We all know that real estate teams can be very profitable. Well-run teams have profit margins between 18% to 30% of gross revenues, which is enormously stronger than most brokerage companies. However, says Steve Murray, senior advisor to RealTrends, many teams come to him for valuations only to realize that they’re leaving money on the table due to the team structure.
The biggest mistakes: too much business is generated by the team leader and the team’s business system is difficult to transfer or replicate.
Where does the business come from?
But most people don’t understand that even though real estate teams are extremely profitable, when the team’s business is generated from sphere of influence (SOI,) the team is tied to the person leading the team. The question becomes: How much value can we put on a team where 50% or more business comes from the sphere of influence, personal referrals, personal relationships of the team leader, or other members of the team? “We’re looking a lot of hybrid teams where 30% or 40% of the business comes from the team leader, and 50% to 60% comes from a business system or lead generation system,” says Murray.
To determine the value of a hybrid team, you must look at each section separately. “We value those two parts of the business differently,” says Murray. “Generally speaking, it’s a much lower valuation on the personal business of a team than the business system part of a team.” He notes that the difference can be significant, “a personal business can be one- to one-and-a-half times EBITDA (earnings before interest, taxes, depreciation, amortization) for a personal business, and it can be two- to two-and-a-half times for business-system generated sales.
For instance, says Murray, Zillow or realtor.com profile pages don’t add a lot to the valuation of the team, primarily because you the team leader can’t transfer that asset to another personal team leader.
Can you replicate the business system?
The second issue is, how easy is it for someone to replicate the business system? Remember, real estate team business system has value, but there are considerations. How easy is that system to replicate? Is it a proprietary system of any kind, or is it just regular social media marketing, SEM, SEO? There’s a difference between some of those. “We look at other factors, such as consistency of results, how much is being spent on advertising and marketing, how much is being spent for the inside agents, and we look at all those factors to determine what that multiple of EBITDA may be,” he says.
Says Murray, “We do have examples of teams selling for higher than a two or two-and-a-half multiple, but generally speaking, these are deals where there is not a lot of cash paid and there is a longer term tail or earn out.”
He notes that, “Instead of two to three years for a brokerage company, it might be four to six years for a team to get a higher price.”
Whether you’re just building your team, or you are established, take a look at these business practices and make adjustments so you get the most value for your team when it’s time for succession planning.
RealTrends will be gathering information on team profitability and structure in an upcoming survey. We plan to publish the results later this year.