Q. I WANT to sell my small real estate business to my son, who is going to take over next year once I retire. I am depending on this payout for my retirement, but at the same time want to provide a fair and reasonable price so that he can make the best go of it. Any tips on how I can go about this?
A. As a business owner looking to retire on the revenue generated from the sale of your business, the best advice I can give you is to figure out the amount of money you'll need to fund your retirement and then calculate the value of your business.
Depending on the type of business, a valuation would be calculated as a multiple of either earnings or revenue. Generally, a real estate agency is valued on the strength of the rent roll as it offers predictable annuity income.
At present, rent rolls attract a multiple of three to five times gross commission with the multiple determined by several risk considerations including landlord concentrations, renter demographics and location.
Goodwill can also come into play when valuing a real estate agency and could be a percentage of commissions earned from realty sales. But this is a higher risk component of the valuation because it's unpredictable and generally more dependent on uncontrollable market factors as well as reliance on the exiting vendor.
The valuation calculation ascribed to real estate commissions can be handled in a few different ways and because of its relative complexity, I'd highly suggest speaking to a financial adviser or qualified accountant to take you through it. A professional adviser can calculate both your business's worth and your retirement needs and then offer advice on the best strategy for you.
It's worth mentioning that banks will often lend about 60 per cent of the valuation of a real estate business so that you as the seller could leverage the business to part-fund the acquisition price. That will help you with your retirement planning and cash flow during this transition. Good luck.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road. His advice here is intended as guidance only.
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