Often, I am asked, “when is the best time to sell my real estate brokerage firm?” The easy answer is, “when you do not need to.” The better answer is, “when you are ready, and it is a planned event.”
The ideal time to sell your company is when your firm is positioned correctly to convey its value. Even more important is the timing when it is in your best interests as a career or life decision. Buyers seek and pay premiums for well-run quality firms and those are rarely for sale. You want to be one of those firms and ready when the time is right.
Not sure when the timing will be right or if you really need to do this now?
My belief is that an exit strategy evaluation should be an important part of your annual business plan. Many owners only consider exiting when their profits are not consistently high enough for the amount of effort that running the firm requires. An unexpected exit may be the right timing from a life or career alternative standpoint. However, even if you exit early, an exit preparation will allow you to receive maximum value for your firm. An unplanned or accelerated exit scenario is typically much better for the buyer.
The terms Exit Strategy and Succession Planning are often used interchangeably. They can be one in the same but Succession Planning is usually a process for the retirement of, or owner departing with a planned transition to internal candidates. Having potential internal buyers or external candidates is always a good idea. I have worked with firms that knew 5 years out who they were building their firm to sell to and then did it successfully.
Begin the plan with some honest self-reflection on your future. This can be simple notes or as I suggest a formalized process and a clear strategy on when and how you might exit. Some work will be required but it will be profitable time spent setting direction for your business. Most improvements you make to your business will be beneficial for you and a prospective buyer.
A very important consideration is a time frame. It is a “best practice” when doing budgets to look ahead at least 3 years (some do 5). Much changes in our industry in 3 years and it represents a fair target that needs fewer adjustments along the way. Ask questions like:
“Where do you want your firm to be in three years,” “What will the firm look like, and what do you need to do to get there?” Follow this by being truthful about when you see yourself doing something different; 5 years, 20 years, 6 months? Please know that many buyers will want the owner to stay on to assist with the transition. I have seen the timeframe as short as 60 days but most likely 2 years or more. This extra time needs to be factored into your timing of doing something else after the sale.
Tracking the value of your firm
An important benchmarking tool is to have a professional valuation prepared for your firm so you have a realistic starting point. A valuation will allow you to gauge how a potential buyer will perceive your firm’s value today. If your desire is to get 3X your current value this can be your 3-year goal (or longer). Next use your normal business planning process to determine how best to get there. Many firms receive valuations annually to confirm if they are on the right track.
Even if you are many years off from a potential exit the exercise is a healthy one. Imagine you are going to sell in 3 years, what would you do differently? Clean up your accounting systems, make changes you have been contemplating for years, close or consolidate a branch office? Growing your firm to maximize profitability is essentially the same as positioning it for sale in 3 years. Buyers will not typically give you much credit for infrastructure or personnel investments that you have made that do not yet reflect improved profitability. It may take 1-2 years for an investment today to be fully realized in profitability. If you want to grow your firm by 3X it will take an investment (time or money), prioritized improvements, an implementation plan, execution, and adjustments along the way.
If circumstances in year 2 or 3 cause an early sale you are in a much better position. You have already made improvements and are in the proper mindset of a planned event. Hopefully, at the end of 3 years, you have achieved your profitability goal with the investments more than paying for themselves. You have maximized your value and made your firm a more attractive sale candidate. Congratulations. If you are still years off from exiting, then start a new 3-year plan with even higher target goals.
Crisis Exit Plan
As a part of your exit strategy, it is beneficial to create a “crisis management plan”. Ask the question, what should your family do if something happened to you? Who would take over short and long term? This is not an enjoyable exercise but better for all to discuss in advance. Well-run companies have contingency plans and you owe it to your family and agents. A “crisis management plan” can be used for an immediate need but should also be a part of your long-term exit strategy. Keep in mind that companies that are sustainable without the primary owner usually bring a premium.
Continuously building your firm with an exit in mind is a healthy exercise. This strategy allows you the opportunity to sell on your terms and timing.