Pipeline, Client and Agent Retention, Among Other Factors That Carry Weight

Determining the value of a CRE brokerage is a complex process which can involve a wide range of metrics. After gathering feedback from SIORs who cover a broad span of international markets, it’s clear that while financial performance is understandably a key consideration, other more subtle measures of what sets a brokerage apart also come into play.

“Valuing a small commercial real estate brokerage business like my own company is typically approached by analyzing its financial health, assets, and potential for growth,” says Tobias Schultheiß, SIOR, managing partner at Blackbird Real Estate GmbH, in Königstein, Germany. and vice president of the SIOR European Chapter. “This involves several key steps like analyzing revenue, client base stability, market share (if at all), and operational efficiency.”

A commonly used approach in Germany, he adds, is valuing the business as a multiple of earnings or revenue like EBIT or EBITDA. “For small brokerages, considerations might also include the strength of the brand, local market reputation, and the expertise of the team, as these ‘soft’ factors can significantly influence value in a competitive market,” he explains. “I often hear that small brokerage firms with less than 5 people do not have a value at all because of the dependency on key people like the owner.”

Sunny Sharma, SIOR, broker at Vertical Marketing Realty Brokerage in Markham, Ontario, Canada, notes a few different ways that brokerages can be valued. “You can take the net income of the brokerage and use a multiple of 2 to 3 depending on what the buyer wants to get or what the seller can get on a 2 to 3-year return,” he says. “Maybe there’s cash up front, maybe you need the first year, the second for balance, and the third-year profit. Also, further dismantling the net income figure; how many ages is this income derived from, and where exactly is it coming from?” He points, for example, to monthly dues, transaction fees, etc. “Are 5 agents out of 20 producing or are all 20 producing?” he poses. “It can come down to what it is you pay per agent; I’ve seen that.”

But as Daniel L. Spiegel, SIOR, senior vice president & managing director for Coldwell Banker Commercial in Chicago, notes, it’s not always about the dollar that counts the most. “As a franchisor of commercial real estate companies, we encourage our owners to look at dimensional diversification to create enterprise value,” he shares. “Examples may be diversification of services (brokerage, property management, capital markets, maintenance, auction) or diversification of skills and backgrounds of brokerage professionals, or diversification of asset classes served. Businesses which have a mix of annuity and cyclical revenue tend to have more value to the acquiring company. We also like firms to consider bringing [in] a broad group of equity partners so the success is not contingent on a sole individual, and there is a group interested in the long-term growth of the business.”

BREAKING DOWN THE PROCESS

Any analytical process involves metrics, and evaluating a brokerage is no exception. What are some of the metrics recommended by SIORs?

“Key metrics are multi-year revenue trend, revenue mix or diversity, normalized net income, multi-year profit margin, portion of the business which may be cancellable (e.g., with management contracts) and contract terms of key leaders or revenue producers,” says Spiegel.

“Try to figure out where the NOI (Net Operating Income) is from – is it from commission? Transaction fees? Is it the old 90-10 rule?” Sharma advises. “Then at least I can figure how much you pay per agent.

In some cases, he continues, rebranding could be a metric – are you buying the brokerage to re-brand, or to incorporate it into a family of your own brokerages? For example, he shares, “I’ve seen agents sold to a Century 21 brokerage.”

The bottom line, he says, is this: “Analyzing where the income is coming from is a key factor in whether you want to pay one time, two times, or three times plus a $1,000 bonus per head.” Schultheiß says the following metrics are often used for valuing a small brokerage company:

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Multiple: “For small brokerages, multiples can vary widely depending on market conditions, but often range between 4–6 times EBITDA,” he says. (EBITDA is a key indicator of a company's performance and ability to generate cash.)
• Revenue Multiple: Sometimes a revenue multiple is used in combination with an EBITDA multiple, Schultheiß says. Depending on market conditions, a revenue multiple might range from 0.5 times to 2 times, with stabilized, higher-margin firms achieving the higher end of this range, he adds.
• Gross Commission Income (GCI – similar to turnover): “For brokerages, GCI is the total commission earned and is often a more relevant indicator than revenue since it represents the actual fees generated by the firm,” notes Schultheiß. “Tracking year-over-year growth in GCI, as well as GCI per agent, can give a clear picture of productivity and potential for future growth.” Client Retention Rates: This, he explains, is not a quantifiable metric, but it is an indicator for quality, long-term client relationships, and can stand for reliable income streams and strong client loyalty, which can support a higher valuation.
• Agent Retention and Productivity: “A key metric for brokerage firms is the retention rate of agents and their average productivity (e.g., GCI per agent),” says Schultheiß. “Lower agent turnover and higher productivity generally reflect strong management practices and an attractive work environment, which adds value.”
• Pipeline of Deals: “To me this metric is most important, since a healthy pipeline reflects future revenue potential and a sustained client base,” Schultheiß observes. “It’s essential for small brokerages, as it assures buyers or investors of a steady income stream.”

