How profitable is the business?

There are many different ways to value a business, and some of them lead to wildly inflated expectations from business owners. A common way for letting agency businesses to be valued is on a multiple of the turnover of the business. Sometimes this turnover is divided between recurring income from management and one-off income from lettings, with different multipliers applied to each.

However, even if your letting agency is turning over a significant amount, if it is not making any profit, or only making a small profit, then what is it really worth?

Think about it in terms of a return on investment for the person buying the business. A buyer is going to put money into your business. They could put that money in any number of places and expect a return on it. A key indicator for them will be how quickly they will recover all of the money they have invested. How many years will they have to wait to get the money back and start to make some profit on it?

Whatever figure a buyer arrives at, he will divide it by your annual profit, and that tells him how many years he waits before he has his money back. Your turnover does not enter that calculation anywhere. Investors, and business owners are investors, will typically want their money back in two to three years, or maybe five years at the most for a very secure business.

So the thinner the profit, the lower the price has to be before those sums work at all. Which is how two agencies with the same turnover, in the same town, with the same number of properties on the books, end up worth very different amounts.

Even if your letting agency is turning over a significant amount of revenue, if it is not making any profit, then what is it really worth?

What has changed since this guide was written

That expectation has hardened. When money cost almost nothing to borrow, a buyer could afford to be patient about the return. Now that borrowing costs real money, every year he waits to get his investment back is a year he is paying for.

The practical effect on you as a seller is that offers are lower than they would have been a few years ago for exactly the same business, and the buyer is not being difficult. He is pricing what the money costs him. The way to move the number is to improve the profit, not to argue about the multiple.

What about the potential?

You might think that your business should be considered more valuable because of the huge potential you see for growth. Any buyer will likely take the view that if the potential was that easy to realise, then you would have exploited it already.

So while new buyers may buy potential, they are unlikely to pay you for it. What matters most to them is the current profitability of the business. If you want to achieve a good price for your letting agency, then that profitability will need to be clearly shown.