For the last six years, most of the agency businesses that I have sold have been nice, happy retirement sales. Now, all of a sudden, I am getting calls again from business owners who are in financial difficulty. I am very sorry to see this trend.
The most difficult situation is when creditors are hammering at the door. It is almost impossible to get the best price for a business under fire sale conditions and by the time some people contact me, it is already too late to do anything. The owners of such businesses want to blame everyone but themselves for their predicament but the fact of the matter is that most problems in an estate agency or letting business can be predicted many months in advance.
So what key ratios should you be monitoring to make sure that your business is in good financial shape? For a sales business, you must monitor your invoice income every month against the previous year. You can then use this date to project your income for the current financial year. If, for example, you banked £1 million last year and had banked £210,000 by the end of the first quarter, it is reasonable to project that, if you have only banked £150,000 by the end of the first quarter, your likely income for the current year will be circa £714,286 unless you take steps to address the issues.
Another very good way to calculate your current year’s income is to check it against your pipeline and unsold stock value. If your pipeline is only 60 per cent of what it was at the same time last year, you know that trouble is ahead very soon. A sales business must also monitor the following key ratios at least once a month:
- Number of valuations
- Valuations to instructions ratio
- Instructions to sales ratio
- Fall through rate
- Average sale price
- Average fee percentage
Average ancillary income per case By monitoring each of these ratios against your target and against last year’s income, you will get a pretty good picture of how the business is performing.
THE PERFECT STORM
Many agents currently feel they are being hit by a perfect storm. Valuation numbers are down in many areas, if your business is suffering, you need to increase market share by improving your marketing or make up for the lost valuations by improving the conversion ratio of valuations to instructions. Many are also seeing a reduction in the instructions to sales ratio. If this is affecting your business, you need to establish whether the problem is too many overpriced properties which can be dealt with through improved vendor care and price reductions, or if it’s caused by inexperienced negotiators unable to persuade applicants to view properties and make offers. This can be addressed through better training.
If you can’t maintain income levels you need to cut costs. Right now.
Fee levels are also slipping in many areas. If your average fee last year was 1.25 per cent and it is now 1 per cent, you have to sell 25 per cent more properties just to maintain your previous income. For many, this is unachievable so the only other way will be to train the valuers in how to achieve a premium fee level by improving their sales presentation.
If you do not believe that it is possible to maintain your income by making these changes, the only other thing left to do is to reduce expenditure to maintain your profit levels. So do it now. Many business owners bury their head in the sand and just keep hoping that things will improve but all too often they don’t. The danger is that by the time you bite the bullet, you will have burnt through your cash reserves and may need to make even more people redundant.
LETTINGS: ALSO AFFECTED
Letting businesses are not immune. There are four main problems at the moment. First, a shortage of new instructions, due to the recent tax changes, increased difficulty in raising a mortgage and uncertainty. The second is that tenants are staying for longer in the same property which reduces the income that you earn particularly if the properties are let on a tenant find-only basis.
The third problem is ever-increasing compliance costs due to new legislation. The final problem is the threat to tenant fees which comprise 15 per cent of all income for the typical letting agent.
A letting business’s income can be accurately projected and if it is going to be lower than last year, you need to take action now to improve your key ratios or reduce your costs. By taking action now, most business owners should be able to get the business back on track. Even if this is not possible, you should at least be able to extract some residual value from the business from an orderly sale.
During the downturn of 2008 to 2009, 5,500 estate agency offices ceased trading. I really hope that the those who survived the last downturn will have learned how to respond more effectively to the current change in market conditions in order to ensure survival.
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