Selling a Residential Real Estate Company

What a buyer is paying for

The buyer is paying for what the company keeps after the agents are paid. Every commission is split between the agent and the company, and what the company retains is often called the company dollar. Buyers want to see it by agent, by month and by transaction side, and they will compare it with the office costs it has to cover. A company with high sales volume and a thin company dollar can look larger than it is, so buyers look at profit after splits and after costs, and not at the total volume of closed sales.

That profit has to be worked out carefully. Owners who are also top-producing agents often have their own sales mixed into the company numbers, sometimes at a split no outside agent would get. A buyer will separate what the owner earns as an agent from what the company earns as a company, and the profit that remains is what gets valued. Our post on add-backs and what counts explains the adjustments a buyer will accept and the ones they will not.

The agents

The roster is the center of the sale. A buyer will ask for each agent's closed transactions for the last few years, volume and company dollar, their split schedule, how long they have been with the company, whether they pay desk fees or a monthly charge, and how they came to you. They want to know how many agents produce most of the revenue. In many offices a small group of agents delivers the bulk of the income, and a buyer will treat those people as the business.

Agents stay for reasons that are worth understanding. Some stay for the brand, some for the training and the coaching, some for the leads the company provides, some for the culture and some because of a relationship with the owner. A buyer will ask each of these questions of your top producers, often with your permission at a late stage in the process. If most agents are there because of you personally, the buyer will price in the risk that they leave when you do. Our post on owner dependency describes how to reduce that before you sell.

Agent agreements matter. The independent contractor agreements should be current, signed and consistent. Buyers will check what they say about commission splits, who owns the listings while the agent is with the company, what happens to pending deals when an agent leaves, and whether there are any restrictions on moving to a competitor. Rules about how agents are classified and what an agreement can restrict vary by state and your attorney confirms what applies. A buyer will also look at whether any agent has been promised something outside the written agreement.

Pipeline and listings

A residential sales firm has a pipeline that the buyer can measure. Listings that are active, pending transactions that have not closed, and expected commission income from them all affect what the buyer expects in the first months. Buyers will ask for a report from the transaction management system showing every file in progress, its expected closing date and the commission expected to the company.

The treatment of pending deals at closing is a point of negotiation. Commissions earned before closing but paid afterward belong to someone, and the contract has to say whose. A buyer will also want to know how the listing pipeline looks compared with the same time in previous years. A company that is listing fewer homes this year than last year may be losing market share even if closings look healthy, since closings reflect listings taken months earlier.

Brand, franchise and technology

Some companies operate under a national franchise or affiliation, and others carry their own local name. A buyer will read the franchise or affiliation agreement closely, because it controls fees, territory, use of the name and whether the agreement can be assigned. If the franchisor has the right to approve a new owner or to refuse a transfer, that has to be dealt with early.

An independent local brand has its own strengths and its own risks. Buyers look at how much referral business comes from the name and the office signs and how much comes from the individual agents. They will also look at the lead sources, the website, the customer database and the technology that holds them, and who owns the accounts. Agents often hold their own client lists and social media accounts, and a buyer needs to understand which assets belong to the company.

Trust accounts, insurance and compliance

A residential sales firm holds money for other people. Earnest money deposits and other client funds sit in a trust account, and the rules for who may operate that account and how it must be reconciled are strict. Buyers will ask for the reconciliation records and the history of any audits or complaints. Errors and omissions insurance, which covers claims from clients who say the company or an agent made a mistake, is another area of focus. A buyer will want the policy, the claims history and any open complaints or disputes.

The licensing arrangement is part of the structure. A company must usually have a licensed person responsible for it, and that person has to be in place at closing. Rules vary by state and your attorney confirms what applies. If the owner is the only person in the company holding that license, the buyer has to bring in their own licensed person or the owner has to stay in the role for a period. Our post on how long you stay after selling describes how transition periods are usually set.

What has to transfer

The office lease comes first. Most residential sales firms rent space, often with a long term and a personal guarantee, and the landlord has to consent to an assignment. The post on the lease as part of the deal covers the usual conversation.

Franchise rights, technology contracts, vendor agreements, signage, phone numbers and websites all need to move too. Licensing and registration filings with the state will need updating, and some may require the buyer to file for approval before the change takes effect. A company's name registration and any trade name filings follow the same pattern.

What tends to sink a sale

Sales of residential real estate companies fail for a short list of reasons. Top agents leave when the sale becomes known, and the buyer withdraws or lowers the price. The numbers mix the owner's personal production with the company's profit. The trust account does not reconcile. The franchise agreement blocks the transfer. Pending commissions are disputed. Confidentiality matters here more than in most businesses, since agents talk to competing offices constantly. We approach buyers without naming the company, and buyers sign a nondisclosure agreement before seeing anything identifying. Our post on how we market a business confidentially gives the steps.

How to prepare

Start by separating your own production from the company's financials and show what the company earns without you. Move your best relationships with top agents toward a sales manager or team leader who can stay. Review each agent agreement and fix inconsistencies. Reconcile the trust account to the penny and keep the records tidy. Understand your franchise agreement's transfer terms. Build a clear pipeline report. Think about who the buyer is likely to be, a larger real estate company wanting your market, a group of your own senior agents, or an outside investor, because each wants different things.

If you are considering selling a real estate company, Business Advisors of America can value it from your own numbers, prepare the materials a buyer will expect, and find buyers who understand how the agent model works.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.