Putting a price tag on your real estate business

(This is Part 5 of a six-part series. See Part 1: Are your ready to sell your real estate practice? Part 2: Finding best successor for your real estate biz; Part 3: How to build a saleable real estate biz; Part 4: 7 ways to beef up your real estate business and Part 6: Navigating the sale of your real estate business.)

Doctors do it, lawyers do it, dentists do it – why shouldn’t you sell your business when you’re ready to retire?

While there are many ways in which to value a business, here’s what your business is worth, according to www.BusinessTown.com:

1. Eight to 10 times profit

The maximum you can hope to obtain for your business is approximately 8 to 10 times your profit. To obtain this amount, you must have a dominant market share and history of a high, long-term (five years or more), predictable income. Your business must be able to generate this income without relying on you as the rainmaker.

2. Five to seven times profit

If you have an established business, good market position, some competitive pressures, and buyer who has strong skills who can successfully step into your shoes as the rainmaker, then you can probably obtain approximately 5 to 7 times your current profit.

3. Two to four times profit

If you have an established business, no competitive advantages, strong competition, and heavy dependence on your skills for success, your business is worth about 2 to 4 times profits.

4. One times profit

If you are a sole practitioner selling to another sole practitioner, your business is worth your latest year of profit.

5. Whatever you can get

If you sell to someone who really wants your business or who is uneducated about how businesses are valued, you may be able to get almost anything you ask within reason.

Clearly, your business is worth more if it doesn’t rely on you as the rainmaker. You will obtain the maximum amount possible for your business if you can automate and systematize it as much as possible. Here are some key steps you can take to increase the value of your business through systematization.

1. Automate your lead generation and lead follow-up.

For example, you can use an 800 call-capture number to track leads and to send out e-mail or fax brochures to buyer leads. There are also numerous programs that allow you to follow-up on Web inquiries by offering an online class or by sending out e-coupon autoresponders.

2. Hire a virtual assistant.

Hiring a virtual assistant frees you from the responsibility of having to personally respond to Web inquiries. Recent research shows that the times when most real estate customers are online is between 7 p.m. and 1 a.m. Many virtual assistants prefer to work late at night. This means that your VA is handling business, even when you may be sleeping.

3. Use a transaction coordinator and a transaction tracking platform.

A virtual assistant can do transaction coordination, or your office may already provide this service for you. The benefit of using a transaction tracking platform is two-fold. First, all communication is done online and you can track when the parties to the transaction receive information. This substantially reduces phone time and provides an accurate paper trail for risk management. Second, a written record of your transactions allows you to document the value of your business, especially in relationship to cost.

4. Use Quick Books or any other standard accounting program.

Calculate your monthly Profit and Loss statement. This allows you to provide detailed financials for potential buyers as well as for the IRS. Ask your accountant or bookkeeper to conduct a cash flow analysis as well. When you sell, most buyers will conduct a thorough audit of your books, much like an IRS audit. High revenue plus high cash flow will generate the maximum price for your business. Accurate documentation is critical.

An important point to note when establishing your profit level is that even if you claim certain expenses on your tax return, you do not have to claim them when valuing your book of business. When calculating the worth of your business, you can legitimately add back deductions for depreciation, health care, travel, conference attendance, travel and entertainment, medical insurance, expensive cars owned or leased by the business, club membership, magazine and newspaper subscriptions, continuing education, plus salaries and bonuses paid to family members.

Need more ideas to sell your business? See next week’s column, “Navigating the Sale of Your Business.”

Bernice Ross, co-owner of Realestatecoach.com, has written a new book, “Waging War on Real Estate’s Discounters,” available online. She can be reached at bernice@realestatecoach.com.

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