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3 Questions to Ask When Perfecting Your Pro Forma

All of a sudden you’ve made the decision to be an entrepreneur and open up your own brokerage. Like any potential business owner, one of the first things you’re going to do is ask yourself, “What is my investment and what do I need to do to offset all my costs and turn a profit?”

If you decide to open up shop by purchasing a franchise or going the independent route, one of the first things you should be doing is working with your franchisor or CPA on a pro forma. A pro forma is a calculation of a company’s assumed sales and earnings that answers the questions “What will my budget look like?” and “How long is it going to take me to be successful?”

It’s crucial to ask and answer the important questions that will most accurately depict the future of your brokerage.

What’s my business model?
First thing’s first. Decide what kind of model and compensation structure you will assume, how many agents you will need to recruit and how many transactions they will need to do per month to cover the expenses of your company.

Your business model is going to determine everything else:

  • If you’re flat-fee or transaction-based, it’s very easy to calculate what your cash flow is monthly, because nine times out of 10, you have a set monthly fee per agent, as well as a set transaction fee.
  • If you’re running a startup traditional brokerage, you must consider the time it takes to recruit an agent, how long will it take your agent to build a pipeline and how long after that it will take for a transaction to close. It isn’t until after all that time has passed that you even see a penny of revenue.

Once your business model is established, you’ll be able to determine what your potential for success might be.

Most franchisors should already have the cost of running the business determined and let you plug in to the formula to create different scenarios. At HomeSmart, it’s easy for us to project when a new brokerage will turn a profit through our cost basis, and help you see what years two and three might look like from a revenue standpoint.

What are my costs?
Since the pro forma’s purpose is to give you business performance insight, it will help you determine answers to the following questions: “If I recruit five agents every month doing x transactions, with my monthly cost of y, it will take me z months to break even—but if I go above and beyond that, what will I see in ROI?”

Begin the process of solving those variables by breaking down your cost basis:

  • Start by writing down your standard chart of accounts. Think about your current broker or the franchisor you’re looking to buy from. If you’re not sure what the costs of running the business are, ask your franchisor, broker or peers.
  • Whether you’re buying a franchise or opening independently, you know you’ll have expenses right out the gate. You need to find an office, and you have standard operating costs. Your big costs initially are going to be rent; furniture; signage; and staffing and utilities, including internet, telephones, copiers and computers. Most of these are one-time expenses. As for staffing, typically when starting out, you’re the broker/owner, recruiter and janitor until you build costs and can afford multiple employees.

Don’t forget to consider the out-of-pocket cost differences to you between buying into a franchise or staying independent.

If you’re an independent brokerage owner, you’re going to have much greater costs starting out than you would if you were with a franchise. Think about your marketing exposure. As an independent brokerage, you’ll need to hire a firm or marketing manager. With a franchisor, they’re already giving marketing materials to you—you’re not reinventing the wheel.

Next, consider the technology-driven era we’re living in, where everything is paperless. What will it cost to go third-party for all of your technology vendors? With a full-service franchisor, they’re already giving you tech. So as an independent, you’re going to have double, if not triple, the cost versus a franchise, and you want to keep costs low as you’re starting to grow and build your company.

At the end of the day, think of your value proposition. If you’re not giving agents the tools, technology and support they need to be successful at a low cost, you’re not going to be able to recruit.

How did other brokers do it?
The entrepreneurial journey to owning your own brokerage is riddled with “hows” and “what-ifs.” Learn from other companies. Ask the franchisor you’re interested in if you can speak with four of their existing brokers who were in your shoes at the start and are now successful. Ask questions like: “What were the last four franchises you had? How many agents did they have? Were they startups? Were they conversions? How have they grown in the last 12 months?”

Get the validation of success stories (and even failures), which any franchisor should be willing to give you. If you decide to go independent, speak to your peers and ask for testimonials. When you think you’ve asked enough questions, ask more.

Being aware of your costs from the beginning of your journey to brokerage ownership will help you be successful for the lifetime of your career. The more hands-on you are with your pro forma, the better of you and your business will be.

Brooks_Bryan_60x60Bryan Brooks is senior vice president of Franchise Sales at HomeSmart International, regularly facilitating mergers and acquisitions for brokerages nationwide. For more information, please visit www.homesmart.com.

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