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So You Want to Sell Your Appraisal Business?
By Dustin Harris, The Appraiser Coach
I am contacted by my peers fairly regularly about whether it is possible to sell their appraisal business. If this is in your future, there are steps you can take today to ensure a better outcome tomorrow.
Most of the inquiries about selling businesses come from appraisers nearing or past typical retirement age. I assume some of them are looking at their retired friends who have built businesses and sold them, and who are now living the good life on the proceeds from that sale.
Appraisers are sometimes discouraged, thinking that they may not enjoy the same. Though there is some truth to the idea that the sale of an appraisal business can be difficult, like any business where the principal/owner provides most of the value, there are steps you can take in advance to make a sale more likely.
What makes an appraisal business valuable? The value of an appraisal business follows many of the same principles that make any business valuable. As appraisers, we have a certain level of understanding when it comes to value. Commercial appraisers tell me that business valuation rests on the same principles as residential real estate: what will a knowledgeable buyer and seller in the marketplace negotiate?
Here are four key factors which determine the value of an appraisal business. Remember, however, that valuation is always in the eye of the beholder.
1. Hard Assets
One of the first things to consider is the value of your hard assets. Hard assets may include a physical, brick and mortar building. In today’s virtual world where more and more people work remotely, owning a commercial building is becoming less and less typical and such an asset may or may not actually be part of a business sale, but it is something to consider. Of course, there is much more than just the building to consider. Most appraisal offices have an extensive setup of computers, networks, phone systems, desks and other office furniture. Again, these things may or may not be part of the sale, but they should be considered as potential negotiating terms that may add overall value.
2. Business Structure
Here’s the rub. Most appraisers are single-person entities, so there is diminished potential and less value for a buyer after the sole practitioner leaves. Businesses where there is one appraiser only, who will not continue working after the sale, obviously are worth less to a potential buyer. However, forward-thinking appraisers combat this by building a “structure” of human resources and procedures that creates a “well-oiled machine” which does offer a potential buyer value. If a new owner can step in, and with very little effort, keep the business going using a process or structure that has sustained itself for years, the value of a business is greatly increased.
What does your business structure look like? Can the business run itself without you? This is the ultimate question. If you have a number of appraisers and office assistants working for you, and the procedures that you have in place now allow them to function with very little supervision, you may have a business that is worth something.
Do you have a track record? Can you sit down with a potential buyer and show them statistical growth? How tightly your books are kept shows a lot about your business and about you as a business owner. Just like a used car buyer would like to see a well-kept maintenance log, a potential buyer would not want to purchase an appraisal business from an owner who does not keep track of the numbers and other crucial business data.
Finally, a huge selling point with regard to structure is your reputation. Have you kept track of positive testimonials? Do you have a Google Business Page, and are you capturing positive testimonials? Those 5-star ratings are usually attached to the business name (not the individual’s name) and will likely carry on to the new owner.
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3. Book of Business
When it comes to the valuation of businesses, the contacts and clients that you have built up in your network over time may be the most valuable asset you have to sell. However, when it comes to appraisal businesses that are formed mainly on AMC work, this becomes less of a factor. For instance, it is not difficult for an appraiser to move to a new area and start performing work quickly if their main income is AMC business. Therefore, if your appraisal business is founded mainly on AMC work, the overall value of your appraisal business is less.
However, if you have built your business mainly on non-lender or local bank connections, the valuation of your business may be higher. Furthermore, if your relations are such that you are able to hand over that trust and connection to a potential buyer, the value of your business may be much, much higher. Unfortunately, most of these relationships are built on personality, and passing this on seamlessly is not easy.
What may be transferable, however, is the ability to pass on your marketing structure. If you have spent time, energy and money building up a marketing machine that is not only trackable but sustainable, the current network of clients and potential future clients is much more marketable. In other words, if you have built up an online reputation through blog posts or helpful community service, the business name can often thrive after a transfer of ownership.
One aspect of this is longevity. How long has your company been in business, and has your reputation held up over the years? There is something to be said about marketing to potential clients by using the tagline “In business since 1986.” Furthermore, if you are a strong presence in the market, competitors sometimes buy each other out in order to eliminate the competition. If you are one of the big players in your market, you are a much better candidate for such a buyout.
Another asset is recurring business. For example, there are appraisers who sometimes have contracts with individuals or corporations to reappraise certain properties every year or three years, etc. Often, these contracts are transferable in the event the business is sold. The more recurring contracts you can obtain, the more valuable your business may be.
Finally, the diversity of your book of business is a factor. Not only should you have a variety of clients to spread the income streams among, but you should have a variety of appraisal products as well. No one client should account for more than 10 percent of your overall revenue. The more diverse you are, the better you look to a potential buyer.
4. Other Revenue Streams
Though it is not common in most current appraisal offices, it is worth mentioning that you may have other forms of revenue that can be valued and passed on to a potential buyer. For example, I know several appraisers who offer house-measuring services for agents who want to know the square footage of homes. This is a service that appraisers market and do well at. It can add to your revenues and be part of a business transfer. I also know of appraisers who put out a regular market analysis that they utilize either to build their client base or sell services outright. Can such a contribution be part of a business valuation? Yes, it absolutely can. Another service might be consulting. Perhaps you and your trained staff can assist potential buyers in their home flipping decisions.
Buying and selling a business is a big deal. Do not underestimate the potential for success or misfortune in this process. You should not attempt it without the expert help of a good business attorney and a business valuation expert. Make sure you fully understand your local laws and the fiscal decisions that need to be made in such a transaction. Doing it without forethought and planning could be the worst mistake of your life. Doing it carefully may ensure a more secure and enjoyable retirement.
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About the Author
Dustin Harris is a successful, self-employed, residential real estate appraiser. He owns and operates The Appraiser Coach where he advises and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth. His free podcast can be listened to on iTunes and Stitcher.
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