Real estate business - Value

Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes

Hey guys,

I hope your well.

How much could you sell a real estate business that makes $1million in profits via flipping houses. I know more variables would need to be calculated but I would be happy with your rough estimates. I am interested in getting an approximate value multiplier. So for example 1 x 3 or 1 x 4

($1million profit = $3million value)

Also, please feel free to share if you know of any other similar business that sold and for what price compared to profits.

Thanks for reading an I am looking forward to your replies.

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Brie SchmidtBusiness Member

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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

12y

A property management company would be similar. Their value would be determined by the value of their contracts. So with 100 clients - say 25 have contracts through the next 90 days and then need renewal. the other 25 are 6 months and the last 50 expire in a year.

The value would be based on the value of the contract until it's renewal - that would be the main asset for the basis of valuation.

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James Vermillion
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
12y
The question is what are you actually selling...just the name / brand?
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y
With no assets or proprietary technology/process I would guess very little.

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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by James Vermillion:
The question is what are you actually selling...just the name / brand?

@James Vermillion

Thanks for your comment.

The whole business. Lets also say it has 5 full time employees.

Feel free to ask further questions?

ps. I am not selling anything lollol

Just after some perceptions and opinions :)
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Brianna Schmidt:
With no assets or proprietary technology/process I would guess very little.

@Brie Schmidt

Thanks for your comment.
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y
@Engelo Rumora - I have 2 experiences with trying to buy a established business a few years ago. Basically no tangible assets, just a client list and less than 10 employees. The Bank would not loan $1 because there was no value - they didnt own anything. If the clients stopped using them tomorrow there was no business therefor it was basically worth nothing.

The only value you could use to sell on would be the assets you currently own and could sell.
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James Vermillion
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
12y
I agree with Brianna...in some businesses a brand can be very significant, but in real estate I do not see it being so in most cases. The employees would make little difference in the valuation. In this scenario what assets would be part of the sale:

- the brand

- any property

- any technology / systems

I can't think of any reason I would pay much for a real estate business if it does not include some assets that I cannot immediate reproduce or hire. In other words...why would I pay 3 mil for something when I can take less than 3 mil and do the exact same thing.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Brianna Schmidt:
@Engelo Rumora - I have 2 experiences with trying to buy a established business a few years ago. Basically no tangible assets, just a client list and less than 10 employees. The Bank would not loan $1 because there was no value - they didnt own anything. If the clients stopped using them tomorrow there was no business therefor it was basically worth nothing.
The only value you could use to sell on would be the assets you currently own and could sell.

@Brie Schmidt

Ok cool, so pretty much if a real estate business is making $1million in profit from whatever its selling with good systems in place but has no assets its not worth anything?

Thanks for your time

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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by James Vermillion:
I agree with Brianna...in some businesses a brand can be very significant, but in real estate I do not see it being so in most cases. The employees would make little difference in the valuation. In this scenario what assets would be part of the sale:
- the brand

- any property

- any technology / systems

I can't think of any reason I would pay much for a real estate business if it does not include some assets that I cannot immediate reproduce or hire. In other words...why would I pay 3 mil for something when I can take less than 3 mil and do the exact same thing.

I agree with what you guys are saying but investors also buy turn key properties when they could buy distressed and do all the work themselves and never pay a margin.

Thanks for your time.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
I'm with the others here - the business has very little if any value. Ask yourself this. If someone wanted to duplicate your business, what would it take? Flipping houses is a well understood business. Actually doing the work is what generates the profit. There is no "brand" involved, like there is with a franchise business. There is no secret set of processes. No supply chain that provides you the inputs to the business. No process for putting a location in the right spot. For that matter, no location. So, anyone can come to your area, start buying junker houses, fixing them, and selling them. The example $1 million profit can be reproduced by anyone who turns the flipping crank.

In your case there isn't even a client list. Retail flippers don't attract repeat buyers.

