Buying a small appraisal business....

[Mark K]

I know a local real estate office was purchased by a regional franchise for approximately 125% of the previous year's net income. This was an office with 18 agents and 4 owners with a good local reputation. Price about $200K and the agents stayed for minimum 2 years and got 100% of their commissions in that time. All four moved on after the two years.

I can't see a 3-person appraisal office having a lot of market value to anyone but you. I'd offer to pay them a % of the net profit for a short time, maybe 2 years max.

OTOH, I certainly would prefer to be in the position of selling an appraiser's office in this environment rather than buying. Take a real good look at the writing on the wall.

 

[tdw.375]

Yeah, you haven't revealed enough for us to help you.

Yes, I would agree.

Why does the owner's name have to retire after they sell the business? Do the orders come in to X name appraisal company, and you are the appraiser who does the work? Do these partners sign on and supervise your reports, or is it your name alone that signs the appraisal?
Some of that might answer which clients would stay on if they sell the company to you. Maybe they could stay on as silent partners -as I suggested and others have as well, base it more on a monthly percent to them over X limited years - if the business declines, the amount they get would decline - idk what they area charging to sell the business - 10k and done is okay, 100k not so much.

I've been appraising with them for 5 years, with orders just now starting to come in my name. Most of the orders come in the wife's name, maybe 70%, and the remaining 30% to the husband. Every appraisal that comes through, I touch and work on, and add a clause in the form about the work that I've done. Several of the banks know who I am and are in the process of getting me on their panels. We work from their home office. I use their computers, software, and equipment and we split the fee.

The goal is to get as many orders in my name this coming year and into the next as possible, that way the AMCs and banks are familiar with me. Since maintaining orders is not a guarantee, I don't think its as valuable as I originally thought it might be. At this point, the business is essentially a "key-person" business, where if the key individual goes, so does the business; hence our efforts to get my name on as many orders as possible.

As far as "the writing on the wall," I'm unsure if I wholly agree with that sentiment. There will always be room for those who embrace and utilize new technology as it comes out to make their business more effective and efficient, and that is one of my goals. I just got the them to use an ipad for photos, and still working on getting them to use the ipad to sketch, so I think there is some areas we can streamline and make more effective and efficient.

I appreciate everyone's thoughts and input.

 

[ucbruin]

Yes, I would agree.

I've been appraising with them for 5 years, with orders just now starting to come in my name. Most of the orders come in the wife's name, maybe 70%, and the remaining 30% to the husband. Every appraisal that comes through, I touch and work on, and add a clause in the form about the work that I've done. Several of the banks know who I am and are in the process of getting me on their panels. We work from their home office. I use their computers, software, and equipment and we split the fee.

The goal is to get as many orders in my name this coming year and into the next as possible, that way the AMCs and banks are familiar with me. Since maintaining orders is not a guarantee, I don't think its as valuable as I originally thought it might be. At this point, the business is essentially a "key-person" business, where if the key individual goes, so does the business; hence our efforts to get my name on as many orders as possible.

As far as "the writing on the wall," I'm unsure if I wholly agree with that sentiment. There will always be room for those who embrace and utilize new technology as it comes out to make their business more effective and efficient, and that is one of my goals. I just got the them to use an ipad for photos, and still working on getting them to use the ipad to sketch, so I think there is some areas we can streamline and make more effective and efficient.

I appreciate everyone's thoughts and input.

Have you or the current owners asked the clients if they'll continue giving you assignments....
And what type of license do you think you'll have by the time the owners retire....

 

[Sadie]

IMO, you are just buying the client list. And you don't need to do that because you know who they are and they know who you are. Why not just give them an agreed upon commission, for an agreed upon amount of time, then be done? That way they can retire and have a little bit of extra income for a while and you aren't stuck with financial obligations related to their business.

Or, just leave and start your own business, work for a while (probably for cheap), then approach their clients. That would be kind of a crummy thing to do but it is an option.

 

[tdw.375]

Have you or the current owners asked the clients if they'll continue giving you assignments....
And what type of license do you think you'll have by the time the owners retire....

Each time the owner speaks with a client, they tell them that I am now CR and can start receiving orders. If I don't get any from them for a few weeks, they follow back up with the conversation the next time they speak with them. I'm currently Certified Residential, which is where I'll be when they retire.

 

[tdw.375]

IMO, you are just buying the client list. And you don't need to do that because you know who they are and they know who you are. Why not just give them an agreed upon commission, for an agreed upon amount of time, then be done? That way they can retire and have a little bit of extra income for a while and you aren't stuck with financial obligations related to their business.

Or, just leave and start your own business, work for a while (probably for cheap), then approach their clients. That would be kind of a crummy thing to do but it is an option.

We had discussed giving them a percentage of the work that I do for a set period of time after they step away. After that discussion, they mentioned selling outright; they like the idea of nothing being in their name and they could truly step away and retire. Unfortunately, I don't think their business is worth as much as we originally thought, since, as everyone has mentioned, there is no guarantee that the clients stay when they go, or that orders will continue to come in.

Leaving and starting my own business and leaving them hanging is out of the question and not an option, respectfully

 

[Sadie]

We had discussed giving them a percentage of the work that I do for a set period of time after they step away. After that discussion, they mentioned selling outright; they like the idea of nothing being in their name and they could truly step away and retire. Unfortunately, I don't think their business is worth as much as we originally thought, since, as everyone has mentioned, there is no guarantee that the clients stay when they go, or that orders will continue to come in.

Leaving and starting my own business and leaving them hanging is out of the question and not an option, respectfully

The second option was noted as being a crummy thing to do to them. You probably want to keep them in your corner because you are still pretty new at this and will need some mentoring. Better them than the AF. Heck we all need mentoring at certain times.

 

[tdw.375]

The second option was noted as being a crummy thing to do to them. You probably want to keep them in your corner because you are still pretty new at this and will need some mentoring. Better them than the AF. Heck we all need mentoring at certain times.

Yes, they are great people and have raised me in the business. We're trying to work out your classic "win win win" situation.

 

[J Grant]

Hopefully you will work something out with them!

 

[chad hampton]

There's a lot of financials that goes into buying a business. I would start by hiring a business consultant - they will analyze tax returns, P/L statements, accounting paperwork, business plan, etc. And similar to buying a house, going to a bank to borrow to buy a business goes through UW. Small business bankers know what businesses are worth based on the paperwork.

I've considered buying 2 businesses over the years (not appraisal businesses) and in a partnership now to buy another. Haven't gotten the numbers to work on the first 2 and the current one not looking good. Just like houses, sellers are emotional. But for me (and partners) and our business consultant, it's just about numbers.

I really don't know what value there is in a residential 3 person appraisal business - once the founder leaves, what will keep the clients there? You are rural you said, where else will they go but you when the founders quit? I don't see how they have much leverage in this deal. Honestly, there's a difference between buying a business and buying a job. Your situation seems like you're buying yourself your current job. But maybe you don't need to buy it to keep it, If that makes sense? But take the business consultant's advise.

I assume you made them decent money over the prior 5 years? Maybe they will just pass the clients onto you when they want to stop? Or maybe you come to agreement to keep them on as consultants and pay them a certain amount per file/per hour/per whatever for their assistance? Or like you said, pay them 20% of the profit for the first year and 10% the second year? Or whatever the numbers you feel comfortable with? What I would never do it write them a check and them watch them leave. You could end up in a hell of a hole.

I've always felt this profession is best suited for small 1-2 person firms. Small and local.