For Managers: Best Practices

FOR MANAGERS
Best Practices

Exit Strategies
There must be50ways to leave your company

By Ronald A. Schmaedick

Looking to bring a successful career to a happy and profitable end? Before you hop on the bus, Gus, you need to prepare yourself and your company for sale, says veteran REALTOR® Ronald A. Schmaedick, a consultant in the field of buying and selling real estate companies. In this first of a two-part series, Schmaedick explains how.

In just the last few years, the real estate industry has experienced gut-wrenching changes in many of the major U.S. markets.

The management paradigms that were successful before 1995 are no longer getting results. Many brokers who started in the 1950s--1960s are now ready to cash in their chips rather than try to adjust to new technology and methods of doing business.

The mergers and consolidation of ownership and the rush to synergistic networking and support groups commonly known as franchises have developed a “bigger is best” psychology in our industry. Only those few companies and sales professionals with a solid hold on a niche or sphere continue to compete profitably as totally autonomous independents unfettered by the changes around them.

If you feel threatened, challenged, frustrated, and ready to get out, you're not alone. The good news is that you have many options. Young people in our industry see change as opportunity. A few people on Wall Street see new paradigms for real estate brokerages and are paying big money (price-to-earnings ratios) never before heard of in our industry.

Many broker-owners don’t have exit plans because they don’t believe they have anything to sell or they believe that selling is reactive: The buyer finds the seller and controls the process and the ultimate results. If they marketed real estate in the same passive manner, they wouldn't be in business very long.

Little grocery stores and restaurants with annual gross revenues of only a few hundred thousand dollars are bought and sold regularly, yet broker-owners with a million dollars or more in gross commission income (GCI) think they have nothing to sell.

Don't just drop off the key, Lee
The keys to your successful exit are a strategic plan, some professional help, and adequate time to make a graceful exit. You don’t want to wait until you “hit the wall” before you start the process.

A good example: A broker-owner in a major luxury home market had been tired and ready to get out for some time but had no plan. She called me when the doctors discovered that her husband had a serious cancer condition. She wanted to be free of the business so that she could have maximum quality time with him.

She was about ready to give half of her small business away just to get out from under the day-to-day management problems. By slowing up and developing a good succession plan, she made sure her new partners paid her $250,000 for the half of the business she was about to give away.

It'll generally take six months to two years to plan and execute a successful transition of ownership if the new owners are experienced managers. If you plan to pass the business on to a family member or one of your sales associates, it may take several years. In either case, you need time to develop a plan, groom the business, negotiate a sale, and assist the new owners in a smooth transition.

Make a little plan, Stan
Most broker-owners have invested blood, sweat, tears, and personal resources in their business. Some sellers need money in the form of cash for other activities or long-term retirement income or debt relief. Other sellers need a “feel good” way out. They want the company name to continue. They want the loyal sales associates and staff to be taken care of. Finally, there is the seller who wants out of the management and ownership responsibilities but wants to continue an active affiliation, a place to go each day, a place to carry on personal production or manage personal investments or both.

A good exit plan can respond to those needs.

My wife and I sold our brokerage to our daughter. My wife, who has both the CRS® and the GRIdesignations, resigned from active real estate to assist me in our new business and be a wonderful, loving grandmother.

I've continued to do consulting for brokers and expanded my personal production activities in industrial real estate as an associate broker in our daughter's company. It’s been profitable for me to finally practice what I've been preaching.

Developing the plan includes determining the answers to several questions. Do you want to

Pass the business on to a family member or sell in an “arm's- length” transaction?
Sell to an insider—partner, current manager, sales associate, and so on—or to an outsider?
Retain a sales or management position in the company or get out completely as soon as possible?

Never slip out the back, Jack
Grooming the company to sell depends somewhat on your plan, but in general you'll want to spruce up the place so that it looks sharp, and not just cosmetically. Here are some things to consider:
Put extra effort into recruiting ambitious salespeople and get rid of the deadwood. The quality of sales associates is more important than the quantity.
Review your company's marketing image. Is it fresh and current?
Clean up any pending litigation, customer complaints, and so on.
Develop capable middle management and office staff that will stay and support the new owner.
Make sure your bookkeeping is organized and simplified so that it reflects the true profits of the brokerage business.

If you're paying quasi-personal expenses out of the business, you'll make your bottom line less attractive. On the other hand, many brokers mistakenly believe that if they don’t pay themselves, taking a draw against commission instead of a salary, and don’t pay rent (they own the building), then everything on the bottom line is profit and their business will be valued accordingly. That’s not going to happen.

The true profit of a business is what remains after expenses are deducted from income. If you're running several businesses out of one office and one set of books—a construction business, a personal investment portfolio, and so on—you’ll want to account for each profit center.

The brokerage should have its own set of books, with reasonable allocations of shared expenses such as office space and secretarial help.

Your real estate brokerage is a bundle of assets, including current listings, pending transactions, furniture, equipment, leasehold improvements, receivables, and goodwill. Goodwill includes such intangible, hard-to-price things as your company name and image, the sales associates, phone numbers, contacts, prospects, and possibly a prime location.

Those assets help create an income stream that ideally generates a profit that’s considered a good return—20 percent to 30 percent—on the investment you're asking the buyer to make.

Nonoperating assets—investment property, collectibles, and stocks held by the company—shouldn’t be sold with the business. If you own the office building, you'll be smart to retain ownership and enter into a lease with the new broker.

I've seen several sellers apply most or all of the buyer's downpayment to the purchase of the building and sell the business on a no-money-down installment basis. Then the business failed, the seller got literally nothing for the business, and the buyer ended up with a good building to sell, to lease, or to lose to foreclosure or bankruptcy.

If the new owners insist on owning the building, give them an option to buy the building at market value after they’ve paid you in full for the business.

Once you clearly understand the assets you have to sell, you'll see that those assets don’t have the same value for all buyers. For example, successful local competitors generally aren’t interested in your company name and image. They may not want your location or much of your furniture and equipment.

On the other hand, a person who isn’t currently operating a company in your area will be interested in buying almost everything in place. Most attorneys will tell the buyers not to buy the stock of the company. If they buy the stock, they acquire the company's liabilities, known and unknown.

Most buyers, therefore, buy only the defined operating assets of the company. That’s why you'll generally end up with the money paid by the buyer, along with a shell corporation that may have some debts to pay and some assets that the buyer didn’t purchase, such as investments, personal vehicles, furniture, or equipment.

What price to get yourself free?
All companies have a book value and a current market value; you need to look at both before selling. Those two values are seldom the same.

Generally, book value is an accountant's calculation of the purchase price of assets such as furniture and equipment minus depreciation. Unfortunately, the depreciation is based on federal tax law and in most cases has no resemblance to actual changes in the market or current resale value of those assets.

Current market value is what a seller can reasonably expect to receive for his or her company. Assets such as goodwill and listings aren’t generally included in the accountant's book value of a company. Notes and accounts receivable are shown at face value, though they might not be collectible or their face value might be severely discounted if they were sold. Current market value takes into account the estimated resale value of each and every asset at the time the valuation is done. In most cases, current market value is significantly greater than book value.

Current market value is best determined by an experienced business appraiser.

Next month:In the conclusion of this two-part series on exit strategies, the author will address how to find successors, where to get help in finalizing the sale, and to what extent you should share risk with the buyer.

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