How to Sell Your Client List
How to Sell Your Client List
You’ve worked hard throughout your sales career and enjoyed a high level of success. Now, it’s time to retire and enjoy the hard-earned fruits of your labor. As a career-long real estate salesperson, do you have anything to sell at retirement?
The answer is yes. After spending years building and growing a loyal client base, your client list—also known as your book of business or goodwill—has value. How do you determine its value, and what is the best way to sell your client list at retirement?
Marcus T. (Tim) Allen, who holds a doctorate in real estate finance and economics from the University of Georgia and is author of the popular college textbook Real Estate Principles, 7th Ed. (Dearborn Real Estate Education, Chicago), offers advice in the Q&A below. Since 1992, Allen has served on the faculty of Florida Atlantic University in Fort Lauderdale, Fla., teaching bachelor’s and master’s level courses in the Real Estate Degree Program in the FAU College of Business and is a director of the FAU Office of Real Estate Research and Education. He is a member of the REALTOR Association of Greater Fort Lauderdale and the Society of Commercial Realtors of Greater Fort Lauderdale.
Q: When is the best time to retire? All other factors aside, is it better to retire in an up market or a down market?
Allen: As you know, retirement is a very personal decision. Not only must the retiree have the economic resources to live comfortably after retirement, he or she must also be emotionally ready for a lifestyle change. In general, the value of a salesperson’s book of business will be greater when the “ business” in the book is most active. That is, if the book contains mostly prospective business with sellers, then it will likely be more valuable in a sellers’ market. On the other hand, if the book contains mostly prospective business with buyers, it would tend to be more valuable in a buyers’ market. Anyone contemplating retirement and considering selling their book of business in some fashion would be wise to consider the nature of that business and prevailing market conditions.
Q: A brokerage’s client base, which is bundled into what they call “ goodwill,” has value in many brokerage sales transactions. Does a salesperson's book of business have value?
Allen: Yes, I believe so. In the language of value theory, a salesperson’s book of business, like any other economic resource, may have value in the marketplace if it is desirable, relatively scarce, and can be exchanged. Listings and pending contracts and leases qualify as scarce and desirable resources, but these are technically the property of the broker in most states and cannot be sold by the salesperson. On the other hand, the contact information and personal knowledge held by a salesperson on prospective buyers, sellers, tenants, etc., is likely to be tradable since it belongs to the salesperson and these things are obviously relatively scarce and desirable. To the extent that such contact information and knowledge have potential to generate future earnings for a salesperson who possesses it, it may have significant value in the marketplace.
Q: How do you determine the value of a salesperson's book of business?
Allen: As is the case with any financial asset, the dollar value of a salesperson's book of business depends on the future income stream the book can be expected to generate over time. Discounting that projected future income stream—at a discount rate that reflects the risk or uncertainty of actually receiving that income projection over time—is the best way to estimate present value.
For example, suppose a retiree’s book of business has potential to generate $5,000 per year for each of the next three years to the acquirer. Discounting that future income at a discount rate of 30 percent per year yields a total present value of $9,081. The percentage discount rate depends on how great a rate of return the acquirer demands for giving up money today in exchange for potentially larger amounts in the future from the retiree’s book of business.
Q: What are the criteria that add value to a book of business?
Allen: Certainly the quantity and quality of the information possessed by the salesperson affects the value of his or her book of business, but other factors also contribute. Having “goodwill” with 50 potential buyers for $100,000 properties is likely to be less valuable than having 10 potential buyers for $10 million properties. The same logic holds for information and relationships with potential sellers and tenants as well. The nature of the properties the prospects are interested in and capable of acquiring, selling, or leasing must be taken into consideration when forecasting the income stream from a retiring salesperson’s book of business. Prevailing and expected future market conditions also are important determinants of how much income can be expected from a salesperson’s book of business. The more income that can be generated from a book of business, the more valuable that book becomes. An extensive client and customer list may not be very valuable if the real estate market hits the doldrums in a given area.
Q: Should you sell your client list at retirement?
Allen: If the salesperson is ready to stop working immediately, cashing out by selling the potential income that could be generated from his or her goodwill certainly can be a rational decision. Some salespeople who are nearing retirement opt to gradually slow down long before officially retiring. The issue becomes how and where the retiree plans to spend his or her time in retirement. I’ve known several successful salespersons who reach a point in life when they choose to “semi-retire” and continue to work their own book of business long after they have stopped aggressively working to build new business.
Q: To whom should you sell?
Allen: Keep in mind that the income stream that could actually be generated from a retiring salesperson's book of business depends on who acquires it from the retiring salesperson and how well the acquirer can perpetuate the retiree’s goodwill under his or her stewardship. The more income the acquirer can expect to generate, the more valuable the goodwill. Finding an acquirer whose work ethic and personal style matches the retiree’s would likely maximize the future expected income stream.
Salespersons thinking about retirement should start observing other salespersons who might be good “replacements,” given the retiree’s client and customer lists. Younger salespersons who have good potential but have not yet developed their own book of business are excellent prospects. I’ve known some retirees who pass their book of business to younger family members who are in the business.
Q: How do you draw up an agreement?
Allen: I’m sure most competent real estate salespersons could negotiate the terms of a simple contract involving a sale/purchase of a retiree’s book of business on their own, but if the deal structure gets complex, an attorney’s services would be certainly be advisable.
Q: What should the agreement cover?
Allen: The agreement should clearly define what is being sold. Perhaps the deal includes just the names, addresses, and other information contained in the retiree’s client book. Or, the deal might include tangible items as well, such as computer equipment, office supplies, or marketing materials. The agreement also should specify the payment arrangements.
Q: How would the payment arrangement work?
Allen: There are many ways to structure the payment arrangements. For example, the parties might agree to a one-time, lump sum payment, or possibly a combination of a lump sum amount followed by future payments as deals are closed based on contacts from the purchased book of business. The future payments could take the form of referral fees or actual commission splits for deals that result from retiree’s client and customer lists for a certain amount of time after the book of business is purchased by the acquirer. The payment structure would depend on the assets being sold, the preferences of the parties to the deal, and their negotiating skills. To get top dollar, the retiree should be willing to wait until the acquirer generates income from the book of business before demanding full payment. For example, a relatively new salesperson may be willing to pay more for the book of business if he or she were given time to earn money from it, rather than having to pay for it before the book of business has generated any income.
Q: Are there tax implications with selling your book of business?
Allen: Yes, death and taxes are facts of life. A good accountant can better explain the tax ramifications of a proposed transfer of a salesperson’s book of business.
Q: For how long should the payment arrangement be in place to minimize tax liability?
Allen: That’s a great question for the accountant! Tax considerations associated with retirement can be complicated. Keep in mind that the proceeds from selling a book of business are likely to be treated as ordinary income. If the retiree’s ordinary income tax rate is expected to drop the year after retirement, it might be wise to delay receipt of some or all of this income until the next year. Again, this is an important issue that deserves the attention of a qualified tax accountant.
Marcus T. (Tim) Allen, Ph.D., is a Florida Licensed Real Estate Broker and a Florida State-Certified General Real Estate Appraiser (RZ2591). He maintains an active private consulting practice that provides valuation and investment support services to brokers, appraisers, attorneys, auctioneers, accountants, and investors. His academic curriculum vitae is available at http://www.fau.edu/~mallenand can be contacted by e-mail at firstname.lastname@example.org.
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