You Built a Great Business. But Can You Sell It?

For years, much of my work in real estate brokerage valuation has focused on a fairly straightforward question:

How do you increase the value of a real estate brokerage?

It is a subject I am passionate about.

I enjoy sitting down with broker/owners, understanding how their companies actually operate and identifying what could make those businesses more valuable. That may mean reducing owner dependence, developing management depth, improving margins, strengthening recruiting and retention, or building more sustainable cash flow.

The principles may be similar from one brokerage to another. The solution rarely is.

And I will continue having those conversations.

But a valuation I performed some time ago caused me to think about the subject a little differently.

It reminded me that sometimes, as valuation professionals, we need to put the valuation hat aside for a moment and ask a much bigger question.

What was the owner trying to build in the first place?

I was working with the owner of a relatively small residential real estate brokerage with more than 50 agents.

On paper, the company was generating millions of dollars in annual profit.

At first glance, you might assume I was looking at an extraordinarily valuable brokerage.

But this was not an ordinary broker/owner.

She is one of the most talented real estate agents I have encountered in my career.

She is a true super-producer.

She is deeply respected in her community. She has built relationships spanning generations. Her connections extend throughout the business and civic community. She gives generously to charity. She has authored several books.

She is the kind of real estate professional that other agents could spend a career learning from.

And she continues to own and operate her brokerage today.

Her success has also afforded her an extraordinary life. She has traveled. She has invested wisely in assets outside the brokerage. She has built meaningful relationships and accumulated considerable wealth.

By virtually any conventional definition, she has been enormously successful.

But there was a problem when we looked at the value of the brokerage itself.

Her personal real estate production dwarfed the production of the agents within her company—by as much as twenty to one in some cases.

A significant amount of her commissions flowed through and remained in the brokerage.

On a financial statement, that income was there.

From the standpoint of business valuation, however, we had to ask a different question:

Would that income continue under a new owner?

Probably not.

A buyer can purchase the brokerage.

A buyer cannot purchase her.

Her relationships, reputation, sales ability and personal connection with clients belong to her.

And it would be difficult to argue that those relationships would simply transfer to another agent or a new brokerage owner. If they could easily be transferred to someone else, there would have been little reason for her to personally produce at such an extraordinary level in the first place.

When we removed her personal production and looked at the sustainable cash flow of the brokerage, the financial picture changed dramatically.

The business that appeared to generate millions of dollars was worth substantially less than someone looking only at the bottom line might have expected.

And that led to a brutal conversation.

Imagine spending decades building a company.

You have more than 50 agents. You generate millions of dollars. You are respected throughout your community. You have created considerable wealth.

Then a valuation professional sits across from you and explains that the business itself has relatively limited transferable value.

I could see the disappointment.

And I understood it.

We spend an enormous amount of time telling business owners how to build more valuable companies. Valuation professionals talk about transferable earnings, owner dependence, recurring revenue, management infrastructure and risk.

I talk about those things, too.

And none of that is wrong.

But her reaction caused me to ask myself a different question:

Did she really fail at building a valuable business?

Or were we simply measuring her success using the wrong yardstick?

Consider what the business has already given her.

For decades, it has produced substantial income.

That income allowed her to live extremely well, travel, invest in other assets and create opportunities outside the brokerage. Those outside investments alone may ultimately be worth considerably more than what the brokerage could ever have sold for.

She didn’t necessarily leave all of the economic value inside the company for a buyer to purchase someday.

She received much of that value along the way.

Year after year after year.

There is something important about that distinction.

Suppose another owner spends decades deliberately reinvesting earnings, building management infrastructure, reducing personal production and creating a company capable of operating independently.

That owner may ultimately have a much more valuable transferable asset.

But does that automatically mean the second owner built the better business?

I don’t know that it does.

It depends on what each owner was trying to accomplish.

The phrase lifestyle business sometimes gets used almost dismissively.

I don’t think it should.

If you intentionally build a business that provides exceptional income, flexibility, relationships, opportunities and a life you enjoy, there is nothing inherently wrong with that.

In fact, if those were your goals and the business delivered them beyond anything you imagined, I would argue that you were extraordinarily successful.

But there is an important expectation that comes with it.

A highly profitable lifestyle business is not necessarily a highly transferable business.

Those are different things.

If most of the company’s earnings depend upon your personal production, relationships, reputation or daily involvement, a buyer cannot simply assume those economics will continue after you leave.

That affects brokerage value.

It affects the multiple a buyer may be willing to pay.

And it affects what you should realistically expect when it eventually comes time to sell your real estate brokerage.

None of that diminishes what you built.

It simply tells you what you built.

If your objective is to maximize the eventual sale value of your brokerage, then you should absolutely work toward creating a business that can thrive without you.

Take yourself out of the picture.

Remove your personal production. Your relationships. Your recruiting ability. Your reputation. Your daily problem-solving.

What remains?

Would the agents stay?

Would management continue functioning?

Would clients continue coming?

Would the brokerage continue generating approximately the same sustainable cash flow under a qualified new owner?

Those are important questions in any real estate brokerage valuation or brokerage M&A discussion.

And if the answers concern you, there are things you can do. A brokerage can be intentionally redesigned over time to become less owner-dependent and more transferable.

But there is another question I think we should ask just as seriously:

What has this business already given you?

If it has given you financial independence, a remarkable income, the ability to travel, outside investments, meaningful relationships and a career you are proud of, don’t dismiss all of that because someone calculated a business valuation that was lower than you expected.

Have realistic expectations.

Know what your business is likely worth.

Understand what will—and will not—transfer to a buyer.

But maintain some perspective.

After performing more than 1,000 business valuations, I have had many conversations with owners who were disappointed by what their companies were worth.

My instinct as a valuation professional is often to start talking about what they can change.

How do we improve sustainable cash flow?

How do we reduce owner dependence?

How do we build management depth?

How do we increase the eventual value of the brokerage?

Those are important conversations, and they are conversations I love having.

But sometimes we need to pause before having them.

Maybe the first question shouldn’t be:

How do we make your business worth more?

Maybe it should be:

What did you want this business to do for your life?

If you wanted to create a transferable asset and eventually realize a significant payout when you sell, then build toward that objective.

But if you built a business that has produced extraordinary income and given you an extraordinary life for decades, embrace that, too.

A lifestyle business isn’t second best. It can be an intentional, rewarding outcome.

Just understand the difference.

Because someday, when it is time to step back, you may discover that there isn’t an enormous check waiting for you at the end.

Perhaps that’s because, in a very real sense, you’ve been receiving pieces of that check every year.

And I wouldn’t call that failure.