What's Your Business Worth?
TIP: Decide in advance what you want to sell. For example, if you own the building in which your business is located, you may want to retain it as an investment. You can rent the property to the new business owner, which will both lower the price and give you a steady stream of rental income.
Valuing a real estate company can be a challenge because a brokerage counts among its assets many intangibles, such as current listing inventory; pending transactions; franchise rights; customer and client lists; leasehold improvements; and the name and reputation of the company, its managers, salespeople, and support staff.
5 Business Valuation Options
There are basically five ways to determine the value of a business.
1. The asset accumulation method looks at the current market value of a company's tangible and intangible assets, including the earning power of its personnel. It doesn’t take into account external factors such as the state of the economy. This is the one of the most common methods used to value brokerage companies since it takes into account the value of intangible assets such as salespeople. View a sample evaluation sheet using the asset accumulation method.
TIP: EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of revenue minus expenses that is often used as a substitute for cash flow or net operating income when valuing a business.
2. The income method emphasizes current and anticipated future income as the major determinant of value. It uses a capitalization rate (a percentage rate of income that would produce the desired return on capital) to convert an estimate of current net operating income into a projection of present and future value. Tangible assets aren’t included in this valuation method. This method is particularly useful to buyers in making an initial estimate of before a complete examination of the property.
3. The discounted cash flow method is a variation of the income valuation method based on the idea that the true value of a real estate business lies in its future earning power. It uses a capitalization rate to determine the present worth of projected future income. But future earnings are discounted individually year by year. Tangible assets aren’t included in this valuation method.
TIP: When projecting future income, use annual growth rates for the past three-to-five year period. If the market has shifted recently, try to compensate by adjusting the projected growth rate accordingly. —Deloitte & Touche Mergers and Acquisitions Guide
4. The replacement value method examines what it would cost to replicate a company's existing earnings by starting a new company. It factors in various start-up costs for staff recruitment and training, advertising, and so on. This method would be most valuable if the company were being sold to or merged with a regional or national company whose other option might be to open a competing office in the market.
5. The market comparable method derives the value of the company by similar companies (much the same as doing a CMA for a home). Guidelines should be developed to determine which brokerage companies are most appropriate for comparison purpose. This method helps establish a basic price range, but just like a CMA, adjustments must be made to reflect each company’s unique attributes and drawbacks.
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