Becoming a Better Business Broker Day 26: Optimizing Business Brokerage Profit
Welcome back to Becoming a Better Business Broker in 30 Days!
This concise series title describes exactly what we hope you get out of it - becoming a broker that can close more deals with less work.
Yesterday we changed things up and chatted about Broker Work Life Balance.
Today, we're getting back to our capitalist roots and talking about the good ol' fundamentals of a business - profit. More specifically, how you can optimize your cash flow as the owner of a business brokerage.
Building a 20% EBITDA Brokerage
Brokers do a wonderful job of presenting the EBITDA of our clients, but a terrible job of optimizing the EBITDA of their brokerages. Granted, solo-broker shops don't really have an EBITDA - they have a personal income. So if you are a solo-broker, this paragraph really isn't for you.
But if you're a brokerage completing $30M+ in annual deal volume. There is no reason why you can't target an EBITDA margin of 20%. Besides the commission split with your Brokers, there are few fixed or variable costs in selling a business.
This is unlike residential real estate, where you have signage, flyers, and other promotional marketing (anyone used a drone shot to sell an HVAC business?). Whereas businesses require a CBR or CIM and maybe an online listing (this cost is eliminated with a strong buyer database).
But let's use real numbers to develop a brokerage pro-forma:
Before you scoff too hard - understand the above represents an optimized brokerage. Not your current situation, we also know brokers who operate at a 20% EBITDA margin - so we know it's possible. But here are a few of the assumptions:
If you are analytical - you are likely stuck on G&A expenses representing only 30% of Gross Profit (or 15% of Total Revenue) - so let's break it down. Now, this obviously doesn't consider every small item (which is why we added a 5% buffer). But here are the big ones - and how you can optimize them:
1) Advertising
2) Salaries & Wages
3) Technology
4) Office & Travel Expenses
While we recognize this pro-forma is aggressive - after we broke it down - did it seem a lot more feasible? We also realize that cost optimization is all fine and dandy, but the more difficult aspect is achieving a high enough volume of closed transactions.
So how do you close more deals? In our opinion, it starts with automating your Brokerage so your Brokers can focus on closing more deals.
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Below are a few ways to automate your operations.
Streamlining Your Brokerage Operations
To avoid sounding redundant, we won't repeat all our previous advice on how to automate your business brokerage. But if you haven't read our earlier articles, we highly encourage you to read:
If you haven't read the above - here's the skinny. Where are the areas you can cut the fat? (yes that was intentional).
Places to start are automating repetitive tasks, outsourcing non-core activities, and adopting cutting-edge brokerage software (like DealBuilder) to reduce administrative overhead and free up your time to focus on closing deals.
Focus on High-Margin Services
Not all deals are created equal. Some require the same amount of work but yield much higher margins. Optimizing your profit means generating a high volume of sell-side leads - most of which you will need to turn away. As covered on Day 3 - filtering sell-side leads is essential for getting the best results for your brokerage.
Cultivate Repeat Business and Referrals
Acquiring a new client is significantly more expensive than retaining an existing one. Foster relationships with your past clients to encourage repeat business and referrals.
Optimize Your Pricing Strategy
Are you leaving money on the table with your current pricing strategy? It might be time for a review. Consider adjusting your fees to better align with the client and make sure you are staying competitive in your local market.
Conclusion: Become a Profitable Business Broker
While there were a lot of assumptions made in this article (let us hear it in the comments if you think we have it all wrong). By streamlining operations, focusing on high-margin services, cultivating repeat business, optimizing pricing, and investing in your brand, you can significantly enhance your Brokerage's profitability.
As we continue our journey to becoming better business brokers, remember that profitability is foundational to achieving work-life balance, re-investing in our business, and making a meaningful impact in our clients' lives.
Stay tuned for Day 27, where we'll explore a very profitable strategy, Pitching PE Roll-ups. As we gear up for the final stretch of our 30-day journey, let's keep our eyes on the prize: building a brokerage that's not only successful but also sustainable and fulfilling.
If you want to learn more about optimizing the profit of your business brokerage with DealBuilder, please visit our site or book a demo here.