With more than 1,000 Inman posts, Bernice Ross is a long-time contributor whose weekly column on real estate trends, luxury, marketing and other best practices publishes every Monday.
What does it take to successfully sell a real estate business? The first step is to determine what you have to sell.
Parts 1 and 2 of this series looked at your mindset regarding leaving the business and how to increase the value of your business when you sell. The next step is negotiating the sale.
Is your company incorporated?
Depending upon whether you are a sole practitioner who files a Schedule 1040C for your business income, or if you are an LLC or corporation, the way you transfer your business will vary. If you haven’t switched to an LLC or S-Corp yet, check with your accountant about doing so due to the protections and tax advantages these create.
How much is your business worth?
Although there are many ways in which to value a business, the best advice is to talk to your CPA and/or someone who specializes in selling real estate businesses.
Real Trends has a detailed guide for brokers that explains how real estate businesses can be valued. Unless you’re running a team, however, much of what’s in that guide does not apply to solo agents who are selling their businesses.
If you would like a quick, general estimate of your business’s value, check out this article by the small business expert and entrepreneur Bob Adams of BusinessTown.com.
How much is a business worth?
1. Eight to 10 times profit
The maximum you can hope to obtain for your business is approximately eight to 10 times your annual 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 or having a strong manager in place.
2. Five to seven times profit
If you have an established business, good market position, some competitive pressures, and a buyer with strong skills who can successfully step into your shoes as the rainmaker, then you might obtain approximately five to seven 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 two to four 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
Adams doesn’t talk about this category, but if you sell to someone who really wants your business for some reason, your sale price is negotiable, likely for a higher price.
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.
You must know your profit level
As you can see from the discussion above of how businesses are valued, your value depends on profitability. Get in the habit of running a 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.
For example, 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.
Because tax laws continue to change, it’s critical that these decisions are made with the guidance of a tax attorney, an attorney who specializes in selling real estate businesses or your CPA.
Terms of the sale
Here are some important decisions that you will have to make regarding the sale of your business.
Below is a list of questions you will have to answer with the guidance of your CPA, tax attorney or business attorney. Failure to address these can lead to dire consequences for your business. If you’re thinking about selling, begin exploring these issues now
- Entity or asset sale? Entity sales transfer all stock in the company or all membership interests for LLCs. The sale is subject to long-term capital gain tax. Asset sales are partially taxed as ordinary income. They can be particularly risky for C-Corporations in that you could be exposed to double taxation on the sale.
- Will the sale be all money upfront or an installment sale?
- When is the best time to take the income?
- How will a default be handled?
- What assets will you keep?
- Will you work during the transition?
- Will you have to sign a non-compete?
These are some of the forms you’ll have to complete:
- Asset Acquisition Statement: Complete IRS Form 8594, and file it with your tax return.
- Bill of sale for tangible assets: This is a consent form for entity owners for the sale of assets. (It may prevent one partner from selling business without consent of the other partners.)
- Independent contractor agreements or employment agreements: You will have to supply these for each agent and employee.
- Promissory note: Secures any debt involved in the sale.
- Security agreement: Provides a lender a security interest in a specified asset or property that is pledged as collateral. In the event that the borrower defaults, the pledged collateral can be seized and sold. In the case where a single agent or small firm is selling to an individual, it may be smart to secure the debt against the person’s home or some other type of secure real estate asset.
- UCC financing statement: A UCC-1 financing statement (an abbreviation for Uniform Commercial Code-1) is a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor (a person who owes a debt to the creditor as typically specified in the agreement creating the debt).
Additional requirements at sale
- Contact information for all clients, members of your referral database, and for all parties involved in transactions that have not closed.
- List of creditors if buyer is purchasing tangible assets that are financed.
- Insurance certificates for the policy covering secured assets if you are financing the purchase.
- Life insurance policy on the purchaser with you as the beneficiary until purchase is paid in full.
- Owners’ manuals for business equipment.
- Contact information for current escrows, inspectors, loan officers, suppliers, and anyone with whom you normally do or have done business.
Pitfalls to avoid
In addition to all the business requirements, here are some additional steps to take to research the buyers who are purchasing your company.
- Check out the buyer’s work ethic — does this person have the commitment required to run your business?
- Run a credit check and background check on your purchaser.
- Is the buyer a culture match for your client base?
- Have an attorney draft and review all documents.
- Don’t let the buyer change the brand to their name until the sale is complete and any debt owed to you is paid in full.
- Build in safeguards if any of your staff is staying on after the sale. This gives your client list consistency and makes for a smooth transition.
- Consider participating in the transition to protect your payout and/or securing your debt against tangible assets such as property.
Begin your personal preparation by becoming bulletproof now
- Pay off mortgage, cars and credit cards.
- Purchase long-term care insurance to protect your assets if you become seriously ill, but note whether these policies continue after you reach 65. Many do not.
- You can use a reverse mortgage or shared equity partner to unlock some of the equity in your primary residence if necessary.
- Continue to earn money from real estate by keeping your license active so you can generate referrals and relocation leads.
Regardless whether you’re new or getting ready to retire, always stay focused on building your business’s value. Even though you may feel it’s unnecessary at this time, start planning for a sale in case you have to sell due to an illness or other issue. Seek the proper legal and tax help before embarking on any type of agreement.
When you’re enjoying retirement or if you have to sell unexpectedly, you’ll be glad you invested in doing this work now.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/