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.
Email questions for Mark Bouris to Larissa Ham at lham@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
How do I figure out how much money I need from selling my business to fund retirement?
Start by calculating the amount you'll need to fund your retirement (living costs, healthcare, lifestyle). Once you know that target, calculate your business's value and see how the sale proceeds match your needs. The article recommends working with a financial adviser or qualified accountant who can calculate both your retirement needs and the business valuation and then advise on the best strategy.
How is a small real estate agency typically valued?
Real estate agencies are often valued as a multiple of earnings or revenue, but many agencies are valued on the strength of their rent roll because it provides predictable annuity income. Valuation can include rent-roll multiples and, in some cases, goodwill from sales commissions — each component is assessed based on risk and predictability.
What rent-roll multiple can I expect when valuing my real estate business?
The article notes that rent rolls currently attract a multiple of about three to five times gross commission. The exact multiple depends on risk factors such as landlord concentration, renter demographics and location.
Does goodwill affect the valuation of a real estate agency, and how risky is it?
Yes — goodwill can be included as a percentage of commissions earned from property sales, but it is a higher-risk part of the valuation because sales commissions are less predictable and often depend on market conditions and the outgoing vendor's relationships.
Should I speak to a financial adviser or accountant before selling my business?
Yes. Because commission-based valuations and retirement planning can be complex, the article strongly recommends speaking to a financial adviser or qualified accountant. A professional can calculate your business’s worth, assess your retirement needs and recommend the best sale or transition strategy.
Can a buyer get bank finance to help purchase my real estate business?
Banks will often lend around 60% of the valuation of a real estate business. That level of lending can allow the business to be leveraged to help part-fund the acquisition price, which can also support your retirement planning and cash flow during the transition.
How much should I pay a temporary replacement in my small beauty business while I’m on leave?
A practical approach is to check job-search websites for current wages in your industry and local area and pay in line with industry and location standards. If you want to retain clients and ensure quality service while you’re away, reasonably compensating the replacement is a smart move.
What can I do to retain clients while I’m away for surgery or leave from my small business?
Keep regular contact with clients before and during your leave to explain the situation and reassure them about the replacement’s service. If you can use phone or email, follow up after appointments, ask for feedback and update clients on when you’ll be back. Consider offering your replacement an incentive or commission for client retention to encourage them to maintain your client base.
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