If you’re thinking about selling your real estate business, but you’re not sure where to start, then you should definitely get advice from an expert. That’s what we’re doing today.
On this episode of the Agent Exit Podcast Renee Williams is joined by Rick Krebs CPA, author of the book Sell Your Business By Design, Not By Default. Rick is an expert in small to medium size business sales and acquisitions. Join Rick and Renee as they discuss how to launch your confidential sales process, rather than just listing your business for sale.
They’ll also discuss the advisory team roles, how to structure your sale, and the most common pitfalls sellers make. Listen until the end for a wealth of solutions that will help you sell your real estate business for top dollar.
Selling Your Real Estate Business For Top Dollar With Rick Krebs
Rick J. Krebs, CPA, is super awesome. He is the author of Sell Your Business By Design, Not By Default. That is the book that we are going to be reviewing. He is the Cofounder of Business Sales Group, a mergers and acquisitions advisory firm which he manages and serves as a sale-side advisor to business sellers. He likes to develop tax reduction strategies for business sales to reduce taxes. He is a member of the CAPS Trust advisory team and co-owner of My Biz Value, a business valuations firm.
He has been quoted as an expert at selling businesses in Forbes.com and advising clients since 1993. He not only advises clients but educates other CPAs, bringing out of obscurity, tax-saving strategies and teaching continuing education classes about mergers and acquisitions through the UACPA. This guy has done a lot. Needless to say, we're going to have a great conversation with Rick and we are looking forward to it starting.
We have with us Rick Krebs, CPA. He is the author of Sell Your Business By Design, Not By Default: A Guide to Selling Your Business for More Money. Welcome, Rick.
I'm happy to be here. Thank you, Renee.
You have given us this great resource. Can you tell us about your career and what made you write this awesome book?
I started my career as a CPA. I got a Master's and Bachelor's degree in Accounting. I was in public accounting for years and I got tired of counting other people's money. I wanted to go make some of my own. I left that and then I got into selling mortgages and mortgage banking. We started a little company called Liberty Mortgage. We were licensed in 23 states and decent-sized. There were three of us and one of the partners wanted to go nationwide. I didn't feel like that's the path we should take. I ended up selling the company but I didn't have an advisor, broker or anyone to help me.
It's like in real estate when you can get those FSBOs. Those people just go and stumble through a sale. That's exactly what I did with my business. Your business is usually the largest financial transaction of your life. I fumbled and messed it up. We ended up getting attorneys trying to get paid and it was a mess. I learned how to sell a business by selling mine the wrong way. There were many mistakes we learned. You learn more from your mistakes than you do from your successes.
Make sure to mind your exit, not blind your exit.
I got into business brokering and started selling smaller businesses. We moved up and sold larger businesses to lower mid-market. I've done this for many years. I get a lot of questions from both buyers and sellers. I'm just one person. We have a small firm here and I can only help so many people. I wanted to write the book to make sure that other people who are considering the sale of their business didn't make the same mistakes that I did not hiring the right advisor, thinking about taxes or getting it done when it should.
The less favorable outcome, if you don't do it right, you're going to stumble through it like FSBO in real estate. They may get it done but then they end up in court or with buyers. It's the single worst decision of their life. It's so stressful. I'm like, "Selling a business does not have to be that way." That's what this book is about. It's about selling it right, minding your exit, not blinding your exit, setting it up properly for maximum dollars in their pocket and the most beneficial outcome that they can achieve.
I liked the FSBO analogy. We are a family of real estate agents here, brokers and team leaders. We get the FSBO analogy. You don't know what you don't know. Many people make so many mistakes when they're trying to sell their homes on their own. Why in the world would we think that we could sell our business without any help? I'm thinking about this too. Your background is a mortgage broker.
I was working with real estate agents all the time and title agents. I have a strong real estate background prior to selling businesses.
You can relate to everything it is that we go through with the type of business that we have. We have feast or famine, cycles where we're up and down in our business. We also have to contend with bookkeeping and recordkeeping. All of those things are super important. As far as the book that you wrote about Selling Your Business By Design, Not By Default, how specifically can this book help me if I'm an experienced real estate agent, broker or team leader, been doing this for 15, 20 or 30 years and I don't even know what to think. How does this book help me in my industry?
It can help you in a number of ways. Let's talk about the philosophy in preparing for an exit because that's what it's about. It's a transition and exit. At some point in time, you want to retire. I have a philosophy called sell then built. That sounds backward from what you would think. The reason I say sell then built is when you start, you start with the end in mind. You think about what's your real estate agency needs to look like to a buyer. What the book does is helps you through that process. It helps you see how a buyer will look at your business and how they're going to value it. It goes through a lot of different things about the transaction through a buyer's eyes but it also has tips for you as a seller, the things that are going to make your business worth more.
