Pricing Tips From a Pro

Beatrice Mitchell, of Sperry Mitchell & Co. and co-author with partner Paul Sperry of The Complete Guide to Selling Your Business, offers some advice on setting a price for your brokerage company.

What advice would you give a real estate broker who is trying to determine a business’s value.

Mitchell: Buyers pay for a good cash flow and return on investment, so what you think your business is worth is less important than what prospective buyers think they can earn. Service businesses such as real estate brokerages are difficult to value and difficult to sell because there’s generally not frequent repeat business from existing customers. Usually the best option to arrive at an estimate of value is to use an average of the company’s adjusted pre-tax earnings for the last three years and multiply the average by a multiplier ranging between three to five. The more attractive a company’s market presence, the higher in the range the multiple will be.

What other factors can affect value?

Mitchell: Sometimes buyers will be willing to pay a premium if they believe that something intangible about your business—your name, your location—offers a very attractive expansion opportunity. But if you do get a bump in price for that reason, it’s more likely to come as an earnout rather than in cash. After all, the buyer is the one putting up the capital and taking the risk of expansion.

Another factor affecting price is the lending climate. Currently, most banks are only willing to lend two to two-and-a-half times cash flow to a buyer purchasing a business. A year ago, some were offering up to five times cash flow. The amount of equity that the buyers have to come up with is going to affect the price they are willing to pay.

What about nonfinancial factors?

Mitchell: One of the most important factors in selling a business for a good price is a sound management team who are willing to stay with the business. If the business owner doesn’t have a strong No. 2 in place who can run the business, he or she is almost certainly going to have to be willing to stay with the company from one to three years after the sale. This often happens in small companies because owners don’t want to delegate.

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