“NON-REAL ESTATE” FACTORS CAN IMPACT VALUE

SIORs note that there are factors not specifically related to real estate that can impact the perceived value of a brokerage.

“The essence of the real estate servicing business hasn’t really changed; however, we encourage firms to consider how they position themselves to incorporate technology change into their businesses,” says Spiegel. “And while change may be embraced at any age, a diverse group of individuals with varied skillsets already looking at new ways of servicing clients may add value to an acquiring firm.”

Schultheiß absolutely agrees that technology can be a critical factor, while enumerating several recent developments impacting valuations:

• Technology Integration: Firms that have successfully integrated technology such as CRM systems, data analytics, AI-driven prospecting tools, are often valued higher due to their potential for efficiency and scalability, he asserts. “Technologically integrated firms can streamline client engagement, marketing, and transaction management, making them more appealing to buyers,” he claims.
• Focus on ESG (Environmental, Social, and Governance): “With the rise of ESG, brokerages actively participating in sustainable practices or focusing on socially responsible projects might enjoy higher valuations, particularly from investors focused on impact investing,” he adds. “This may not be as important in the U.S., but in Germany and Europe, ESG is a big thing!”
• COVID-19 and Hybrid Models: The COVID-19 pandemic has also emphasized the need for adaptable operational models, Schultheiß observes. Brokerages with strong digital platforms and remote working capabilities are likely to command higher values due to their resilience in volatile conditions.
• Data-Driven Valuations: “Increasingly, brokerages are turning to data analytics for predictive modeling, allowing for better forecasts of future earnings and improved risk assessments,” says Schultheiß.

THE CHANGING VALUE OF BROKERAGES

Of course, it’s rare for the value of any commodity to remain stagnant. How has the value of commercial real estate brokerages changed and why?

“I think there is more professionalism and training involved in today’s world of real estate,” says Sharma. “Our value from a broker perspective has gone up for individuals, and hence I would think [for the brokerage as well].” The fact that transaction fees have gone up and the price of industrial property has doubled in the past 5 years hasn’t hurt either, he points out.

The value of a brokerage can change significantly based on market dynamics, operational improvements, or shifts in demand, says Schultheiß, offering these examples:

• Adding a new high-performing team or adopting cutting-edge technology can positively impact value by enhancing productivity and competitive positioning.
• For small brokerages, recent years have seen value shifts tied to the move towards digital solutions, client demand for data transparency, and increased competition. As a result, firms that have invested in technology, data management, and efficient client service models may have seen an increase in valuation.

“One of the biggest challenges when valuing a brokerage business is dealing with two key unknowns,” says Spiegel. “The first issue relates to how much of the business is concentrated into the relationships of a few individuals and any uncertainty as to how long those individuals will remain in the business and if they will be retained. The other issue is to what extent is the profitability of the firm contingent on a certain level of transaction activity -- which is contingent on varying economic conditions. The value of a business continues to fluctuate around these 2 key issues, along with synergy or savings opportunities.”

ADDING VALUE TO YOUR CLIENTS

Of course, to a significant degree, the value of a brokerage is in the hands of management and its team – not only in terms of performance but in terms of consistently adding value for their clients. How are SIORs doing that?

“We encourage our firms to look at the full life cycle of a real estate asset and consider how the firm’s services add value to the client in multiple ways,” says Spiegel. “Just like a bank would like to offer a consumer checking, mortgage, investment management and a credit card, a real estate services company needs to consider having multiple engagement points with clients to create a more valuable business.”

“We regularly facilitate CCIM courses in my brokerage, and other brokerages come to the classes I offer; some we charge for, some are free,” Sharma shares. “We’re raising the bar as far as value by raising the education of our brokers, as well as that of others.”

“At Blackbird Real Estate, we prioritize client relationships, ensure transparency, and provide market insights in order to build trust and loyalty, which in turn stabilizes revenue streams and supports long-term growth,” says Schultheiß. He further breaks that down as follows:

• Market Intelligence and Data Analysis: “We use data analytics to offer clients unique market insights and help them make more informed decisions, which improves client satisfaction and retention.
• Comprehensive Client Support: Providing a full suite of services - from site selection to lease negotiation - positions the brokerage as a one-stop shop, increasing value by strengthening client relationships.
• Proactive Communication and Transparency: “This is a key element: Effective communication builds trust, particularly for clients dealing with complex transactions,” notes Schultheiß. “At Blackbird Real Estate, we invest in regular client engagement and transparency.

In summary, he says, the value of a brokerage company is not only determined by its financial performance but also by its reputation, client relationships, operational efficiency and adaptability to current trends. “The ability to meet client expectations and deliver superior service directly influences its attractiveness and valuation in the market,” he concludes.

This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.

CONTRIBUTING MEMBERS

• Tobias Schultheiß, SIOR
• Sunny Sharma, SIOR 
• Daniel L. Spiegel, SIOR