Why is a property in Knightsbridge worth five times as much as the same property in a London suburb and 25 times as much as the same property in the north of England? Many have tried to explain this over the last thirty-five years but the arguments all boil down to the same thing – it’s determined by market forces.

I am beginning to feel the same way about the yawning gap between the value of residential letting businesses and residential sales businesses. For many years, letting businesses have sold for much higher prices than sales businesses but since Brexit, the gap has become a chasm.

WHERE’S THE VALUE?

The value of a letting business is logical and defensible. They are usually valued on turnover, not profit, because most can be absorbed into another business and the prices paid give the buyers an acceptable rate of return. Prices are high because the buyers believe that most landlords will stay with the business and that the future income is secure particularly if the majority of properties are let on a fully managed basis.

If you own a sales-only estate agency business and are thinking of retiring, my advice is to wait…

Residential sales businesses used to sell on profit. This is logical because there is less opportunity to amalgamate them with another business. Prices have always been much lower and this too is logical because their future income is more dependent upon the ability and motivation of the proprietor. However, since Brexit, sales businesses seem to be worth almost nothing and this cannot be right.

The trading name of a well-established business must have a value. For example, in Radlett where my parents lived for fifty years, the son of an estate agent who sold out in the 1980s re-opened twenty years later with the original trading name and logo. Within just a few months, he was the market leader.

I do not believe that this would have been possible if he had started from scratch.

The client records also have a value. Many clients, particularly those from an older generation, have a strong tendency to go back to the agent that they bought their property through. Similarly, records of old valuations that did not come to the market and instructions that were withdrawn from the market have a significant value if they are used properly.

The staff may also be an important asset. If they have been with the business for some time, they will have built a personal reputation themselves which again can be extremely valuable.

The stock of available instructions has a quantifiable cash value and also gives the business important momentum. Most cold staff offices spend the first twelve months touting other agents’ overpriced and unsaleable instructions or offering free or heavily discounted fees in order to build a register. The cost of doing this is significant.

Finally of course, there is the cash value of the pipeline, which will improve the cashflow of the business during the first crucial six months.

TIME TO SELL?

Despite all this, many sales businesses are currently worth no more than their pipeline value. This seems crazy. So how can it be? I can only think of two reasons. The first is fear of the future. Some potential buyers are worried about the impact that Brexit might have on the future of the housing market even though it has had little impact yet. Others are worried about the possible impact of the online agents even though they have only won a tiny percentage of the market so far.

However, in my opinion, the real reason is that the idea of investing in residential sales agents has simply gone out of fashion. If I am right, then sooner or later demand will return.

So, if you own a sales-only estate agency and are thinking of retiring, my advice would be to wait if you can until the market returns. Markets usually move in cycles and at some point value should pick up.

I will finish by telling you how one of my clients has responded to the current market. He sold his letting business three years ago for £1,050,000. It used to produce a profit of £148,000 per annum. He used the proceeds of the sale to buy four single branch residential sales agents. He bought them for little more than their pipeline value. Last year, they produced a profit of almost £1,000,000!

I do hope that other buyers will start to see the obvious benefit of investing in the residential sales sector.

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