Business valuation of real estate appraisal companies
Residential and commercial real estate appraisal firms comprise a large segment of the real estate services industry. Classified under the SIC code 6531 – 9901 and NAICS 531320, there are some 14,000 such companies operating in the industry in the US alone.
Together these professional services firms generate just over $5.8B in annual revenues employing more than 36,900 people that include real estate appraisers, managers, and support staff. Yet an average firm in this sector is small – with the annual revenue of about $415,000 and 3 staffers.
Business valuation of real estate appraisal companies
Appraisal firms serve the essential function of establishing the value of assets in the real estate industry. For many business development requires lasting relationships with local and regional lenders and real estate agents. Successful appraisal companies tend to create strong bonds with their referral sources that contribute to a steady stream of new and recurring business.
Solid earnings and profitability make these companies highly desirable acquisition targets. So if you need to value an appraisal company in your market, comparison to the recent sales of other firms in the industry sector is an excellent place to start.
if you plan to use the market approach to valuing your appraisal company, valuation multiples are the typical tools. As a rule, the multiples let you calculate the enterprise value of your company based on the selling prices and financial performance of companies similar to yours.
Here are the common valuation multiples to consider in valuing an appraisal firm:
- Enterprise value (EV) divided by revenues (net sales)
- EV to EBITDA
- Value to seller’s discretionary cash flow (SDCF)
- EV to total business assets
- EV to book value of owners’ equity
Example: Valuation of a real estate appraisal business using multiples
As an example, let’s analyze an average real estate appraisal company with these annual financials:
- Revenue: $200,000
- EBITDA: $95,000
- SDCF: $145,000
- Total business assets: $180,000
Using the valuation multiples obtained from similar appraisal firms we can calculate the business value as follows:
| Multiple | Multiple value | Business value |
|---|---|---|
| EV to net sales | 0.4499 | $89,982 |
| Value to EBITDA | 2.0107 | $191,018 |
| EV to SDCF | 1.8205 | $263,966 |
| EV to total assets | 1.2469 | $224,444 |
| Average Business Value | $192,353 | |
You may notice quite a bit of variation in the results using the different valuation multiples. This depends to a large extent on how the subject company compares to its industry peers. For example, a higher business valuation based on EBITDA may point to an appraisal company that is more profitable than its competitors.
See Valuation Tour