The Secret Few Brokers Discuss »RealtyBizNews: Real Estate News
There is a dirty little secret in the real estate brokerage world that few people talk about. This is a worrying trend that is observed more frequently in small and medium-sized businesses: Many brokerages these days are just not very profitable.
In over 35 years, I have reviewed thousands of financial statements. What’s interesting lately is that even with industry-wide record years where brokers have been making big bucks, when you look at their P&L– which often show beautiful profitable results– we find that the profit in many brokerage houses today actually comes from the personal production of the broker.
Since the beginning of the industry, the best agents generally earn more than the broker; it’s like that. Except… today’s conditions have changed so much for the broker / owner of businesses of all sizes that there is a real disparity between agent and broker income. Take a look at how things have changed in recent years:
- The company’s dollar has fallen nearly 30% in the past five years
- Competitive brokerage models require higher agent divisions
- Rising expenses have drastically reduced profits
- The downward pressure on commissions keeps increasing
- New technologies and new models are designed to undermine brokers
I have written often about actions brokers can take to increase the company’s money and profits, which usually requires a change in brokerage strategy and direction. It also involves an investment in resources that require capital from the broker / owner. Changing direction and making time and financial commitments in their business is the path that only a few choose to take.
Instead, many small and medium-sized brokers today choose to remain producers because it has worked well for them. They work with buyers and sellers because they like it and often times they may not make a lot of money from the brokerage. their profit comes from being an agent.
The problem arises when the owner is ready for a personal change. Maybe they want to slow down; maybe even cash in by selling or merging their businesses and that’s when determining the market value of their brokerage becomes important. Income statements and actual profits determine the market value of the business. Looking at financial data, we often find that when brokerage commissions are included but displayed as profits, once they are adjusted to reality, the company’s profits go down or, as is often the case. , they lose money in fact.
Several questions arise in the process of determining the actual profitability of the owner’s production:
- How are owner’s commissions presented in the financial statements?
- Does the owner pay himself the same amount as a comparable agent?
- What are the real dollars and profits of the business after adjusting the owner’s compensation?
- What would be the replacement cost for management?
A case study:
We were very interested in acquiring a seemingly profitable Southeastern brokerage house run by a dynamic and active broker / owner. However, the financial data was quite surprising. The company had the highest retained dollar and highest profit ratio in the history of real estate brokerage operations. But… closer examination revealed that the reason for the huge profits was that the owner who was the top producer by a considerable amount did not pay himself any commissions. none, nada, zero. The result was an artificially high corporate dollar and a profit margin that exceeded anything I have ever seen. Of course, the owner’s asking price was also based on this very high net profit.
Once an actual commission structure was factored in and income was adjusted for unpaid commissions, it became apparent that the owner was subsidizing the business with their commissions. In fact, the agents did not even cover overhead costs and without the owner’s personal financial contribution, the business was losing significant revenue. Unfortunately, we were unable to justify the acquisition.
Does this mean that the market is bleak for those who are considering selling small to mid-sized brokerage houses? Not at all, in fact he is very active as large companies often pay a premium to establish themselves in a market or to increase their existing market share. There are ways to structure the transaction that are meaningful to everyone as well. One of the most important steps that a broker / owner who plans to sell in the near future must take is to invest in good accounting records that clearly document income, expenses, and actual profitability.
I have discovered over the years that documentation is one of the main success factors for brokers wishing to cash out.
If you want to learn more and find out what an assessment looks like for your business, click here to contact Rick Ellis today.
“… Documentation is one of the biggest business killers for brokers wishing to cash in“
Rick holds an MBA in Digital Technology and is a Certified Real Estate Broker. He is a business growth consultant and regular speaker at real estate industry events. Rick and his wife live on the Georgian coast on St. Simons Island. It is available for consultation with brokers who are looking for options.