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:

Brokers take a 70% cut of all commissions. Brokerage uses 30% to pay for all technology + listing fees for the Brokers.
This example brokerage has 10 Brokers, each on average closing 4 deals, at an average commission of $100,000. We realize this is fairly aggressive but stay with us.
General & Administrative expenses are based on Gross Profit - which is where the 30% comes from. Far too often I hear of Brokers budgeting off Gross Revenue (when a majority of that revenue doesn't belong to them). This makes for bad budgeting, use Gross Profit.

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

We've heard of some Brokerages spending over $100,000 per month on digital advertising. However, this is not the Brokerage we modelled above. We also are confident most Brokers aren't spending 10% of their gross profit on Advertising. But if we're wrong - please debate with us on Business Brokerage HQ.
How to optimize: outsourcing is your friend on this. Find a marketing agency to run effective digital marketing for your firm (don't try to master Google Ads yourself). Have them help write blogs and outreach campaigns to potential referral partners (your best source of leads) on the sell side. But don't neglect the buy-side, remember that each buyer you add to your email list = 1 less contact you need to find via an online marketplace.

2) Salaries & Wages

This one is controversial, but consider off-shoring your admin requirements. The first step is fostering a culture of Brokers using self-guided tools (like DealBuilder) to get deals listed without an army of admin assistants doing the work for them.
We will hear push-back on the above from Managing Brokers who will worry that they don't provide enough "value" if the Broker does a lot of work themselves (i.e. the Brokerage's 30% cut starts feeling greedy). We would tend to agree, however, we would say as a Brokerage you really add your value in generating sell-side leads + providing deal mentorship. So, instead of adding a ton of salaries & wages, re-allocate your new admin budget into generating more sell-side leads - your brokers will thank you and will have time to close more deals (a great flywheel to have).
How to optimize: look at hiring a business brokerage-trained virtual assistant to take over your administrative tasks. This is achievable on a budget of as little as $500-$1,500/month for a full-time assistant. For the above example, we've budgeted 2 full-time admins to assist with the volume of transactions occurring.
Shameless plug: DealBuilder has trained overseas VAs ready to help streamline your administrative tasks - book a call if you want to learn more.

3) Technology

With the recent integration of Deal Studio + DealBuilder you now have a system capable of covering 90% of your technology needs. You can read about the final 10% and what technology we recommend for Business Broker here.
Based on this, we tried to keep our cost estimate conservative, adding additional costs for marketing deals on BizBuySell or other directories, and the other death-by-a-thousand-subscriptions we all suffer from 🥴

4) Office & Travel Expenses

Since COVID-19 Sellers are more comfortable working in remote environments than ever before and don't 'need' to see your bronze-covered offices to be impressed by your capabilities.
How to optimize: consider operating a remote brokerage with regular weekly meetings being done via Zoom and then in-person meetings done monthly at a Hotel or Co-Working meeting space.

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.

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.

Automate: Use CRM systems to automate client follow-ups and lead management.
Outsource: As we covered on Day 14, outsourcing tasks like administrative work, marketing, and even some aspects of the due diligence process by using agencies, virtual assistants, and Deal Associates. As mentioned above, VAs can cost as little as $900 to $1,500/month for a dedicated assistant who is highly competent and hard-working.
Adopt Tech Solutions: Invest in industry-specific software that can streamline deal management, from initial listing to closing. A great place to start is using a robust CRM like from our friends at Deal Studio.

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.

Specialize: Carve out a niche where you can command higher fees due to your specialized expertise. This also leads to a higher rate of word-of-mouth referrals as you are positioned as the 'industry expert' on the deal.
Package Services: Offer bundled services that provide value to your clients and increase your per-deal revenue. For many Brokers, this may include legal or SBA referrals to buyers.

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.

Stay in Touch: Use email newsletters and social media to keep your brokerage top of mind.
Offer Incentives: Create a referral program that rewards clients for sending new business your way.
Build a Network: Regularly engage with your professional network of lawyers, bankers, and accountants to stay on their radar for 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.

Market Analysis: Regularly assess the competitive landscape to ensure your pricing reflects the value you deliver.
Value-Aligned Pricing: We have recently explored value-aligned commission models. I.e. there is a reduced commission (say 7%) at a baseline purchase price (say $2M) but anything above the benchmark is at a higher commission (say 12%). You will need to be selective with whom you offer this pricing model (clients likely to receive multiple offers).

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.