I WANT to sell my small real estate business to my son, who is going to take over next year once I retire. I am depending on this payout for my retirement, but at the same time want to provide a fair and reasonable price so that he can make the best go of it. Any tips on how I can go about this?
AS A business owner looking to retire on the revenue generated from the sale of your business, the best advice I can give you is to figure out the amount of money you'll need to fund your retirement and then calculate the value of your business.
Depending on the type of business, a valuation would be calculated as a multiple of either earnings or revenue. Generally, a real estate agency is valued on the strength of the rent roll as it offers predictable annuity income.
At present, rent rolls attract a multiple of three to five times gross commission with the multiple determined by several risk considerations including landlord concentrations, renter demographics and location.
Goodwill can also come into play when valuing a real estate agency and could be a percentage of commissions earned from realty sales. But this is a higher risk component of the valuation because it's unpredictable and generally more dependent on uncontrollable market factors as well as reliance on the exiting vendor.
The valuation calculation ascribed to real estate commissions can be handled in a few different ways and because of its relative complexity, I'd highly suggest speaking to a financial adviser or qualified accountant to take you through it. A professional adviser can calculate both your business's worth and your retirement needs and then offer advice on the best strategy for you.
It's worth mentioning that banks will often lend about 60 per cent of the valuation of a real estate business so that you as the seller could leverage the business to part-fund the acquisition price. That will help you with your retirement planning and cash flow during this transition. Good luck.
I RUN a beauty business and need to take some time off for an operation about two months and have enlisted a replacement over this time. I'm unsure how much money I should pay her, though. She will be taking on extra responsibility, but I suspect a few of my clients will go elsewhere during this period, and I don't have that much to spare. Any advice?
THE easiest way to go about this is to jump on a job search website and take a look at what kind of wages are being offered in your industry and based on where you live. If you want to retain clients and have reassurance that your replacement will give your customers the service they deserve, it's a smart idea to compensate her in accordance with industry and area standards.
If you are very concerned that your clients might go elsewhere during the duration of your leave, I'd suggest keeping in regular contact with them both before and during your time away. Explain your situation and give them confidence that your replacement is going to offer the same level of service that you do.
If your recovery enables you to use phone and email, call clients after their appointments, ask for their feedback, and keep them up-to-date on when they can expect you back at work.
It also might be worth offering your replacement some sort of incentive to keep the clients coming in. If she knows she's earning a commission based on customer retention, she might just make that extra bit of effort.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road. His advice here is intended as guidance only.
Email questions for Mark Bouris to Larissa Ham at lham@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
How should I value my small real estate business if I plan to sell it to my son?
Start by calculating how much money you need for retirement, then work out the business value. Agencies are often valued as a multiple of earnings or revenue — for real estate the rent roll is key — so speak to a financial adviser or qualified accountant to get a professional valuation and a plan that meets your retirement needs.
What is a rent roll and how does a rent roll multiple affect the value of a real estate agency?
A rent roll represents predictable annuity income from property management, and agencies are commonly valued on its strength. Rent rolls typically attract a multiple of about three to five times gross commission, with the exact multiple influenced by risks like landlord concentration, renter demographics and location.
Can I leverage the business to help fund my retirement when selling a real estate agency?
Yes — banks will often lend around 60% of a real estate business valuation, so the buyer (or you as seller arranging finance) can use that lending to part-fund the acquisition price and help smooth your retirement cash flow during the transition.
What role does goodwill play in valuing a real estate agency and is it risky to include it?
Goodwill can be included as a percentage of commissions earned from sales, reflecting reputation and client relationships, but it’s higher risk because sales commissions are unpredictable and often depend on broader market factors and the exiting vendor’s influence.
Who should I consult to get an accurate valuation and retirement plan from the sale of my business?
Talk to a financial adviser or a qualified accountant — they can calculate your business’s worth, estimate how much you need for retirement and recommend the best strategy for selling or structuring the handover.
How much should I pay a temporary replacement while I take two months off from my beauty business?
Check current wages on job search websites for your industry and local area and aim to compensate the replacement in line with those industry and area standards; if funds are tight, consider combining a base rate with performance incentives tied to client retention.
How can I keep clients from leaving while I’m on medical leave from my beauty business?
Stay in regular contact with clients before and during your leave, explain the situation, reassure them about the replacement’s service, and if you can use phone or email during recovery, follow up after appointments to get feedback and keep clients informed about your return.
Should I offer incentives to my temporary replacement to help retain clients?
Yes — offering a retention-based incentive or commission can motivate the replacement to keep clients coming in, giving them extra reason to put in the effort to maintain your business while you’re away.
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