For instance, you're talking about real estate agents. They're salespeople. They love to work with people. Typically, salespeople are not good accountants. You have minimal requirements for compliance with your state agencies and most agents keep up with that. They keep their files, all of their documents, addendums and everything together but they don't do a good job with accounting. Since it's not your area of expertise, you want to have a CPA or an outside bookkeeping firm to keep your books. One of the four biggest mistakes I see that sellers make is they don't have good books and you're busy.
As an agent, you're out there. You're meeting with people, working nights and weekends. Everyone that's good is busy. They're working 24/7. Vacation, what's that? We heard about that years ago. In the busyness of it, you have to hire these professional people to handle the back-end office. One of the main things is your books and accounting. Another thing that I talked about when you think about the end in mind is you have to think a little bit about your number, where you like your business to be used. Is it selling for $1 million, $500,000 or $10 million? What is that number? I would suggest that you do a valuation of your business now and look at it.
I have a valuation service as well. We do valuations for $500. They're dirt cheap. We look at it. We see what that number is now and then you think, "What steps do I need to do? What roadmap do I need to follow to get you where you need to be to hit that number?" If you don't have a target in mind, you're never going to hit it and you're going to go along. A lot of people I see approach the sale of their business like they do their taxes. They cross their fingers, close their eyes and hope for the best. You don't want to deal with this so you kick the can down the road. When you kick it down the road for ten years, how can you expect to have a good outcome with that?
I'm so sad to see people who don't get good outcomes, don't sell it right or prepare for that because they make some money on it but it's like your house. You're going to make $500,000 or $2 million. How you fix it up and you think about that with your business. If you look at a piece of real estate that you're buying, you're like, "What can I do if you're flipping it? What can I do that's going to maximize the value?" We put in a new kitchen. Those are dollars that make sense. "Do I put it in the above-ground swimming pool?" Absolutely not. Same way with your business, you've got to know what steps to take to maximize the value of your business. That's what the book will teach you.
Let's get into the book because I love this book. I'm a busy entrepreneur like all realtors are. I like that it had lists because they made it an easy read. There are lots of lists in different chapters. Let's go through the sections. I'll read what they are. From each section, we'll pick something to talk about. Section 1, how do I prepare to sell my business? Section 2, the process of selling a business. Section 3, sales structure, types and compensation. Section 4, what increases the value of my business before I sell? Section 5, taxes and how to minimize. Section 6, managing and choosing your advisory team.
You mentioned the four common mistakes made by sellers. That is in section one, “How do I prepare to sell my business?” I'm going to read what those are and then we expound. "The four most common mistakes made by sellers. One, having poor financials. Two, changing the deal after it is agreed upon." We call that re-trade in real estate investing. You never re-trade. "Choosing poor advisors and number four, not being realistic with pricing." Let's dive into having poor financials. The book says, "Internally prepared financials are not going to cut it for most buyers. At the very least, you should have financials compiled by a CPA." Can we dig a little deeper into what that should look like?
There are different levels of financial reporting. The low, rock-bottom level is for taxes. That is where most people's financial reporting lies. They do the minimum and send everything to their accountant once a year who does the taxes. The next level from that is internally prepared financials where you have someone inside or an outside bookkeeper that prepares your monthly financials. The next level up is called a compiled financial. That is where you send everything to your CPA. They prepare financials either on a monthly, quarterly or annual basis. Those financials have the CPA's letterhead on them. They're not audited but they're a much better presentation of your financials.
If you're considering a sale, that will make your business look a lot better than other businesses out there. If you do annual ones, it will cost you anywhere from $1,200 to $1,500 a year to do this but it's money well spent. With the house analogy, that's like carpet and paint. It's like you put that out there and it exponentially increases the value of your business by having that. That's why I recommend it. You don't to be bothered in your review but a compiled financial.
Start your business with the end in mind.
What if I haven't done that? What if I'm thinking about selling my business but I haven't had a CPA go through my last few years? I have them all through a bookkeeper or internally. Can I hand all of that to a CPA now and have someone do that? What price range would I be looking at depending on the size of my business?
You can do that. You can go back and do the historical for the last couple of years. Depending on your CPA, I would plan to spend $1,200 and $1,500 per year to do that. Since they're doing multiple years, it may be less. You can shop around a little bit. You don't necessarily have to just use one CPA. Tell them, "I need some compiled financials." I would talk to 2 or 3 and see how much they're charging. If you go during the summer, they're not as busy but if you ask them in March, they're going to growl at you and it would be a high price. Now, they're trying to fill their staff and schedules. They're much more likely to reduce the price or give you discounts for doing multiple years like that.
