[Read time: 3 minutes]
"Of course we're profitable," says the broker. "I take a quarter million dollars out of this business every year!"
Every so often we hear statements like this from brokers. Sometimes it's an owner who is ready to retire and wants to sell the business to one of our clients.
But when we analyze their books, we discover that although the company appears profitable on the surface, it is actually barely breaking even.
To help determine a company's true profitability, here are the first three questions we ask brokers:
If you sell, are you paying yourself the appropriate split?
Very often, broker/owners don't take their split. They leave the money in the company account, and pay themselves out of what's left over after expenses are covered.
While this helps ensure that the company has the necessary cash flow, it can mask profitability issues. If the owner is the top-producing agent, that can really skew the results.
Are you paying yourself for the time you spend managing the company?
You need to determine how much of your time is devoted to administration and management. Then you need to figure out how much it would cost to hire someone else to perform those functions. Until you hire that person (or those people), you should pay yourself the same amount of money.
Are you getting a return on your investment?
You need to have profit built in separately from your split and the money you make performing management duties. This is your return on the capital you invested to buy
or start the business. If there is no return on capital, you are going to have a hard time selling your business for any significant amount.
The bottom line is that you need to structure your business financially so that if you decided to go live on a beach in Fiji and do nothing more than sip mango daiquiris in your beach chair, your company would still be profitable.
You have to make sure that you are paid for all the functions you perform: as an agent, as a manager, and as an investor.
Once you have done that, you will be able to sell the company at a substantial profit – or hire someone to manage your business while you go off to Australia!