There have been several recent reports of the extraordinary prices being achieved for estate agency and letting businesses. One letting business has just sold for twenty-six times its profit! Another single office letting business sold for over £5 million! It’s extraordinary but unfortunately there is not such strong demand for every type of business. Generally, good quality letting businesses are selling very well; buyers are looking for businesses with good compliance, where most properties are fully managed and businesses in large towns where they can be combined with an existing operation. If your business isn’t like that, it can be more difficult to find a buyer.

So, what can you do?

If the problem is poor compliance, consider bringing a specialist in to conduct a thorough audit of your procedures. There are half a dozen consultants who specialise in this field and the typical cost of around £2,000 for a single office business can be recouped many times over when you sell. Even if you are keeping your business, it is a sensible precaution to have a compliance audit every couple of years.

If the problem is that your properties are let on a let-only basis, try to convert landlords to fully managed or rent collection contracts. This income is seen as far more secure and will command a much higher multiple when you sell. However, if you are converting one-off fees into recurring income, then it will take 13 months for this to wash through the cashflow so do this at least two years before you plan to sell.

Buyers of letting agencies look for those based in large towns with good compliance and fully managed properties.

If your business is in a small village miles from anywhere, its value will be determined by profit rather than turnover. In this case, focus on improving the profit level in the year or two before you offer the business for sale; maximise income and review of your costs. Every pound of additional profit will be worth several pounds on the sale price.

If your business is predominantly residential sales, it may be more difficult to sell. Landlords tend to be loyal to their agents and stick with them even if the business is sold. The residential sales business, however, is dependent upon the skill, ability and energy of the business owner. Buyers worry that if John Smith leaves John Smith & Company estate agents and is replaced by a salaried manager, then business will fall away. This is why sales businesses sell for significantly less.

Residential sales businesses are usually sold on profit rather than on turnover so you need to increase the profit prior to the sale. If you trade under your own name, recruit a good number two to show potential buyers that the business is transferable.

However, even then you may find that the offers for your business are little more than its pipeline value. This can be terribly disappointing.

What’s the alternative?

One alternative is to put a manager in to run the business for you. The problem, however, is that managers tend to become resentful if they are doing the work and you are taking most of the profit and the relationship may not last. An alternative may be to sell the business to your manager or to someone who you bring in from outside with payment phased over three to five years. The mechanism is that you pay them a basic salary for their work and allow them to buy one third of the business each year for three years with the sale price paid for out of the profit. This might achieve a far better price for you than a sale to a third party. The contract will have to be drawn up by a solicitor and you must have absolute confidence in the manager’s ability to run the business competently and pay you the instalments as they fall due.

There are, however, some businesses that are unsaleable. The only option is to wait for the next break in the lease and wind the business down to close on this date with minimal exposure. It is sad to see a business close after many years but you should remind yourself that the business has provided you with a good income and recognise that not all businesses have a capital value.  Professional sportsmen realise that their career has a finite end and that after that, they will need to earn their living in a different way. The same is true for some estate agency businesses.

Adam Walker is a management consultant, business sales agent and trainer who has specialised in the property sector for more than 25 years.
www.adamjwalker.co.uk