We're going to move onto section two. We talked about the process of selling a business. The book starts with Chapter 7, 14 Steps to Selling Your Business. We're not going to talk about all fourteen. Ladies, if you wanted all fourteen, you got to buy the book. I want to talk about step number three, which is valuation assessment and timing. The book says, "This process generally requires either a formal valuation by an independent outside third-party or an informal valuation performed by the advisor. Be prepared to present at least three years of financials and tax returns." Does that information that we received back from the CPA inform us on what the price is or how do we get to the valuation from there?
If you're looking to list with the company or a broker, one of the first things they're going to do is a valuation. They will give you that number and won't charge you as a general rule. I will warn you. A lot of brokers, their MO is they ask you first what you think your business is worth and then they will list it for that even though it's high priced to get the listing. I say, “Get an outside person who doesn't have a vested interest in selling it. Give me a number,” and that will give you a realistic number. That's one of the mistakes that sellers make. They overprice businesses. Brokers feed the fire because they like to tell people, "Your businesses were $10 million," when it's only were $6 million.
As real estate agents, it's the same way. It's going to sell for what the market will bear and what buyers are willing to pay. They do that to get the listing. Over time, they or the market beats them up and then they reduce the price down to what the market will bear anyway. Know that there's a lot of that going on out there. You need a realistic number so you can determine if that's high enough. Is that where you need to be? If not, what do you need to do to get you there?
Are there comps available? I'm thinking like a real estate agent now. Should my broker be providing me with comps of other businesses of similar size that have sold? Should those comps be in my area or commercial real estate is based on ROI? How do I know what's appropriate for my business?
There aren't comparables that are readily available. With real estate, you have a Multiple Listing Service. You can pull up Zillow or any of those services, RealEstate.com. With businesses, it's private. In order to get comparables, you have to subscribe to services. A broker or someone that's in the business will have access to those comps and you can certainly ask for them, "Let's look at the comparables," because there are fewer comparables to rely on, you have to increase the scope.
Oftentimes, you'll see nationwide comparables that are used instead of the local comparables because you have a lack of comparables in your immediate area. That's okay. You can look at the nationwide ones and those will work with the business because a real estate office in Houston, Texas is worth about the same as a real estate office in Denver, Colorado, for instance. It will sell about the same multiple. There are some geographic discrepancies. LA or New York has certain metropolitan areas but as a general rule, the nationwide comparables are okay.
The next question is sales structure, types and compensation. Under this, we have Chapter 17, 8 Common Types of Seller Compensation. In those, I'm going to list the eight and if you can answer a quick question for me. Here are the eight. Cash, cash with seller note, earn-out, profit sharing, 100% seller financing, board membership payment, consulting fees and equity rollover. Of those eight, for a real estate broker, team lead or agent, which makes the most sense for us to use?
I want to talk about 2 or 3. The first one, when you sell a business, very seldom do I see that you sell for 100% cash. That was number one. We all love to be paid, throw the keys on the counter and sail off into the sunset but very seldom does that happen. I would go ahead and plan on this as a seller but you have to have some type of seller note. Usually, it's cash and a seller note. Like with real estate, a seller note is paid behind the first mortgage lien that they will usually have with the bank. You have what's called a UCC filing.
More often than not, I would see an inside person buy out the real estate agency. With attorneys, CPAs and dentists, you see these professionals oftentimes groom someone from inside to take over. When you do that, that's a great way to sell because you already know the buyer but oftentimes they don't have the money to do it. You're either looking at SBA financing or they'll finance 75% and you would carry back 20% or 25% or you'll see 100% seller financing. I would see that as a more common scenario with real estate agencies than I would in an all-cash scenario.
That brings us to succession planning. I know that talking about seller compensation, the way that the seller is paid, if I'm going to promote someone who is going to take over the business and they need to do 100% financing, would a person in your role help me structure like, "What does that look like? How many years should I expect to receive those payments if it's an internal person? How do I come up with the number?"
You can get someone in the business like me. I'm a structure and a deal guy. Oftentimes, people will come to me and hire me to help with the structure. We put together the template. We turn it over to an attorney to formalize it and make sure that all the T's are crossed and the I's are dotted in any state laws that are specific to your area or your state are complied with. Typically, you'll see anywhere from 3 to 5 years. I negotiated one that was a seven-year payout which is longer than normal. It's going to depend on your goals. “Do you want to leave tomorrow or do you want to stay, work and transition?” You can negotiate that however you like. You can do a long payout with fixed payments, like a lease payment. Maybe you're getting a few thousand dollars a month. You have to define your roles.
