Determining the right sales price for your title agency is a challenging feat. There are a dozen or more valuation methods, so which one is best? This article looks at many title agency valuation methods and the popular profit-multiplier method with an in-depth guide to help you.
Potential buyers want more than answers about estimated overhead and costs. They want to know how much they can make from the business during the first day, week, month, and year of ownership and five, 10, or 15 years down the line. Profits and other elements are what will establish your agency’s true worth. Keep on reading to work out your valuation today:
What Is Profit?
Profit (put simply) is the money made by a business. It’s the difference between the amount earned and the amount spent in buying, operating, or producing something.
With the profit-multiplier method, “profit” means the financial gains a new owner can expect after purchasing your title agency. This means the estimated profit never includes income brought to the business that is unique to the current owner or accrued nontransferable expenses or debts.
A new owner might need the business relationships or ties to the community that helped acquire a large portion of income. Additionally, the new owner is not responsible for repaying current business loans. As a result, you should never add numbers related to these calculations. For example, only use expenses typically seen as “general” business costs.
Other Factors that Impact Profit
Title agency valuation via the profit-multiplier method requires the current owner or manager to consider a wide range of influencing factors. Consider the items below for an accurate price when calculating your sales value.
– Management: If management impacts current profits positively, the seller needs to account for this when determining the business value. Conversely, a buyer needs to know the time, money, and effort required beyond the purchase to maintain existing earnings. This way, buyers understand the current staff techniques and production processes while ensuring the correct revenues are achieved.
– Location: Sellers may increase the price if their agency location is relevant to maintaining customer relationships. Additionally, in a purchase market, it is essential to maintain “closing offices” that parrot the footprint of the agency’s clients. Having these offices will, in fact, impact valuation.
How to Use the Profit-Multiplier Method
The actual calculation is simple and requires easy-to-locate data. Take the net income or profit earned by your title agency each year, either the average amount for the last two years or the last year, and increase that number by a multiplier based on the industry. For our industry, the multiplier for 2023 ranges between 3 and 6.5:
(PROFIT x MULTIPLIER # = ESTIMATED VALUE)
For example, a title agency with an estimated profit of $1M has an estimated value between $3M and $6.5M after using the multiplier.
It’s crucial to account for current circumstances that caused revenues to increase or decrease to a level outside the norm. Using unreliable numbers based on unique events gives potential buyers a false sense of profits and losses.
This is the first in a series of articles on title agency valuation. Our next article will cover how to arrive at an accurate multiplier.
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