Module 6 ~ Lesson 3
- Your company’s strategic value. What niche does it serve? What are its intangible assets—your database, experience of your team members, and value of your brand name?
- Its financial performance, both over time and as compared with competitors in your market place, and normalized to include nonrecurring expenses and revenues.
- Its operations. How dependent is it on you?
- Primary concern for any buyer will be retention of your existing agents.
External factors that can impact your valuation include the economic climate, both on a macro level (are housing sales nationally heading up or down?) and on a micro level (what is the local market? How is the jobs outlook?)
Once the factors are assigned a value, you can determine your company’s adjusted earnings before interest, taxes, deductions, and appreciation (EBITDA) or cash flow.
Potential valuation for your business and a starting point for negotiation of the eventual sales price can be determined using a multiple, such as two times EBITDA. For example is your adjusted EBITDA is $400,000, the multiple might bring the value to $800,000. The multiple might be as high as six times EBITDA, with higher multiples applied to companies based on size, profitability, pending sales volume, and size of the listing base.
In a sale, that $800,000 won’t necessarily be the final price. Buyers like to pay based on actual performance. So contracts often will include an earn out formula to allow for price adjustments over a specified term.
The most important factor in determining the worth of your business is your net profits and the amount of positive cash flow that your business generates. While gross revenue is important to track, the key factor is to determine your average net business profit (this is your income less all business expenses) for the last three years.
In addition to net profit, you must also be able to provide the following for a potential purchaser of your business:
- Accurate data on how many transactions you closed each year, the number of listings you took, and the costs associated with closing each deal
- Evidence of a positive, consistent cash flow. Consistent cash flow is critical because it’s required to pay the bills each month.
- The other financial, productivity and operational reports and systems we previously outlined
Can you withstand a full audit of your books and records? If you are going to sell, it’s important that your books can withstand a full audit. This means having all the supporting documents.
The Internal Revenue Service regularly targets businesses that report their income on a Schedule C rather than as a partnership or corporation. Consequently, having accurate books is critical now and at the time of sale.
The following guidelines are assuming you are running a very small business, such as $100,000 to $2 million in sales, with a modest level of recent and expected future growth, such as mid–single digit, and no looming major problems (such as a new competitor chopping into the market share). Finally, these multiples are based on pretax profits.
- An extremely well-established and steady business with a rock-solid market position, whose continued earnings will not be dependent upon a strong management team: a multiple of 8 to 10 times current profits.
- An established business with a good market position, with some competitive pressures and some swings in earnings, requiring continual management attention: a multiple of five to seven times current profits.
- An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success: a multiple of two to four times current profits.
- A small, personal service business where the new owner will be the only, or one of the only, professional service providers: a multiple of one times current profits.
If you have not already done so, go to the Module 6 Overview page and download the Workbook, Slide Decks, and all related Documents for this module.