Now, perhaps there's more to the business than we see. If, for instance, this is a turnkey business that has an established source for properties (e.g., close ties with some bank selling REOs), and established a brand name among some investors who are buying from you, and have established a brand presence among potential investors (e.g., by running an advertising campaign for some length of time), then perhaps there is some value there.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by James Vermillion:
I agree with Brianna...in some businesses a brand can be very significant, but in real estate I do not see it being so in most cases. The employees would make little difference in the valuation. In this scenario what assets would be part of the sale:
- the brand

- any property

- any technology / systems

I can't think of any reason I would pay much for a real estate business if it does not include some assets that I cannot immediate reproduce or hire. In other words...why would I pay 3 mil for something when I can take less than 3 mil and do the exact same thing.

@James Vermillion

How do you value a brand?

Thanks
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
@Jon Holdman

Thanks Jon,

Great reply and much appreciated. Some awesome points raised.

Thanks.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Hey guys,

What about a property management company? How could one sell a property management company that doesn't have assets but has over 100 properties under management for example?

Thanks for your time.
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Account Closed
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
12y
Total Assets + Economic Moat + Competitive Advantages - FV Asset Base = Brand Value
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y

Systems are assets. But to be a valuable asset, the "system" has to have some real meat to it. If a company has a process for providing a service that process has value. Look at mortgage servicers. They provide a service to investors who are willing to pay to let them send mortgage statements, collect payments, handle distributions of taxes and insurance, and perform foreclosures. Those servicers have systems for performing these tasks. And the computer systems and software and all the people infrastructure to perform those tasks. That system is an asset. There are some hard assets involved, usually, but the major portion of the value is the "system" that uses those assets to provide a service.

Franchises, as in my example above, also have systems that have value over and above the hard assets they provide. A franchise purchaser can buy a franchise and have the business up and running quickly. They have advertising behind them to promote their business. Compare the value of a McDonalds store to "Jon's Burgers". To compete, I would have to do a bunch of work just to get my store up and running and I would still not have the presence of a McDonalds store. If you can build your business into a franchise, then there will be some real value. I recommend the book "The E-Myth Revisited", which discusses the concept that your "product", as a small business owner, is not the thing you're selling. Its the business. In other words, a franchise. And gives concrete steps for how to get there from where you are now - having a job.
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y
A property management company would be similar. Their value would be determined by the value of their contracts. So with 100 clients - say 25 have contracts through the next 90 days and then need renewal. the other 25 are 6 months and the last 50 expire in a year.

The value would be based on the value of the contract until it's renewal - that would be the main asset for the basis of valuation.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Awesome stuff @Jon Holdman

I like what you say regarding the "system" being and asset.

I finished reading the E-Myth 6 or so months ago. Great book.

I guess it would come down to numerous variables before such a "turn key flipping" business could be valued.

Maybe if someone has an example of a similar company that they know of the sale and the structure of the company?

Thanks to all for reading.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Brianna Schmidt:
A property management company would be similar. Their value would be determined by the value of their contracts. So with 100 clients - say 25 have contracts through the next 90 days and then need renewal. the other 25 are 6 months and the last 50 expire in a year.

The value would be based on the value of the contract until it's renewal - that would be the main asset for the basis of valuation.

Thanks Brianna,

Is there a set multiplier for the PM company?

Sorry for all the questions guys lol

Thanks for your time.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
The problem with the RE industry is that companies that rely on skills, sales, construction, fix and fips, etc. are not easily duplicated. For any business to claim value the production must be easily duplicated by any buyer.

Next will be the issue of hard assets at market value. Your $800 table saw may only be worth $300! Each hard asset is depreciated to it's quick sale value basically and lenders might look at 50% to loan on.

Duplication of efforts can't be measured very well unless you can show that a buyer has the same or greater skills than the seller and if that is the case, the value to that buyer will be less in most cases as they recognize several issues.

1. If you fall out of the market, reduce your production, sell to any unknowing operator or stop seeking growth, their market share can be expected to grow filling your void.

