It might be natural to think that signing a large account is good for your property management business. It certainly can be, however, there is a point when any one customer can represent too much of your overall client mix.
Why is this a problem?
It’s not an issue—until it is. You may have staffed up to support the workload and lined up vendors accordingly, but that also means your business could face significant disruption if that account is lost. Even with a strong relationship with the property owner, factors beyond your control—such as a sale of the properties, changes in health, or family circumstances—can quickly make that business disappear.
If you’re considering selling, this concentration becomes even more critical. A potential buyer will scrutinize your customer mix and may walk away altogether or present a significantly discounted offer.
I learned this lesson the hard way. Years ago, I acquired a company that had almost 20 percent of its portfolio tied to one owner. Within days of closing, the owner used the sale as an opportunity to pull his business. There was no time to make changes, and we certainly didn’t have time to make mistakes. He simply took advantage of a change in ownership to take his properties to another company.
That deal, which significantly reduced the value of the company I’d bought practically overnight, taught me a lot. The first lesson was that every contract I signed with an owner had to include terms that protected my interests against bad luck and capricious changes of mind.
I’m not suggesting not taking on that whale of a client, but I am suggesting taking steps to mitigate the risk.
To avoid a similar predicament, here are some of the ways a property manager can protect themselves:
Include an assignability clause. An assignability clause in a contract dictates whether a party can transfer their rights and obligations to another party. These clauses allow for the transfer of contractual duties in situations like mergers and acquisitions. It makes changing company ownership immaterial to the customer’s commitment.
Include non-compete and non-solicitation clauses. If you sell your company, you can make the business you’ve been developing part of the deal. For instance, if an owner you’ve been working on for a year decides to sign with your former company, you are entitled to a referral fee. If you still have properties under management in the market, you can require the new property manager to refrain from soliciting their business for a specific period.
Include a claw back clause. If I had had a claw-back provision in my sale agreement, I’d be entitled torecover some of the money I paid for the company when the owner canceled his contract. Claw back clauses also protect you from misrepresentation, unethical conduct you uncover later, and other issues the seller might have withheld from you.
Change the way you structure your fees. A change that helped protect my company’s interests was redefining when my fees were due. Now, all the fees over the term of the agreement are due and payable upon signing. I can, and do, elect to collect them periodically (monthly, for example), but if the owner decides to terminate the contract, I can collect the revenue that I’d be entitled to until the original term ends. You can also include a notice period for terminating the contract, which serves the same purpose. You’ll be entitled to continue collecting several months of revenue and buy some time to look for units to replace what will be lost.
The rule of thumb for the property management industry is to ensure that no small number of owners control more than 15-20% of your income stream. Growing and diversifying your portfolio organically takes time and resources, so it’s important to make changes to the way you’re writing your agreements to mitigate risk. Start now, because it can be a slow and gradual process to change your contract language with each owner.
In some cases, having a niche can be an asset for a portfolio. You might be dominating a desirable neighborhood or specific price point in the market, and buyers will recognize the value that adds to your company. But be aware that if you’re focused in a small area, a change in local laws or policies can eliminate your revenue stream with the stroke of a pen. A great example is cities that decide that short-term rentals are no longer allowed. You can’t predict the future, so for the most part, diversifying your geographic reach, your customer base, and your asset classes is a smart strategy.