Agents: When you think of selling your business, do you automatically think retirement? Not so fast: There are many reasons that an agent may want to sell their business. Whatever the reason, you should understand how to start the process.
First, let’s talk a voluntarily sale vs. involuntarily one.
A voluntary transfer is via the traditional sale method; an involuntary transfer would be where the agent passes away or is disabled, and corporate documents automatically transfer the assets of the business to another person to maintain the enterprise (going concern) value.
With the growing proliferation of teams, as well as the continued concentration of business into those teams, more than ever it makes sense now for the rainmaker to include an exit strategy in team planning. Reasons to sell the business can include the following:
The most common reason to sell an agent business is retirement. There are scores of agents with businesses large enough that can justify a respectable sales price from a buyer. The rainmaker of the business should NEVER say the word “retirement” to anyone in their database, on social media, or anywhere for that matter. The goodwill of the business is tied up in the relationships that the rainmaker has with their database, and there is a specific way to address how to maximize the integrity of the transfer of that goodwill. More on that in a future article.
Although not required to be a family member, it’s common to see an agent business transferred from, for example, a mother to a son. This allows the parent to gradually exit the business over a number of years, and can also assist in tax strategies if needed due to a high valuation on the business. If the family member doesn’t have the business expertise to continue the operation, it may be a better solution to sell to an unrelated third party and give the family member an inheritance instead of a business.
Desire to cash out
Before blindly charging into a sale and taking any cash or a note from a buyer, the seller should consult with – at a minimum – their attorney, CPA, financial advisor, and usually a business broker as well. There are many issues that could be in play during a sale of the business, including gift tax, capital gains and more. Selling the business as on ongoing concern will generally have a higher valuation than simply liquidating the assets of the business. For some agents who can see headwinds on the way (anyone anticipate the 2008-12 recession?), they may choose to park their resources in a different industry.
To maintain the goodwill of the business, and therefore maximize its value for a sale, the seller must maintain the income levels of the business consistent with the recent past, and help to hold those levels while the buyer is being integrated into the business.
Record low inventories and interest rates, the ability for remote work at an unprecedented level, supply chain issues, and extensive under-building of new home inventory from 2007-2019, has produced demand for housing at a level the United States hasn’t seen in generations. To say that the real estate business has been challenging in the past two years would be an understatement. No one would blame a seller for not wanting to stay on the roller coaster now.
This is one of the hardest categories to address as a reason for selling an agent’s business. In an age of social media, it’s likely that many people in an agent’s database are also friends with the agent on Facebook or some other public platform, which means they will know when the agent has been admitted to a hospital or has a significant health issue.
While the agent’s friends mean well in wishing them a speedy recovery, it’s unlikely that they will give that agent direct business or referrals until they see that they are “back in business” and functional.
It’s also in this vein that corporate documents should be in place to address a “triggering event” that causes the assets of the business to transfer to a family member or third party in the event of the agent’s death or disability that prevents daily operation of the team by the rainmaker.
Take stock of your business and finances
The foregoing is a non-exhaustive: there are many more reasons an agent may wish to sell their business (divorce, the business plateauing, etc.) Sit down periodically – I’d recommend at least once a year – and take stock of where your business is at on revenue, profitability, agent count, staff count and space needs, and figure out how to structure things in their business so that revenue interruption is minimized in the event of a significant event in the market or to them personally.
The next article will address methods and activities that an agent can exercise now to increase the value of the business.
This article is the first of a series designed to spotlight the issues surrounding the sale of an agent’s business. None of the series content should be considered accounting or legal advice. You should consult your local tax or legal professional in your state for appropriate strategies.