2. Service companies rely on personal service, personalities and relationships established by that operator. Those can't be duplicated and it's unlikely any business keeps all of the customers, so that reduces the value as seen by an owner.

3. Many aspects of RE are as much an art as a science, subjective decisions, again, these can't really be duplicated by one person, especially if they lack experience. So, your potential market is reduced finding qualified buyers in terms of skills. Knowing this, any buyer that will be interested will recognize your limited possibilities in the market and adjust an offer accordingly.

5. Business outlook, why is a seller selling if it's a money maker, so we need to look at the economic conditions and what the expected production will be rather than historic earnings under previous management.

The best way to sell service business is or can be rather convoluted based on not just what is assumed but what will be produced with the seller providing management direction over time to 1. teach the buyer, 2. soften the blow to customers with respect to relationships changing and 3. to finance the transaction as financing for a service entity is almost nonexistent.

The best way to sell a rehab company is by admitting a buying partner, teach them and allow them to earn their way in. While this is a totally different issue from BP, you'll get a higher price going this route than trying to sell for cash.

What your gross income was last year certainly adds to a buyer seeing the possibilities, in reality, it may not be worth a tenth of what you are doing as it can not be duplicated. :)
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y
I don't know. I just know how the banks valued the business we were looking into. We looked at buying one like the PM company, that the value was the contracts in place, and I think they told us 1.5 times the value of the contracts - but that was years ago
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
Buying your example PM business is "buying a job". Most small businesses amount to nothing more than "buying a job". True of a lot of real estate businesses, including fix and flipping.

So, if I was interested in running a PM business with a base of 100 properties I would compare buying an existing business vs. starting from scratch. I would consider that 100 properties is essentially a full time job for one person, so there's no business here, really. Its just me managing 100 properties. Its not a bad job. If those are $1,000 per month rentals, and I charge 10% of collected rents and half a month to fill a vacancy it probably grosses over $150K a year. Certainly I have some expenses - office supplies, mailing, gas - but they're not huge. So, I'd ask "what does it take to build a 100 unit PM business from scratch"? Perhaps I'd have to invest $50K in advertising and other marketing to build up that client base. Maybe it takes a year, so I give up half a year's income or $75K. (Those are just guesses. If I were really doing this I'd put a lot more thought into it.) So, I might be willing to pay a bit more for an existing business, perhaps $150K.

OTOH, if this PM business managed 1000 units, had a well-trained staff, and had the systems to manage 1000 tenants, there might be some additional value. That's way too many units for one person to do. Jobs have to be divided up, defined and assigned to different people, just like E-Myth describes. That's the "system" and that has real value.
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Bill Gulley:
The problem with the RE industry is that companies that rely on skills, sales, construction, fix and fips, etc. are not easily duplicated. For any business to claim value the production must be easily duplicated by any buyer.

Next will be the issue of hard assets at market value. Your $800 table saw may only be worth $300! Each hard asset is depreciated to it's quick sale value basically and lenders might look at 50% to loan on.

Duplication of efforts can't be measured very well unless you can show that a buyer has the same or greater skills than the seller and if that is the case, the value to that buyer will be less in most cases as they recognize several issues.

1. If you fall out of the market, reduce your production, sell to any unknowing operator or stop seeking growth, their market share can be expected to grow filling your void.

2. Service companies rely on personal service, personalities and relationships established by that operator. Those can't be duplicated and it's unlikely any business keeps all of the customers, so that reduces the value as seen by an owner.

3. Many aspects of RE are as much an art as a science, subjective decisions, again, these can't really be duplicated by one person, especially if they lack experience. So, your potential market is reduced finding qualified buyers in terms of skills. Knowing this, any buyer that will be interested will recognize your limited possibilities in the market and adjust an offer accordingly.

5. Business outlook, why is a seller selling if it's a money maker, so we need to look at the economic conditions and what the expected production will be rather than historic earnings under previous management.

