The recent recovery in the housing market has led to a sharp rise in the value of residential sales businesses. Letting businesses have been selling for good prices for some time but, for the last five years, there has been almost no demand for residential sales businesses. I would confidently predict that 2014 will be the year that this changes.
During the downturn, over five thousand estate agency offices ceased trading and many more businesses ran up significant losses. There was a huge over-supply of businesses for sale and virtually no buyers. As a result, the value of even the best businesses fell to almost nothing. A few canny buyers picked up some top quality businesses for little more than the value of their pipeline but for the most part, there was no market. Now, this has suddenly changed.
Residential sales businesses will never sell for as much as letting businesses. The reason for this is that sales income is seen as more volatile and is much more dependent upon the skill of the branch manager. Landlords, on the other hand, are usually very loyal to their letting agents and if an excellent manager is replaced with a mediocre one, most landlords will stay with the business.
It is also quite difficult to build a new letting business from scratch because of the difficulty of getting contact details for the landlords. Touting, canvassing and leafleting don’t work and even if a landlord does want to change agents, they will not usually do so until their current tenant leaves which might be a year or more away. As a consequence, buying a letting agency is seen almost like buying an annuity which is why letting agents are usually valued on a multiple of turnover rather than profit.
The performance of a residential sales business, however, is much more dependent upon the ability of its manager. A bad manager can kill the profitability of a branch in less than a year and a good one can create a profitable business from nothing almost as quickly.
Nevertheless, a well run estate agency business with a strong and consistent profit record will now sell for three to four times pre-tax profit and the very best businesses can sell for significantly more than this (look at the price that Foxtons achieved). It is six years since prices like this were last achieved so if you were thinking of selling your business, now could be a very good time to do so.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for twenty-five years.