The most common method is based on cash flows. The usual metric for
cash flow in real estate brokerages is the Adjusted EBITDA (earnings
before interest, taxes, depreciation, and amortization adjusted for
nonrecurring items). A variety of factors influence the multiple that
a purchaser will be willing to pay. Size, market share, and strategic
fit all play a role.
Here are some general guidelines for multiples that can be expected:
"However, the top of the market, at 5-to-6.5 times the last 12 months?
cash flow (Adjusted EBITDA), is only available to those firms that are
significantly large, have strategic value to purchasers, have large
market shares in their services areas or where all of these factors
are present and the purchaser has synergies available or a desire to
win a contest for the firm in the face of competition.
Firms that are moderately sized and have good operating results, and
that represent important market shares to the purchaser, can expect
prices in the range of 3.75 to 4.25. Firms that do not represent some
significant value to the purchaser, or where there is little
competition for the assets of the firm, can expect values at least
0.75-to-1.0 multiples less."
"Valuations in the residential brokerage market" REAL Trends Monthly
Newsletter (January 2003)
http://www.realtrends.com/past_newsletters.asp?article=newsletters/2003_01_4.htm
Here is another article that is more recent discussing EBITDA multiples:
"'The rule of thumb is that if a company is doing $2 million or less
in gross commissions over 12 months, it?s generally worth its EBITDA,"
he says. In other words, a multiple of one times earnings, rather than
a higher multiple.
The bigger the company, the higher the price. "People want size and
they?re willing to pay for that,' Michonski says.
When a company has $4 million in commissions, the purchase multiple
can go to 2.5 times EBITDA, and can triple once the earnings hit $6
million, he says. 'That?s what I call the magic number,' Michonski
says.
The $9 million to $12 million range hits a multiple of four or better,
and over that, prices will range from 5 times EBITDA to as much as a
6.5 multiple."
"What firms are worth" by Will Swarts, The Real Deal (November 2004)
http://www.therealdeal.net/issues/November_2004/1099357936.php
BusinessWeek believes that the market for real estate brokerages is
increasingly a buyer's market with increasing consolidation likely.
This may result in current Adjusted EBITDA multiples being somewhat
lower than those presented in the previous articles.
"To create this powerhouse, Chief Executive Ronald J. Peltier has
taken a page from Buffett's own value-investing playbook. Peltier
typically buys four to six real estate chains a year, and like
Buffett, he won't buy just anything with a 'for sale' sign. He seeks
out the No. 1 or No. 2 player in a region, and the firm's management
team must be willing to stick around and keep running the show.
Neither is he willing to pay a premium for these businesses, a value
orientation that no doubt makes his boss in Omaha proud."
"In 1990, the top 500 firms accounted for 15% of home sales and
purchases; today it's more like 30%. And with the U.S. still boasting
more than 75,000 firms, several factors will keep pushing them
together. The cost of crucial new technology -- such as Web sites --
is a heavy burden for smaller outfits, while Internet firms and other
discounters are chipping away at the long-sacrosanct 6% commission on
home sales."
"Warren Buffett's Invisible Empire" by Adrienne Carter, BusinessWeek
(May 30, 2005) http://www.businessweek.com/@@CjqqYmUQQk9hDg0A/premium/content/05_22/b3935113_mz020.htm
The following page provides a brokerage valuation calculator that can
give you a ballpark estimate of your firm's valuation. It also gives
you an idea of the relevant factors involved in assessing real estate
brokerage valuation.
"Brokerage Valuation Analysis" REAL Trends (2005)
http://www.realtrends.com/brokerage_v_a.asp
Sincerely,
Wonko
Search Terms:
"real estate brokerage" valuation
"real estate" brokerage multiple EBITDA |