The best way to sell service business is or can be rather convoluted based on not just what is assumed but what will be produced with the seller providing management direction over time to 1. teach the buyer, 2. soften the blow to customers with respect to relationships changing and 3. to finance the transaction as financing for a service entity is almost nonexistent.

The best way to sell a rehab company is by admitting a buying partner, teach them and allow them to earn their way in. While this is a totally different issue from BP, you'll get a higher price going this route than trying to sell for cash.

What your gross income was last year certainly adds to a buyer seeing the possibilities, in reality, it may not be worth a tenth of what you are doing as it can not be duplicated. :)

Thanks Bill,

Awesome post. Another idea could be not to entirely sell out and maybe only sell 50% so the buyer will feel more comfortable as you will still remain withi the business and maybe you can just agree on terms to be passive and just overlook operations.

Thanks

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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Brianna Schmidt:
I don't know. I just know how the banks valued the business we were looking into. We looked at buying one like the PM company, that the value was the contracts in place, and I think they told us 1.5 times the value of the contracts - but that was years ago

Ok, WOW.

Not much at all.

Thanks
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Engelo RumoraBusiness Member
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Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by Jon Holdman:
Buying your example PM business is "buying a job". Most small businesses amount to nothing more than "buying a job". True of a lot of real estate businesses, including fix and flipping.

So, if I was interested in running a PM business with a base of 100 properties I would compare buying an existing business vs. starting from scratch. I would consider that 100 properties is essentially a full time job for one person, so there's no business here, really. Its just me managing 100 properties. Its not a bad job. If those are $1,000 per month rentals, and I charge 10% of collected rents and half a month to fill a vacancy it probably grosses over $150K a year. Certainly I have some expenses - office supplies, mailing, gas - but they're not huge. So, I'd ask "what does it take to build a 100 unit PM business from scratch"? Perhaps I'd have to invest $50K in advertising and other marketing to build up that client base. Maybe it takes a year, so I give up half a year's income or $75K. (Those are just guesses. If I were really doing this I'd put a lot more thought into it.) So, I might be willing to pay a bit more for an existing business, perhaps $150K.

OTOH, if this PM business managed 1000 units, had a well-trained staff, and had the systems to manage 1000 tenants, there might be some additional value. That's way too many units for one person to do. Jobs have to be divided up, defined and assigned to different people, just like E-Myth describes. That's the "system" and that has real value.

Thanks Jon,

I always liked the idea of the numbers in property management.

The best way to go is definitely to start turning it into a turn key product even if one is bought into.

Thanks for your time.
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Stephanie Dupuis
Residential Real Estate Broker · Bremerton, WA · Member since 2013 · 494 posts · 142 votes
12y
The typical valuation for a company is 1.5 times the company's net profit from the previous two years' tax returns. If the company is new, it is valued less and three years' returns are used. Other variables go into this, too - leases, other assets, etc.
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Shaun Reilly
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
12y
I have the same thoughts as everyone else that even the most successful flipping business has little value as a business asset to sell without some serious differences from the standard model.

I think to have any chance of selling that type of business you need to be almost fully vertically integrated.

Like you would need an in house marketing and acquisition staff, where you have no real involvement (Advantage in acquiring properties). Probably a large cash account for purchases and maybe a ginormous credit line at some preferred rate, say like $2M at prime +1% or something, for that as well (Advantage in funding the purchases). An in house construction crew to easily evaluate the work to be done and time involved while keeping costs down since you can also get big material discounts with the volume you are doing (Advantage in fixing the properties fast and for less than the small guy). Possibly having an in house brokerage to list and sell the places for minimal fees (Advantage is disposition of the properties).

If you have something like that then you have a real business that someone can buy. If not why would someone give you anything of real value? They can buy a "How to Rehab" in a box form a guru for a couple grand. If they are a little more serious and more business savvy they will just buy something like a HomeVestors franchise. In some other recent threads I think someone said it is only like $15K to get into one of those, then of course there are whatever fees and royalties, but that seems like a way better deal then dumping $3M to buy a flipping business with no particular advantage over anyone else in the market.
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