Before the Story
This book turns on one question. What does it take to build a firm that runs without you, and why does a buyer pay twelve times for one firm’s fee earnings and two or three times for another’s?
The answer fits in one line, and I would like you to keep it with you from here to the last page.
What your firm is worth = recurring fee earnings × the multiple a buyer will pay × (1 − the founder discount)
Each part of that line is something you can move.
Recurring fee earnings are what the firm earns whether or not it closes a deal this year.
The multiple is how confident a buyer is that those earnings will keep coming. Fees that keep arriving and a written way of deciding raise it.
The founder discount is how much of it a buyer expects to walk out the door with you. Judgment on paper and a named successor shrink it.
Underneath sit two moats. The moat of people keeps the value in the founder and a few busy heads, and it leaves when they do. The moat of platform keeps it in the process and the record, and it stays when they go.
I believe this because of Ernie Wittich. My career started at a publicly traded REIT, and Ernie, one of my bosses there, taught me what sound judgment looks like and what it takes to produce. He would ask me to print the Argus and Excel output, and we would sit for an hour or more going line by line: every tenant entry, every lease escalation and expiration, every CAM pool and recovery calculation, every key-tenant ROFO, ROFR and expansion scenario. Then he would take a yellow legal pad and an HP 12C and rebuild the P&L by hand, checking my modeled output as we went.
Every so often he found something off, an inconsistent formula or a mispriced risk that could have cost us the returns we had promised. Once, a weighted-average cap-rate error led me to overprice a six billion dollar residential portfolio acquisition by three hundred million dollars in our underwriting, and Ernie’s hand check caught it. Ever since, I have asked myself what happens to that proof when Ernie is out of the room. A platform is the answer: the checking and the record are built into how the firm works, so they hold when any one careful person is away, the founder included.
Today agents can do much of the line-by-line work Ernie and I did together, overnight. On a real platform that is a blessing, because the work has rules to follow and a record to check against. On a weak one it spreads the mess faster.
In the pages that follow you will watch one firm, a Sun Belt apartment sponsor with a good record, move each of those three levers, one rung at a time.