An update on the value of brokerages amid COVID-19.
The first half of 2020 was a tough pill to swallow for most brokerage firms, especially those that initiated a valuation between April and July. Since valuations in our industry are almost always based on the last 12 months of financial performance, most firms that had the pandemic shut down at the end of their trailing 12 months took big hits to their value.
Thankfully, the world didn’t come to an end, and, in just a few short months, brokerage financial performance has righted the ship—and then some! Thanks to pent-up demand and new migration surges in some markets, Q3 ended up being a record quarter for many firms. Not only was it a record quarter by volume, cost-savings measures spawned by the pandemic yielded record financial performance.
This strong Q3 performance largely made up for a weaker Q2, and a solid 12-month rolling financial performance through Q3 2020 has certainly helped the cause for stronger valuations for many firms.
Not all brokerages came out of the pandemic unscathed, but those that used this period of wild uncertainty to shore up expenses and stay present in their markets thrived on the other side. With an inside track on brokerage financial performance, we’re seeing Q4 lining up to be quite strong for many of these firms. For some, 2020 will be a record year on the top and bottom lines.
Despite this resurgent strength for many firms, we’re still being cautious as we price for valuations. Some of the following factors that affect market-ability could have major adverse effects on brokerage financial performance over the next several years
- Inventory issues still abound in many markets. What are things going to look like in 2021 and beyond after the pent-up pandemic supply/demand flows through the system?
- Will there be a secondary or tertiary wave of shutdowns due to ongoing pandemic concerns?
- How will the policies of the incoming Democratic regime affect the housing market? Interestingly, in our Q4 Broker Sentiment Survey only 1% of the respondents believed that a Biden presidency would be good for real estate. Read between the lines of what the other 99% are thinking!
- Economic uncertainty is real. According to an update to the Economic Outlook from the Congressional Budget Office (CBO), it will be at least a decade before we see the unemployment rate near pre-pandemic levels. The CBO also projects real GDP to be 3.4% lower, on average, than pre-pandemic levels through 2030. Margin compression. It’s real.
These factors and more are what we need to consider as we apply multiples to our valuations. Thankfully, among the heaviest weighted factors is buyer interest. Buyers remain interested and active in today’s market.
As a result, valuation multiples have only softened slightly. The biggest hit to sellers is not necessarily on price, but rather transaction terms. Buyers, rightly so, are keen to the uncertainty and are being cautious as they seek to protect themselves from extreme volatility or a precipitous decline in the housing market. Terms for upfront/guaranteed capital and the carry portion of the deal have become more buyer friendly.
The bottom line is that brokerage financial performance has come back strong in the second half of 2020. This positions firms for stronger valuations relatively speaking. We are being prudent in how we price given the uncertain road ahead. Contact us today at 303-741-1000 if a valuation is something you see in your near future. The first call is always free!