Chuck Harvey, president of the International Business Exchange in Austin, answers common questions about selling small businesses to help you get the most for your brokerage.
Texas REALTOR®: What are potential buyers looking for in a real estate brokerage?
Chuck Harvey: Many real estate brokerages aren’t attractive investments. A big reason is that the success of many of the businesses rests with the owner. Potential buyers worry that if that owner is out of the picture, the business will suffer.
So, buyers are looking for transferrable assets and firms that depend on the success of the agents rather than on the owner.
That means owners should be able to demonstrate successful and transferrable methods for attracting agents, training agents, and retaining agents. For residential firms, there should be in place marketing processes to find and secure listings and to find and attract homebuyers.
Also, potential buyers want to see a brand they can leverage. That includes a history of success and maybe a niche where they can continue to focus the firm’s efforts. A business that’s been helping buyers find vacation homes in an area for 30 years is more attractive than a brokerage that’s been doing a little bit of everything for 30 years.
You mentioned residential brokerages. What about commercial?
There’s a big difference between commercial and residential firms. Commercial firms offer a more traditional business model for prospect generation, customer leverage, and customer retention. An owner will still want to demonstrate the firm’s marketing engine, but, again, it’s more about how the commercial practitioners build relationships and develop the brand—tasks similar to businesses outside real estate.
If someone’s ready to sell a brokerage, where does he or she start?
It’s important to note that selling a firm isn’t a quick process. Depending on the structure of the business and the health of the firm, it could take years to be in a position to sell the business.
That said, here are the big-picture items to have in order:
- Make sure your financial records are complete, clear, and timely.
- Document all of your business processes.
- Put together at least three years of consistent financial performance.
- Distance yourself from the day-to-day management of your firm.
- Develop a five-year strategic plan.
Don’t forget, it will be hard to leave behind your business. You’ve worked hard to make it successful and have made commitments to those
who work with you.
What are common mistakes you see from people selling their businesses?
Acting on impulse. Someone asks, “Have you considered selling your brokerage?” and you’re suddenly planning what to do with the proceeds from the sale. Unless you’ve already taken steps toward a sale and the inquiry is sincere, one flirtation isn’t enough to drive your future.
Another mistake—this one from people who’ve already taken steps to sell—is allowing their brokerage to falter. You have to maintain your success. Seasonal fluctuations from real estate brokerages are expected but otherwise allowing the business to fall off while you concentrate on the sale or your next endeavor will hurt your return.
And even though real estate professionals counsel their clients to keep emotions out of a transaction, it’s a pitfall that many of those professionals succumb to when selling their own brokerage.
What things don’t people consider when selling a real estate brokerage?
You want potential buyers to be bound to confidentiality before they learn the specifics of the brokerage for sale because you—the broker seller your firm—want to control the message. You want your agents and employees to learn of the sale from you, so you can answer questions.
Also, selling your brokerage is a big time commitment. You must prepare sales presentations, find potential buyers, answer the buyers’ questions, negotiate a letter of intent and purchase agreement, and manage due diligence. I estimate that it takes 500 to 1,000 man-hours to complete a transaction.
These deals are large and complex. It helps to have an experienced professional guiding both sides through the process—much as you guide your clients through complicated real estate transactions.
And, don’t forget, it will be hard to leave behind your business. You’ve worked hard to make it successful and have made commitments to those who work with you. All of this effort and these relationships make the emotional component of selling the brokerage quite profound. I have seen many tears shed at the closing table. I had one client tell me, “On Tuesday, I was making all of the decisions. On Wednesday, I felt like a ghost in the hallway.”
How does someone find a buyer?
Like most sales transactions, these types of deals often happen due to personal connections.
Potential buyers could come from within your organization—maybe an agent who’s getting her broker’s license or a broker-associate ready for more responsibility. Discuss it with these people, not as a formal offer but a conversation about the opportunity.
If you don’t have any takers in your firm, expand your net. Create a list of other area brokers and, based on your knowledge of their operations, rank them in order of likely interest in your business. Reach out to friends in the business community who aren’t in real estate.
You can also present the opportunity to buy your firm on business exchange marketplaces.
Do you have any tips on vetting potential buyers?
Most small-business owners share two main concerns: getting paid and preserving their legacy.
To verify that buyers can pay you, ask them to describe their financial resources, to detail how they will finance the transaction, and to list their sources of capital.
Predicting how people will treat your business once you’re no longer involved is trickier. You hope they’ll build on what you’ve done, but there are no guarantees. You can do some background checks and ask for references. However, preserving your legacy is subjective, so you’ll have to rely on your intuition. What do you think based on the negotiations and discussions of your five-year strategic plan?
Where can someone get help with the process?
The best place to start is with advisors who know your brokerage and you already trust—your attorney, CPA, or banker. You can also contact business brokers and merger/acquisitions consultants in your community.
Remember that buyers are most interested in future cash flow. The more secure the future cash flow seems, the more likely buyers will buy. The more clearly a buyer can see growth opportunities, the more likely buyers will pay more for the business.
International Business Exchange (IBEX) has been helping owners and executives sell businesses since 1979. The eight-person IBEX team collectively has more than a century of corporate leadership at Fortune 500 and middle-market companies, and has executed hundreds of buy- and sell-side transactions as both corporate executives and third-party advisers. IBEX is a member of the International Business Brokers Association, M&A Source, and the Texas Association of Business Brokers.