In the dark ages before the internet brought light to our lives, when we needed a holiday, we would, generally, visit a high street travel agent. They knew all about the places to visit, which airlines flew there, what there was to do. They’d put the whole package together (or sell you a prepackaged holiday) and off you went.
We trusted travel agents as professionals, experts; we didn’t argue about the cost because we didn’t have the means to do it all ourselves and it all seemed fair enough.
Then came the internet and we discovered that we could put our own itinerary together – and the high street travel agency business crashed, big time.
Some survived, modernising their offering, specialising in certain markets, offering a complete service to those who prefer that security – or who simply don’t like the internet.
Now that same internet light is shining on estate agency, exposing the relative cost of selling a property through an estate agency compared to using an online service and saving, the critics say, thousands of pounds simply by creating your own package of For Sale board (or not) accompanied viewings (or not), photography services (or not) and many other services in the estate agency arsenal.
And guess what, the high street estate agency business may not have crashed as dramatically as travel agency, but there’s no denying it is affecting the profitability of many businesses.
So, if you are of a certain age, or fancying another business opportunity, or even just being part of a larger organsiation with all the benefits that brings, you may think, “I’ll sell out. All the big corporates are buying up independents like me, I’ll get a good price and go off and play golf.” And why not?
The issue is, of course, is your business sufficiently successful to be attractive to potential buyers? I asked several independent specialists for their advice.
Q1 What percentage of owners wishing to sell, have their business in excellent running order when they approach you?
Adam Walker, of Adam Walker Associates, says that many estate agency owners are already losing interest in their business when they call in advisors,
“Only about 20 per cent of the business owners that I meet have prepared their businesses properly for sale.
“Just as when selling a house, first class presentation is vital and sellers need to realise that they will not get the best price if they present the buyer with a shoe box full of handwritten accounts.
First class presentation is vital, sellers will not get the best price if they present the buyer with a shoe box full of handwritten accounts. Adam Walker, Adam Walker Associates.
“To get the best price I need accurate and properly presented financial information for the last three years. If more time is available there are many other things that can be done in the 12 to 18 months prior to a sale to improve the value and saleability of a business.”
The best deals give a clear benefit to both buyer and seller. The seller gets the money but the buyer gets a business to improve their existing one. Peter Nicholls, Ideology Consulting.
Peter Nicholls, at Ideology Consulting says that many sellers may well be good estate agents, but by far the majority have done little in the way of preparation before they approach business brokers.
“Most have run their businesses to realise maximum income which is understandable, but there needs to be a change of mindset in the lead up to selling a business, as selling is all about realising an asset by making it as attractive as possible.”
That means eradicating personal expenditures i.e. the lease on your wife’s car… or the cost of your children’s mobile phone bills (it’s all too easy to ‘forget’ these arrangements).
Also, he adds, “It is important that a seller does not take on expensive or one-off commitments, in the full knowledge that they will be exiting the business shortly, leaving the buyer with an unanticipated burden –nobody relishes unpleasant and unexpected surprises.”
Paul West at The Rosewater Group takes a more positive view, saying that while his business has not been operational for very long, the number of well prepared businesses that The Rosewater Group sees are actually quite high at 75 per cent.
Q2 When a potential purchaser reviews an agency, what are the three most important elements in the business?
Peter Nicholls says that top of his list is Compatability: “The best deals are where there is clear benefit to both buyer and seller in doing the deal. The seller may well get the money, but the buyer is getting a business that once integrated is going to improve their existing business.”
Secondly, Confidence: “Confidence in both the business they wish to acquire and indeed in the owner selling it.
Much of the value in an estate agency is “Goodwill”, and the buyer needs to be convinced of the worth of that goodwill – by the seller acting in good faith both prior to and after the business is sold.
Thirdly: Turnover, “Turnover across 3-5 years, is a very blunt measure of “Goodwill” but whereas profits can be manipulated by the seller, turnover cannot (without committing fraud).”
Adam Walker says that at the moment most of the buyers are looking for letting businesses not sales businesses.
“Above all else they are looking for businesses where most of the properties are fully managed, not let only.
“They also want businesses that are compliant, long established and have a stable income. “They are nervous about businesses where a high percentage of the book is owned by big multiple landlords and they are nervous of housing benefit tenants, HMOs, room lets and student lets.”
Paul West agrees, “It’s the number of managed properties, number of different clients, fixed costs – and now (with the spectre of a ban on tenant fees) buyers will also be looking at how much turnover is from tenants’ fees and discounting it!
Finally, Marc Daniels puts his main requirements simply: “PIP – Profit. Income. Potential.”
Q3 Is there a common way of valuing an estate agency business?
Our experts all agreed that the valuation figure is not, as some sellers may like to think, up to them to estimate, but rather that it is usually a multiple of turnover with important factors in lettings businesses being how much of the turnover is from a managed portfolio, how many different clients and the average management fee.
Peter Nicholls, added that a common multiplier for the lettings sector is around 1.75 times management income.
Meanwhile, for sales businesses, Adam Walker says that they are usually valued on a multiple of the last three years adjusted profits, that means Earnings before Interest, Taxes, Depreciation and Amortization. (EBITDA).
Peter Nicholls adds that for multidisciplined firms it could be a multiplier of profits and/or a breakdown of residual income like surveying, block management, property management etc. plus an agreed figure for goodwill to cover sales, auctioneering etc.
Q4 Are there more, or fewer, buyers for estate agency businesses than there were three years ago?
Our experts say that the number of buyers for letting businesses has remained fairly stable. Some buyers are temporarily out of the market but new ones have replaced them. The number of buyers for residential sales businesses has dropped sharply since Brexit.
Peter Nicholls and his colleague at Ideology Consulting, Jeremy Wright, both sold their own estate agency businesses nearly three years ago, and, “I would say that the big difference is largely to do with market confidence.
“As market sentiment with regard to business sales goes, it’s very much mirrors the fortunes of the UK housing market, and therefore prices and buyer numbers adjust accordingly.”
If you aren’t quite ready to sell, but think that you midght like to in the not too distant future, any of the experts listed below will be happy to have a preliminary chat about what you need to do to be prepared to put that For Sale board up on your own business.
It’s a great idea to seek their advice on accounts, staff contracts, taxation etc., well before you feel the desire to sell, so that everything is in order and – as you no doubt advise your vendors – smarten everything up and have all the facts and figures to hand.
Every business owner deserves to get the best possible deal when it comes to selling, so don’t forget, always ask the experts!