Real Estate Agents: Selling Businesses.
Three weeks ago, my post was about an epic opportunity that real estate agents are, for the most part, missing – notwithstanding the fact that real estate agents are uniquely well-positioned to take advantage of it. That post received a lot of activity.
Not surprisingly, much of that activity came from real estate agents.
That post clearly struck a chord and needed further discussion. So, in last week’s post I elaborated on that opportunity – the so-called “Silver Tsunami” – and why real estate agents are perfectly positioned to get in on what is projected to be a generational shift in business ownership.
In that post, I also promised to provide some real-life examples of how, if they were properly prepared, real estate agents could have made a ton of dough selling businesses but, because they were woefully unprepared, they missed out on significant paydays.
This is the first of those examples.
I made a slight reference to this story in a post a year or so ago. The story is true and entails a real estate agent that, after years of futilely trying to sell a business, contacted us to see if we would be able to help. This post will provide more detail than that earlier one did – and I use it because it clearly illustrates two significant points:
- That real estate agents are ideally positioned to to take advantage of this coming generational shift in business ownership.
- If real estate agents know how to do this, they could supercharge their commission income.
The business in this story is a moderately upscale restaurant in an East Coast resort area. It’s been around for at least 25 years and enjoys a good reputation. The owners had been interested in selling since at least 2012 and, using various real estate agents over the years, the business owners had hoped to find a buyer.
But remember my oft-repeated line that the only reason something – anything; a house, a car, a sheet of plywood or a pound of potatoes – doesn’t sell is that the price is too high? Though these owners changed direction at various points over nearly a decade, they hardly changed the price they wanted for the business.
And because the real estate agents had no idea how to value a business, they all were happy as clams to get the listing – even though they all knew that the business had been for sale for a long time, at or near the price the owners were asking them to sell it for.
If they thought they could sell it using the same marketing methods, at roughly the same price, they must have asked themselves at some point why it hadn’t sold before. But optimism being a hallmark of the real estate industry, these successive agents took the listing anyway.
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Because they could brag that they now had a big “business listing” – something few of their peers could boast about? Or was it because they were hoping that they might be the lucky one?… the one that happened to have the listing when “just the right buyer” happened along?
Their odds are just as good – if not better! – in Las Vegas, Monte Carlo or Macau!
We Get Involved – Kind of…
For the most recent real estate agent attempt – in early 2018, prior to anyone speaking with us – the business was listed in the local multiple listing service – where no one, in the history of the world, has ever gone to find a business to buy – for $1.25 million. About 18 months later, the real estate agent contacted us to see if we would be able to help her sell the business.
By that time, of course, at least two of the three cardinal rules of business brokering had been broken. As such, we were hesitant to get involved. But if we could help on some level, we wanted to.
The first thing we did was to ask for the price justification.
The usual response to such a request is either, “what do you mean?” or “that’s what the owner wants.” In this case we were pleasantly surprised to learn that either the owners or the agent engaged a couple of professionals to determine value and we received both a business valuation done by a mid-sized accounting firm in a neighboring state and a real estate appraisal done by a licensed appraiser.
When we get such data, we generally do a quick review to see if anyone involved knows what they’re doing and in this case we could see that both the accounting firm and the appraiser both were knowledgeable and produced a legitimate product.
But a significant problem became apparent early in our review and that is that either the real estate agent or the owners, apparently without reviewing either report, simply added the two numbers together and, voilá, arrived at “The Price”. As it turned out, The Price bore no relation to The Value.
Any quarrel we might have had with the business valuation would amount to no more than picking a few nits. At $465,000, it was within a couple of grand of where we would have been. The real estate appraisal, on the other hand, was a different story.
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Whoever hired the appraiser failed to mention the reason for the appraisal.
The appraiser took the information he was given, did his research of the market – the vacancy rate, the per-foot rental rate, the absorption rate, what the competition looked like, etc. – and arrived at a value of $650,000. Adding the two numbers – which is what the real estate agent and owners did – suggests a value of roughly $1.1 million. If true, an asking price of $1.25 million would not be unreasonable.
The problem was that the business was not paying the market rental rate. It was paying 45% less than the market rate!
If the business was valued using a market rental rate, its value would be roughly $150,000 less than estimated by the accounting form (and essentially confirmed by us). If the real estate was valued on what the business was actually paying in rent, its value would be nearly $300,000 less than what the appraiser arrived at.
