ
How to value a real estate brokerage?
It’s a bit different than other business valuations due to how they operate. Agents are contractors and can leave at any time. If you choose to hire a business broker, pick one that specializes in valuing real estate companies.
Are Real Estate Brokerages Profitable?
If run well and in a good market, real estate brokerages can be very profitable businesses.
What are valuation multiples for selling a real estate company?
This is tough in the real estate brokerage business. Since the entire business is based on your agents’ (that are independent contractors) real estate production, you have to take many factors into consideration.
