Real estate business for sale??? Why buy?? Should I???

Question

I didnt know where to put this.  I did some searching on the forum and found nothing on this topic. So heres the question. Well with a small background first.

My wife and I own and run a small property management business. We manage our own units about six in total. We are always looking for was to gain passive income in many differant areas of investing. So now the real question

Local Real Estate Company might be for sale.  How do we decide to buy our not?
Questions to my self are. 
Why own one?
I'm not even a licensed realtor ? (but my long time realtor is and will run the business)
How do you decide a value?? Building is on a lease, agents are able to come and go ( no long term contracts with them). 
Am I just buying a name? (Brand per say)
Is there overhead that im missing??? It seems as if it might just be little overhead, great managing broker and be a passive income.

Any info on this will be very helpful.

Joe Holloway · Answer

While I am not nearly as educated in Real Estate as most people here, I have bought and sold a few service-based businesses, in my case they were accounting practices.  Whenever you are considering buying a service-based you must make sure that you have strong Non-compete clauses, so the existing owner can't just sell to you and then start up another business doing the same thing one town over.  I would also recommend getting, in writing, a commitment from whoever is really running the business that they will be staying on.  Lastly, I believe in buy-outs in any service-based transaction, meaning you will make a down payment but a portion of the ultimate sales price will be paid to the previous owner as a percentage of net income over the next 2-5 years, or whatever you decide.

Mark Bradford · Answer

Great words Kevin. @ J Scott I am working on getting the info you are speaking of.  This is very early stage and so I bet more info will come in the near future as I get it. Ill keep you all posted. Thanks so far.

Kevin Yoo · Answer

Mark,

Although I agree running any business let alone a brokerage firm should not be done passively at least at first, it can become a passive investment if done correctly.

Let me go back to your statement: "We are always looking for was to gain passive income in many differant areas of investing. ."

A business is an excellent way to get passive income. You have to at first build it up by working very hard at it. You also have to have a good team of people that you can leverage. Seems like you have that already. If you have the drive and the desire, I suggest you jump in and seize the opportunity. If you don't and have reservations, don't do this as you may hate it and most likely fail at it.

I have several businesses myself and this year started a construction company. I know nothing about construction and as of now it is losing money. But I know a lot about running businesses and I don't plan to fail. Even if I do, I will get up and shake off the dust and get back in the ring.

Good luck.

J Scott · Answer

Have you put together financial projections based the compensation structure used for the agents, the overhead, and project income?

If you can post that, we can probably tell you if it looks reasonable...

Mark Bradford · Answer

Thanks Joe. Very helpful.  I have never bought a business. I have read alot thru the years but reading and doing are far different.

Mark Bradford · Answer

@J  Scott I'm with you on the "Brand" part of it.  If I was to start my own it would be cheaper as a start up cost. But if this " Brand" is established and has a current profit then my ROI should be quicker overall.  But if the "brand" needs rebuilt (which this one does not) why try to turn it around. I would just start my own. I never planned to be in real estate. Never even thought about a RE company. So what would be the perks or problems with owning one.  Im not looking for the problems like drama from agents and.......daily business management. I talking about legal or $$ issues and perks.

Mark Bradford · Answer

Thanks @Joel Owens. I shouldnt have said passive in running it. Sorry for that. But the owner is not the active broker in this case. Two brokers run it for her and they would stay to the best of my knowledge right now. I agree with the building side of it. So that will lower the price for sure. Is it just not worth my time and legal risk is the big question. Im trying to learn as I go here mistakes will happen. And have in other areas LOL!

J Scott · Answer

Agreed with Joel...

To add my $.02, you're just buying a brand.  If not for the brand, why don't you just start a new brokerage, lease a new building and find some new agents.  Much, much cheaper...

Now, if the brand is worth something, that's another consideration, but I'm not sure if that's the case...

Joel Owens · Answer

Nothing passive about running a real estate brokerage.

If most of the business is derived from the relationship of the principal broker then if they sell and leave many agents and clients might go also.

I do not like that they lease. At least if you were buying and they owned the building you would have a tangible asset to sell or regenerate income if the brokerage went under. With a lease you do not have any of that.

If you have millions of dollars cash and this is a 100k purchase then risk is lower. If you have 110k cash and the purchase is 100k I wouldn't do it. Businesses generally ask for 3 times net earnings. So if after expenses before taxes they are showing 100k they are asking 300k. I like to buy at 1.5 to 2 of net earnings. Put 25% to 50% down and have the carry the other 75% to 50% of the note. If they are going for all cash and not holding anything then I will go lower in price. It's the time value of cash today is worth more than tomorrow.

I want to use the least amount of my cash to generate the highest return.

Real estate business for sale??? Why buy?? Should I???

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