Here's something that's very important with this. As you enter into an agreement, you have to think about the end in mind. It's like a prenuptial agreement. You've got to think, "How do we break this thing up? If I sell to my partner and five years into it he puts pain, what do we do?" Those are the types of things that a good attorney will have in your document but you have to plan on the worst-case scenario and have that in all of your agreements how to get back out or if they die. If a couple of years into it, they have a tragic accident and pass away, you need some life insurance requirements in there or you're bought out. There's a lot to think about with these. I'm happy to help structure that.
You've got to know what steps to take to maximize the value of your business.
Those are things I had never even considered. That was good information. As we move on to section four, what increases the value of my business before I sell it? This brings me back to the mindset of being a real estate agent who is coaching a client to prepare their house for selling. We want to make sure that we declutter and we have it ready with cookies baked so that it smells great when buyers come through. We want to make sure that we do some staging and fix it up so that it looks good. As far as me selling my business, there are a couple of things that you have listed here. There are eight but I just want to talk about two of them. This is from Chapter 18, Market Timing Versus My Timing. Let's talk about that first and then I would like to talk about management.
I'm all about timing. What I mean by that is many of us have invested in real estate. You buy a stock low and you're trying to wait for the precise moment when it's at the highest point before it goes down. That's when you want to sell. Timing tha1t is very difficult. It's nearly impossible. Same way with your business, timing when is the best time to sell. I'm more about preparing your business and getting it ready for sale. Once you've done that then it's the right time because the market is going to go up and down but I've seen market fluctuations and a recession. Businesses sell during a recession as well as they do at other times. Good businesses do. They might suffer a little bit less but they still sell. I'm about preparation, getting it right and timing it right when you are ready versus trying to time the market.
This is the excerpt from the book. For value driver number one at Chapter 18, Market Timing Versus My Timing says, "Clients often ask me when the best time is to sell their business. I tell them that it's not as much about market timing as it is about your timing. You'll find that listing your business based solely on market timing is a fruitless endeavor. List your business when your business is ready to be listed. Take the time you need to prepare so that when you list your business for sale, you don't just list it. You launch it." What does launching look like? Can we get a snippet of what that is?
Launching is all about preparation. It's getting it ready and doing the financials as we talked about in compiled financials. Think of it as a house. You go in your house, clean, prep and get it all ready operationally and financially. Once it's all ready, you hire a professional broker that's going to take that and they're going to get it in front of thousands of potential buyers in the first few days. That's one of the things that I do. I don't know if my competitors do. We take the time to get it ready and then get the teaser ready. It's marketed confidentially. You don't put a sign out in the front. That's the last thing you want to do. You can't let employees or anyone know that it's for sale. It's marketed through this teaser to thousands of people. When they start asking questions, you're ready to answer those questions because you've done all your prep work.
There's one other thing I wanted to bring up that is important. Your business has to run better in your absence than it does in your presence. This is a hard one because you're hands-on and I am too but you have to start growing that and running your real estate agency not as an agent but as a CEO. You're working with the buyers and sellers less. You're more working with your people, helping them and being a manager. The other mistake I would see people make in real estate is they name their agency after themselves. Once you're gone, they always wonder who that person is. Chiropractors run into the same thing. Dr. Bill Smith, instead of something chiropractic that's not a name. I would look at changing the name up a little bit so once you left, it doesn't have your name and face on it as much. It has that as an island, for instance.
Everybody's mind is blown. I've been told my whole career, “I'm the face.” People buy from people they know, like and trust. I have to be the face of the business. Now, you're telling me, in order to sell the business, it can't be me. I want to put some thoughts in people's heads that I've seen done before. I've known people that have had great businesses, hundreds of millions of dollars in sales, who have done rebranding where they change the name of the team. They were still very active as the lead agent or team leader. I'm making this name up. I'm going to say, Mary Jane.
Let's say Mary Jane has been in business for twenty years. It's always been the Mary Jane Team. If Mary Jane is in Southwest Houston then perhaps Mary Jane may want to consider changing the name to the Southwest Houston Team, Southwest Houston Realty or some name representing the area that you serve but Mary Jane is still the primary person in the business because she did it before she was ready to make the transition a couple of years before. The clients knew that the name changed but the person was still the same. Two years later, she started to slowly phase out of business. By the time she got to 25 years, she was ready to step out of production, leaving the name Southwest Houston Realty. I'm making that up. I'm sorry if there's an actual Southwest Houston Realty. I'm sorry for borrowing that. I'm in Houston so I picked a name.