Often when people contemplate business ownership in real estate, they think only of the obvious options – finding an existing business to buy, which really means buying a rent roll, or starting a business from scratch. Either way there are significant costs and significant risks. Sometimes circumstance will make these options unviable. But there is another, less considered way to achieve business ownership which has unique benefits to all parties involved.
It’s called succession planning. Another word for it is continuity planning – it’s the process whereby a business is readied for someone from within to take it over. There are major benefits to both the salesperson looking to eventually own the business, and the outgoing principal.
Whether you have your own real estate business already or are just thinking about the possibilities, maximising your return equally involves long term wealth creation planning as well as the day to day cash-flow of the business. To do both effectively, start by considering a business entity as something separate to its current owner.
Ideally, the business is a bit like a roundabout, where different owners are able to jump on and off without losing momentum. You jump on with a view to taking over a business, and you jump off when you’re at the point of retirement and ideally, selling your business. Whichever point you’re at, if you stop for a minute to consider this analogy it could have a big effect on your bottom line and ultimately your long term wealth.
First let’s look at the salesperson who will become the new principal. If you are able to join a business as a salesperson where there is the opportunity to own it in the future, you get to establish yourself within the local area and the business itself prior to actually buying it. This means you can build up your personal cash-flow and your reputation all the while learning the business’ unique systems and personalities.
Where a succession plan is properly executed, the outgoing principal will teach and mentor you as to how to best operate the business. When the time finally comes, the handover will be seamless and the risk of failure greatly minimised. The business will cost more than just the value of the rent roll as there will be continuity in the profitability of the sales business, but you’re paying more because you’re getting more. To balance this out, it’s often possible to work out a financial arrangement with the outgoing principal which suits you both.
Next let’s look at the outgoing principal. A real estate business’ value to an external prospective purchaser is effectively the value of the rent roll plus a nominal depreciated amount for fixture and fittings. For a more in depth discussion of the value of a business, click here . The sales business normally has no value, with one significant exception; if you have an effective succession plan, your successor will be taking over a sales business which does have a tangible value, because the changeover in ownership will be seamless. Staff and customers will be expecting and prepared for the change and any disruption to the business and its cash-flow is likely to be minor.
Tony Warland, Ray White’s Director of Recruitment, says many principals in the real estate industry do not have an exit strategy in place.
“In my opinion, not having a succession plan is just avoiding the inevitable – things do change and no-one owns a business forever. When the time comes to pursue new interests or retire, those principals without a plan end up having to sell the business they have spent years building up for only the value of the rent roll. Meanwhile new operators are starting sales businesses from scratch, which is hard work and slow to become profitable. The obvious solution is to match up successful salespeople who have good ownership prospects with principals who are likely to be exiting within the next few years – it’s a win-win for everyone involved. We have seen it work time and time again.”
Tony also says it’s not unusual to see flexible financial arrangements being made.
“The buy-out might take place over two or three years for example, which means the incoming principal doesn’t need to come up with a large amount of cash all at once. In one recent case, a principal actually gave his successor half of the sales business gratis a couple of years before retiring on the understanding the salesman would buy the other half when the outgoing principal retired.” Tony added.
Chris Mourd from McGrath Northern Suburbs says in his experience, a business which is being sold through a succession plan is worth between 25-50% more than it would be otherwise.
“The new principal is paying for traction and continuity and gets to hit the ground running. In a properly executed succession plan, it’s just business as usual. Clients and staff shouldn’t notice any difference from one day to the next when the changeover takes place. The process works for all parties” Chris said.
