Why do a brokerage valuation on your business every year? There are so many other tasks occupying your time when you’re running a real estate brokerage that finding the time to work on the company instead of at the company is difficult — sometimes impossible. And yet, if you want to reach your full potential as a business-owner, there are certain regular assessments that you simply can’t ignore.
One of those is a real estate brokerage valuation. How much is your brokerage worth today? Being able to answer that question on the fly can save you time and energy, showcase your own business expertise, and help you plan for the future. In fact, you should be valuing your brokerage every single year.
Why do you need to be assessing your company’s worth so frequently? There are all kinds of reasons to keep tabs on your brokerage’s valuation. Here are eleven of the most compelling.
- Benchmarking for growth and initiative planning
- Business and succession planning
- Accountability for ownership and management
- Internal transfer or sale of shares
- Accurate personal net worth statements
- Annual bank loan requirements
- Seeking funding
- Insurance purposes
- Estate planning
- Legal reasons
- You’re buying another brokerage or selling yours
Let’s dig into each in more detail.
1. Benchmarking for growth and initiative planning
Before you can decide where you want to go in the next two to five years, and the best way to reach those goals, you’ll first need to figure out where you are today. That sounds like basic common sense, but it’s surprising how many business-owners don’t assess their current positioning before deciding where to take their company in the future!
Understanding the current value of your brokerage will help you make plans vis-a-vis that valuation. Do you want to increase the market worth of your business? What would a reasonable increase look like? What might you set as a “stretch” goal? And what are your biggest opportunities for growth?
“You can’t determine if the time and efforts you are investing in your business are worth it if you do not have a baseline valuation before you start your business plan. Then, it’s a good idea to value your firm annually to check your progress,” explains George Slusser, a brokerage valuation expert who penned the definitive book on mergers and acquisitions in real estate, Acquiring (More) Profit. “A brokerage valuation gives you a reliable benchmark for growth and establishes a jumping-off point for your firm’s future.”
Once you start to implement your growth plans, regular valuations can help you assess how well you’re tracking toward meeting those goals you’ve set for your business.
2. Business and succession planning
Once you’ve benchmarked where your business is today, you can more easily determine what opportunities exist for you and where you can go in the future. One valuation done in one year gives you one snapshot of where you are, and if you continue to value your business over time, those snapshots together can create a dynamic picture of your company’s trajectory and the opportunities available to you.
“Having an annual valuation of your business is like the annual physical with your doctor,” says Finley Hair, the national director of WAV Group’s M&A Advisory division. “It gives you the markers necessary to evaluate and make changes for improvements to better health — in life and in business.”
Regular valuations can also help you figure out your exit plan from the business: Most people want to retire at some point in their lives, and while selling the brokerage is one option, it’s not the only option. Some brokers turn over operations to an associate or partner, and this can happen over a long timespan if that’s the preference for everyone involved. Understanding how much the business is worth can help broker-owners plan for and periodically adjust these transitions as needed.
3. Accountability for ownership and management
How should broker-owners hold themselves accountable for the success of their business? And how should they measure performance and success for key operators within their companies, such as managers?
A brokerage’s bottom-line value is an excellent metric for assessing whether the business is generally on track and growing, or whether there are problems with the management or the ownership. The same key performance indicators (KPIs) that drive profitability — agent count, sales volume, and others — are all metrics that contribute to the value of the company. This is why using regular valuations as the ultimate measure of your effectiveness can be a smart way to help owners and managers keep each other accountable.
4. Internal transfer or sale of shares
Perhaps a shareholder is leaving the brokerage, or a new shareholder (even a minority shareholder) is coming on board. Whenever making decisions or agreements around shares, it’s always smart to understand what they might be worth before making any transfers of ownership, even fractional ones.
5. Accurate personal net worth statements
Broker-owners might need a personal net worth statement for all kinds of borrowing or loan needs, including home loans, personal loans, and even some car loans.
Financial planners might also ask for these statements so they can properly advise you about planning for retirement, college tuition, or other long-term financial goals you might have.
6. Annual bank loan requirements
Some bank loans that help fund your business might require you to value your company every so often, typically once each year. Even if you don’t currently carry one of these loans, showing that you regularly keep tabs on the value of your firm can prove to lenders that you have your finger on the pulse of compliance and due diligence, an asset in the business world!
7. Seeking funding
Speaking of seeking loans, there are other entities besides banks that might be interested in providing you with funding today in exchange for some shares in your company that can be cashed in tomorrow. Venture capitalist funds, angel investors, and other people and groups exist who are interested in real estate and might be willing to put some of that interest into the form of a check.
Guess what these entities are going to want to see before they’re willing to invest in your enterprise? You guessed it: a rundown of your company’s current valuation, and it’s always better if you can show growth over time by way of multiple valuations throughout the years.
8. Insurance purposes
Some specific insurance policies, such as “key person” life insurance policies, require firm valuations before the insurance company can put together a policy. These are policies that help companies manage risk; they are essentially life insurance policies purchased on people who are considered vital to the company’s success and ultimate survival, with the companies themselves as the beneficiaries.
If something happens to the key person covered by the policy, then the company gets a payout that will hopefully create enough of a safety net for it to recover and move on. In order to determine coverage amounts and deductibles, an insurance company is going to need a brokerage valuation.
9. Estate planning
Many of us don’t like to think about our own demise, but as a business-owner, it’s critical to understand what will happen to your assets — including one of your largest assets, your brokerage — if something unexpected and unfortunate were to happen to you.
Knowing that this is always a possibility and planning for it is something that good leaders do. It can also help ensure that family members you help support are well-represented and cared for when you’re no longer able to personally see to their comfort.
10. Legal reasons
Nobody wants to be involved in a legal issue, dispute, or lawsuit, but these things can happen to anyone, including broker-owners or brokerage partners. Courts might request brokerage valuations in legal situations involving death or divorce, bankruptcy, or partnership disputes — and even prenuptial agreements.
You may not be able to present a recent valuation of your firm in lieu of a valuation that’s ordered by a court representative, but having your brokerage regularly valued can help protect you legally if the valuations presented in court are wildly off-base.
11. You’re buying another brokerage or selling yours
Perhaps you have plans to expand into a new market or a new niche, or perhaps you’ve been approached by another company that seems to be a great fit for a merger or a fold-in acquisition. Before you can start seriously negotiating what a transition plan might look like for you, you’ll need to know what your brokerage is worth to a buyer.
Because you’ll likely want an answer to the question “how much is my brokerage worth” sooner rather than later in this scenario, it’s probably wise to bring an expert into the conversation so they can help explain how a valuation works to both sides and come up with a number that’s reasonable and fair.
“One of the fastest paths to growth is to merge with or acquire another real estate brokerage,” notes Slusser. “But before the deal is finalized, both the buyer and the seller are going to want to know the fair-market value of the business. Being able to present a series of valuations that go back several years can help you when the time comes for you to negotiate a price for your hard work and effort.”
Why savvy broker-owners value their company annually
Clearly, there are many reasons why you’d want to get a regular valuation of arguably the biggest asset you may ever own — your real estate brokerage. Besides business planning and financial rationales, understanding how your firm’s value has grown and changed over the years can also give you more information when you get to the negotiating table for a brokerage sale or purchase.
What’s the best way to get a brokerage valuation? It’s going to depend on the market you’re operating in, your specific brokerage, and how it’s managed. For more information and details about how to arrive at a valuation, or to talk to an expert about getting a valuation done for your firm, contact us today! We talk to brokerages like yours every day about how to pinpoint a number that accurately reflects their hard work and value.
Connect with WAV Group for a Brokerage Valuation