Profitability and leadership
Revenue Is Vanity. Profit Is Sanity. Cash Is King.
What building an estate agency taught me about the difference between looking successful and running a healthy business.
There is a particular kind of satisfaction that comes from seeing your boards everywhere.
The phone is ringing. The diary is full. Instructions are coming in. You are hiring people, winning business and becoming a name in your town.
I know that feeling. I started DM & Co. Homes from scratch in Solihull in 2013 and grew it into a business generating more than £1.5 million in annual revenue.
I also know that a busy agency can absorb an enormous amount of money, energy and time. The view from the pavement does not tell you what is happening in the bank account.
That is why, when I talk to agency owners now, I want to understand more than how much they are turning over.
What does the business keep? When does the money arrive? And what does the owner have to do to make it all happen?
Starting cheap made sense. Staying cheap needed questioning.
When we launched, our fees were around 0.6% to 0.7%. We were trying to establish ourselves in a competitive market. We made ourselves available, responded quickly and worked hard to give people a reason to choose a new agency.
There were practical things, too. An open office. Someone at the desk while someone else was out canvassing. Relationships with local shops. Boards that helped generate more boards.
Those habits helped us build momentum. But the economics of a small start-up do not automatically work for a larger business.
A fee that feels acceptable when you are doing much of the work yourself can look very different when it has to support a valuer, a negotiator, administration, sales progression and an office.
As the business changes, the commercial model needs to change with it. Otherwise you can build a much bigger machine that still earns too little for the work it does.
The extra instruction is not the whole calculation
Here is an illustrative example, with all figures excluding VAT.
An agency completes 100 sales at an average collected fee of £3,000. That produces £300,000 in sales fee income.
If the average collected fee rises to £3,500 and completions remain at 100, income becomes £350,000. That is another £50,000 before any additional costs associated with achieving it.
To produce the same fee income at £3,000 per completion, the agency would need roughly 117 completions.
That means more instructions to win, more viewings to arrange and more transactions to progress. It may also mean additional staffing or marketing costs.
Of course, raising fees is not a magic trick. Conversion may change. Your proposition has to justify the price, and the team needs the confidence to explain it. Some instructions are worth accepting on different terms.
But owners should understand the choice they are making. Another deal is not always the most effective route to a better result.
Look at the average fee you actually collect, after negotiated reductions. Then look at how much work and cost sit behind it.
A bigger turnover can hide a weaker business
Consider two hypothetical agencies.
Agency A generates £750,000 in annual revenue and makes £30,000 in operating profit. Agency B generates £450,000 and makes £90,000.
On those figures, A has a 4% operating margin. B has a 20% margin and three times the operating profit, despite its lower turnover.
For that comparison to mean anything, both businesses must measure profit consistently, including a realistic cost for the owner's work. An agency relying on its owner working full-time for very little pay can appear more profitable than it really is.
The smaller business may be financially healthier. You would still want to examine its cash, recurring income, risks and dependence on the owner before reaching a conclusion.
Revenue tells you the scale of the business. It does not, by itself, tell you the quality of it.
Growth needs a purpose
I enjoy growth. Building something from nothing is exciting, and seeing a team develop is one of the most rewarding parts of owning an agency.
But growth brings commitments. People need paying every month. Offices, software, portals and marketing continue to cost money whether that week's sales complete or not.
Sometimes investing ahead of revenue is sensible. A new colleague or a developing lettings operation may take time to become productive. The mistake is treating every increase in cost as proof that the business is moving forward.
Before adding a cost, ask what it is intended to achieve and when you will review the result.
Will the hire improve conversion, release capacity or reduce the owner's workload? Will the software replace another system or improve a process that people will actually use?
“We are growing” is a reason to examine the numbers more carefully, not a reason to stop asking questions.
A sale agreed does not pay the wages
Sales pipeline is encouraging. Cash received is what allows you to meet commitments.
An agreed sale can take months to turn into a collected fee. Some transactions fall through. Others complete later than expected. Meanwhile, the work and overheads continue.
That gap deserves its own attention. A healthy profit figure does not guarantee that cash will be available on the day you need it.
A simple rolling 13-week cash forecast is a useful starting point. Record your opening cash, expected receipts and actual payment dates. Include payroll, rent, subscriptions, tax payments and other commitments.
Use realistic completion assumptions. Then consider what happens if several anticipated receipts move back a month.
If the answer changes dramatically, you have identified something to manage before it becomes a Friday-afternoon emergency.
Part payments upfront, such as marketing or commitment fees, can change the timing of receipts where they fit your service and are clearly agreed. They still need a convincing customer proposition. They are not a substitute for fixing an unprofitable fee structure.
Recurring income changes the conversation
Building lettings became an important part of our journey after establishing the sales business.
Management income gives an agency a different rhythm. Rather than relying entirely on the timing of sales completions, part of the income arrives regularly.
That can make planning easier, but recurring revenue still has to earn its keep. Managed properties bring service obligations, administration and staffing requirements. The useful question is how much contribution the portfolio produces after the cost of delivering the service.
A growing management book is valuable when the fees, processes and capacity work together. Adding units without understanding those things can simply create another busy department.
Count the owner's work properly
One of the easiest costs to overlook is yourself.
You win instructions, solve problems, cover absences and keep relationships together. When something falls between departments, it lands on your desk.
That may be necessary while you are building. But if the business depends on that contribution indefinitely, the accounts alone may not show the full picture.
Ask what it would cost to replace the work you do. You do not necessarily need to hire that person tomorrow. You do need to understand whether the agency can afford the role.
This matters whether you have owned your business for 12 months or 12 years. Success should reflect what you want from it: income, security, freedom, growth or an eventual exit. A larger turnover is only useful if it helps you move towards that goal.
Start with a clearer picture
This month, put five things on one page: collected revenue, operating profit, average collected fee, available business cash and your expected receipts and payments over the next 13 weeks.
Alongside them, write down your working hours and the responsibilities that still depend entirely on you.
Then choose one change. It might be improving fee confidence, removing a duplicated cost, tightening sales progression or reviewing the profitability of your lettings service.
Give it an owner, a deadline and a measure of success. Knowing the problem is useful. Doing something about it is where the benefit comes from.
I have lived it. Loved it. Loathed it. But most importantly, learned from it.
That experience is why The Estate Agency Audit looks beyond revenue growth. The aim is to understand what needs to change and help you build a healthier business that works for you.
Because the goal is not simply to have more boards outside. It is to have a business worth owning.
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Want to put these ideas into practice? Explore The Estate Agency Audit and its 90-day programme.