‘Ask T3’: Don’t FSBO your brokerage when you’re ready to exit 

Editor's note: The Ask T3 series explores some of the biggest questions in real estate with thoughtful insight from industry professionals. Check out our top takeaways and watch the latest episode from host Nick Bailey, chief real estate officer at T3 Sixty. (Real Estate News is an editorially independent division of T3 Sixty.)

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The consolidation moment in the brokerage business is here. But what happens when a brokerage owner decides it's time to explore a sale of their business?

On the latest episode of Ask T3, host Nick Bailey, chief real estate officer at T3 Sixty, and Fran Santangelo, founder and principal at FX Consulting, touched on the best practices and strategies when seeking a valuation and potential sale of a brokerage.

Understand your brokerage's worth: A brokerage owner who is ready to exit first has to determine a fair assessed value of their business, which can come with some complications. The hard numbers — revenue versus expenses — will largely determine the result, but there will be other considerations.

"We normally think about ranges of value as three to five times of adjusted EBITDA, which is earnings before interest, taxes, depreciation and amortization," Santangelo explained. "'Adjusted' is the key word because companies have operating EBITDA — or net income — but they also normally have expenses that are extraordinary or expenses that are nonrecurring."

Be an open book: Being transparent about the books is important, whether a business' accounting is done via a "shoebox full of receipts," as Bailey described, or through more sophisticated means. This is particularly crucial when seeking a valuation from an independent third party whose determination relies on the information they are presented with. 

"I think it all helps, because the eyeballs that we bring to bear on these individual companies gives them a little bit more insight as to what their books and records should look like," Santangelo said. "You always want to make sure that your charts of accounts are consistent across the years."

Avoid FSBO trappings: A common for-sale-by-owner trend is that the seller often has an inflated sense of how much their home is worth due to their sentimental attachment to the property — and the same can happen in business valuations.

"I have a phrase: Don't FSBO your business," Bailey said. "If you've ever sold real estate, you go in and the seller always thinks their house is worth more than the comp that you are delivering to them."

For brokerages, the market ultimately "is going to really dictate what your particular value is," Santangelo explained, as investors or other business owners who purchase a brokerage "can bring reduction of expenses to bear on a particular business where buyers of real estate can't."

Preparing for a sale — and potential pitfalls: The communication and timing linked to a potential sale can be tricky. Sellers — or buyers — who are flaky, hesitant or not motivated to complete the transaction process will very likely fail to complete the sale. 

"Time kills all deals," Santangelo said. "You want to do it right — you don't want to rush into the transaction, but failure to return requests can be very damaging and they'll move on to something else."

Motivated sellers can expect to close within 90 to 120 days, Santangelo indicated, adding that the "compression of the time frame" also "creates less risk" that agents or others in the market are going to find out about the brokerage sale.