Whether you are in the early stages of building your real estate practice or approaching retirement, establishing a succession plan is essential to securing your future. As you grow your business, expand your client database, generate referrals or establish a team, it’s important to consider how these elements contribute to creating a valuable, salable asset that can support your retirement plans.
Why succession planning matters for real estate team leaders
For team leaders planning for retirement, a solid succession plan is a crucial component to protecting your legacy. When executed correctly, your business becomes a valuable asset that can help you to retire on your own terms. It also serves as a contingency plan if you’re ever unable to work unexpectedly. On the other hand, succession can offer exciting acquisition opportunities to those looking to expand their existing real estate operations. A business with established systems, clientele and consistent sales performance can be an attractive option for potential buyers.
When should you start thinking about succession?
It’s never too early or too late to plan for your business’s future. Whether you’re nearing retirement or just starting to build momentum, you can harness the power of a strong brand to ensure your business is a highly marketable asset when it’s time to sell. Your future transition plans should influence everyday business decisions to ensure scalability. And, having a plan in place – if the unexpected occurs – can help minimize disruption, support your team’s well-being and reduce financial risk.
Key elements of an effective succession plan
Keep an organized database: Your database is the backbone of your business. Ensure it’s up to date and thoroughly organized, with contacts segmented into groups like active clients, past clients and referral sources, including lenders, stagers and other agents within your sphere of influence.
Track Key Performance Indicators (KPIs): If organized correctly, your database can reveal where your deals come from and your annual returns and average commissions, among other KPIs that reveal consistent or improved performance, benchmarks over time. Tracking KPIs gives potential buyers insight into the health of your business and its potential for growth.
Manage your finances like a pro: It’s critical to have a strong handle on and understanding of your finances. Creating annual budgets and monthly Profit and Loss (P&L) statements to track revenue and expenses helps keep you on target to meet your goals. Businesses with consistently strong financial performance will be most attractive to potential buyers.
Clearly document systems and processes: Buyers will want to see Standard Operating Procedures (SOPs) in place for lead generation, client conversion, listings and client management, along with all the other processes in your business. Clear, efficient and easily replicable systems make the business easier to acquire and scale, increasing its appeal.
Ensure cultural alignment: While it is often overlooked, it’s important to find a buyer who shares similar values and service standards. For example, a business that serves first-time buyers may not be the best fit for a luxury real estate operation looking to expand. Similarly, companies with inclusive, team-oriented cultures will not align well with top-down leadership models. Buyers will be keen to retain the sales and operations staff, which is critical to sustaining performance results.
Valuating your business
Businesses are typically valued using a multiple of annual net income averaged over the past three to five years, excluding periods of unusual fluctuations, like the pandemic. Multiples typically range from two to five times net income. The key elements listed above will influence the multiple.
The transition model also impacts valuation. Sellers who exit immediately, while not recommended, should be willing to accept a lower valuation. It is preferable to support your successor in a multi-year transition, which can garner a higher price.
How to find the right buyer for your business
If you have a trusted brokerage owner or manager, your first step should be to discuss your options with them. They can likely offer guidance, review your succession plan, and help you identify potential buyers. When it comes to local recruiting trends, your brokerage owner may be well-positioned to help you make connections.
You can also look within your own team. In many cases, the best buyer for your business is someone already working with you. Leveraging talent on your current team ensures continuity and minimizes transition time, maintaining consistency for your clients, staff and sales team.
How to successfully transition your business
The ideal transition period is two to five years, depending on the size and complexity of your…
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