What elements really make a real estate business valuable?
It is important for all real estate professionals to understand what creates or detracts from a business’ value. This applies whether you are a Realtor considering building a team or venturing out with your own brokerage, are an entrepreneur launching a tech based real estate startup, are an investor building a new business, or are simply a commercial real estate broker. It applies to all types of related vendors from mortgage companies to title companies to home inspectors. It is also vital for those considering franchising, buying into a real estate brokerage or investment franchise, or simply want to attract the best possible team.
Free Money for the Taking
Many don’t get into real estate to build a business they can sell. They are normally thinking about short term personal income and individual wealth building for retirement. This often causes them to completely miss out on millions of dollars.
The fact is that ‘building a business’ is a part of what real estate professionals are doing every day. They are building revenues, making sales, creating a brand, and more often than not, they are using teams to help them. For the price of a good lunch, you can incorporate your real estate business, gain additional tax advantages and liability protections, and perhaps reap a windfall in accumulating business value.
It may take a little more thought than this, but it can add millions to the return on what you are doing already. And the truth is you never know when you might need to sell, or could benefit from raising capital or bringing in partners. If you haven’t organized, planned, and taken a moment to understand what makes a business valuable or not, you might have nothing. While a competitor who is just a little more organized might be able to sell their venture for seven or eight figures or more when health issues arise, current partners need to bail, large cash needs arise, or big opportunities show up.
4 Ways To Value A Real Estate Business
There is more than one way to value a real estate business today…
Asset Value
Commercial real estate professionals and business brokers are probably already very familiar with this method of evaluation. What are the company’s assets that have worth? This can work well or poorly for real estate companies. Those that own and hold real estate can have very sizable assets. Others might not have much more than a laptop, desk, and an iPhone. Note that trademarks, staff, and income producing contracts (like leases) can add to this value too.
Income Value
You may already be familiar with this approach from how stocks are quoted on price to earnings ratios, and the super-sized valuations of hot tech startups. Buyers are buying into future cash flows.
Team Value
What’s your real estate team worth? One of the most popular ways businesses are bought today is as acquihires. That means they are being purchased for their talent. So have you cultivated a strong team? How will you recruit to add value to your real estate business?
The VC Method
There are several methods that investors use to evaluate startup and small business methods. The Venture Capital method combines several different ways to look at a company’s worth. This is perhaps most like real estate appraisals. Values of other comparable business sales are looked at, as well as fundamentals – such as team and management strength – and a discounted cash flow figure is assigned.
Business Value Factors To Watch
Keep an eye on these elements:
- Resources
- Proven, consistent traction
- Contracts and recurring income
- The most likely type of exit or sale
- Established business channels and strategic partnerships
- Cost to duplicate what you have created versus acquiring your company
- Brand strength and recognition
- Proprietary technology and systems
- Market timing (supply, demand, and attractiveness)
Summary
Don’t miss out on the huge financial gains to be had from building a legitimate real estate business. Get to understand how business valuations work and create a plan to steadily increase the value of your business. You really never know when you could use the additional wealth this offers, but you’ll be glad you invested in this part of your work.
