Brokerage owners have heard the same advice for years, no matter what challenges they face:
- Need more revenue? Recruit.
- Need more market share? Recruit.
- Need a higher valuation? Recruit.
However, according to Fiji app co-founder, CPA and M&A advisor Rob Wolf, recruitment isn’t always the answer. For many brokerages, the problem is efficiency, not growth. Until brokerage owners understand the difference, they’ll keep chasing bigger companies instead of more valuable ones.
Bigger doesn’t automatically mean more valuable
The real estate industry often uses agent headcount as shorthand for growth and success. It makes for splashy headlines and signals momentum. But brokerage buyers don’t buy agent rosters unless there’s a profitable business attached.
Wolf shared an example of a brokerage with hundreds of agents and multiple offices that, ultimately, had almost no enterprise value because “they spent every penny they made.”
“A company that looks big means it has a lot of agents,” Wolf said. “That doesn’t necessarily mean it’s valuable.”
What’s more, all of that recruiting costs money for conferences, consultants, coaching programs and more. Wolf argues, however, that recruiting is just one lever and not necessarily the most important one.
The better question is: How do you know recruiting is actually the highest-return investment for your brokerage today? The answer? You don’t know unless you know your numbers.
“You have to explore every financial lever,” Wolf said. That means looking at recruiting alongside agent productivity and expense reduction.
The fastest way to increase value usually isn’t glamorous
Most owners assume that adding revenue creates value faster than cutting costs. Financially, however, that’s rarely true, Wolf said.
For example, recruiting one productive agent creates incremental profit, which is offset by the expense of recruitment and onboarding. At the same time, every unnecessary dollar eliminated from expenses flows directly to bottom-line EBITDA. That’s pennies versus dollars.
“It’s not how much you make,” Wolf said. “It’s how much you keep.”
Another place owners see value in their brokerage is through the effort they’ve put in.
- “I’ve spent 20 years building this business.”
- “I’ve sacrificed weekends and holidays.”
- “I’ve built a recognizable brand.”
However, business buyers don’t pay for the sacrifices you’ve made. They pay for predictable future cash flow. That can leave many business owners feeling frustrated. “I thought it would be worth more” is how Wolf describes the common first reaction of brokerage owners upon receiving an objective valuation.
How to understand the numbers buyers care about
While many owners know their brokerage’s revenue and net income numbers, few understand EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and even fewer understand adjusted EBITDA.
Adjusted EBITDA subtracts expenses and adds back costs that won’t exist after the brokerage is sold.
For example, if an owner is still active and producing commissions, that income will go away once that owner leaves. That adjusts revenue downward.
At the same time, many owners run personal and professional expenses through the company, so a country club membership or company car would be an expense that would also go away once the owner sells the brokerage.
Remember, the buyer isn’t purchasing the company’s history. They’re purchasing the company’s future cash-flow potential.
In addition, many owners subsidize agent:
- Marketing budgets
- Office space
- Car allowances
- Technology
- Administrative support
While the agent split looks profitable on the surface, the relationship isn’t. That means you could be losing money on an agent, so “you have to measure the true cost per agent,” Wolf said.
Instead of asking “How many agents did we recruit?” owners should ask about the following:
- Revenue per transaction
- Rent per transaction
- Company dollar per agent
- Expense per transaction
- Agent productivity
- Office efficiency
- EBITDA growth
“If you don’t measure it, you can’t manage it,” Wolf said. “The only metric that really matters is transactions. Every expense category should be measured against that.”
“Brokerages need to assess the profitability of individual agents,” Courted co-founder and CEO Sean Soderstrom said. “They can start by looking at company dollar contribution per agent which factors in the splits and other fees they pay to agents, but ideally they look at contribution margin or profitability at the individual agent level.”
“The long and short is that the middle-producing agents are typically the most profitable, yet they are not the ones that brokerages typically tend to focus on recruiting or even retaining when they look at risk assessment of their existing roster,” he added.
How to build a more valuable brokerage
1. Stop chasing agent count for its own sake
Adding agents doesn’t automatically increase enterprise value. If those agents require costly incentives, produce low margins or increase operational complexity, they may actually make the business less attractive to buyers.
2. Know your valuation — and understand what drives it
You can’t improve what you don’t measure. An objective valuation provides a baseline, but it’s up to you to know which operational changes will have the greatest impact on enterprise value before investing time and money in recruitment.
3. Focus on profitability before expansion
Growing revenue is important, but improving profitability often creates value more quickly. Evaluate recurring expenses, vendor contracts, office leases and staffing levels to identify opportunities to improve margins without sacrificing service or culture.
4. Measure the right metrics
Monitor metrics like EBITDA, revenue per transaction, expense per transaction, company dollar per agent and office-level profitability. These indicators provide a much clearer picture of the health and future value of the business.
5. Understand the true cost of every agent
Commission splits don’t tell the whole story. Marketing allowances, technology, administrative support, office space and other incentives all contribute to an agent’s total cost. High-producing agents can still be unprofitable.
6. Build systems that scale
A brokerage built around one owner’s relationships and intuition is difficult to grow and even harder to sell. Standardized financial reporting, repeatable operating procedures and consistent performance measurement make the business more efficient today and more valuable tomorrow.
7. Think like an investor, not just an operator
The best brokerage owners periodically step back from day-to-day production and ask a different question: If I were buying this business today, what would I want to improve? Viewing the brokerage through the eyes of a buyer often reveals overlooked opportunities.
Years in business, personal sacrifice and a recognizable brand all matter emotionally, but buyers pay for a brokerage’s ability to generate sustainable profits. Every strategic decision should move the brokerage toward stronger, more predictable financial performance.
Fittingly for a CPA, Wolf returned to this reality throughout our conversation: “The answers are always financial. It’s never just ‘recruit.’”
Troy Palmquist is the founder and principal at HomeCode Advisors. Connect with him on LinkedIn.