Our review – which was only cursory – suggested to us that the package was worth about $850,000; maybe $875,000.
With an asking price of $1.25 million – nearly 50% more than it’s worth – it’s little wonder that no buyers had surfaced.
In one respect, the real estate agent or her broker bear some responsibility for this fiasco. But in her defense, though she is a stellar real estate agent – one of the best in the region, as I understand – she is completely untrained in how to value and sell businesses. She’s probably equally untrained in how to sell boats, publicly-traded stocks and life insurance, other assets that she would never try to sell. If she knew what she was doing on this deal, she would have reviewed the valuation and appraisal, and seen the issue as quickly as we did.
But the sellers bear a portion of the responsibility, as well.
Why? For two reasons.
First, because they hired a real estate agent untrained in the task they wanted performed – getting their business sold for the best price and terms – and, second, because for whatever reason, they failed to disclose accurate details to the appraiser. This combination resulted in incorrect pricing, incorrect marketing and years of wasted time and money.
The Not-So-Happy Ending
After almost a decade of trying, the owners eventually did sell – but for much less than they were hoping for and even significantly less than we estimated the business was worth.
Mistake #1 was using a real estate agent untrained in the marketing and sale of a business. For starters, this meant that everybody and their mother – customers, suppliers, employees and, most of all, competitors – knew the business was for sale the whole time. Unlike selling a house, confidentiality when selling a business is critical.
It also meant that given the way the business was marketed – in the real estate multiple listing service – the chances of anyone who was actually looking for a business to buy would ever see it were slim to none.
Mistake #2 was neglecting to acknowledge what the business was actually paying in rent resulting in an incorrect real estate valuation. And, because the sellers wanted to sell the whole package, this meant an incorrect listing price and, most importantly, false hope for the sellers about what the value was.
But, again, both the real estate agent and the owners are culpable only because they didn’t know what to do.
The real estate agent didn’t know how to value and sell a business and the owners didn’t know who else to call. A lot of time and money was wasted – and a ton of dough was left on the table. THIS IS EXACTLY WHAT I MEAN WHEN I SAY THAT THERE IS AN EPIC OPPORTUNITY FOR REALTORS.
Recently, I happened to be visiting that resort area and dining at a restaurant owned by some friends. They shared with me that the owners of the business that is the subject of this story had come in recently and told their tale of woe. They acknowledged receiving far less than they hoped for – more than $500,000 less than the asking price, more than $400,000 less than they were led to believe their business was worth and even more than $100,000 less than our back-of-the-envelop estimate.
They’d been trying to sell since 2012 – NINE YEARS! They said they were simply tired of the effort. The ordeal was far more painful and time-consuming than they’d expected it would be. They were worn out. They were just happy it was over.
The Bottom Line
This story – all of which is true – illustrates the following points:
- If the real estate agent knew how to value businesses, this business would have come to market at a reasonable price.
- She would have earned a commission of between $80,000 and $90,000 – TWICE what was paid in the actual transaction.
- Given the state where the business is located, she would have been able to sell this business as a business broker, not as a Realtor; allowing her to keep the entire commission rather than splitting it with her broker.
- If the business was valued correctly – and then priced accordingly – given its location, it should have sold in less than 12 months.
- By not knowing how to value a business, the real estate agent left an additional several thousand dollars in a valuation fee on the table. And, if she’d valued the business herself, she would have saved her clients the $10,000 and $12,000 in fees paid to the accountant and appraiser.
THIS is the EPIC OPPORTUNITY that real estate agents have – but so few even see it.
I have nothing against realtors. The vast majority of them are honest, ethical and skilled in their chosen field. Like veterinarians, landscapers, plumbers and countless other professionals, most Realtors are professional and extremely proficient at what they do – in the realtors’ case, selling real estate.
But real estate agents don’t know how to splint a pony’s leg, choose the right foliage for the weather in Minnesota, Florence or Normandy or how to run a waste line in a 10 -story building. They also don’t know how to value, package and sell businesses.
There is, in fact, an EPIC OPPORTUNITY for Realtors right now. Real estate agents are uniquely positioned to take advantage of the coming “Baby Boomer Business Sell-Off.” Baby Boomers are heading for the exits and there will be a lot of money made by anyone who knows how to show them the way.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.