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Owning and operating any company is hard work, but if you’re reading this, chances are that you know property management companies can be especially challenging because you’re also in the people business. Some days, you might even wish you weren’t. In those moments, it can be hard to tell if your thoughts about selling are the beginning of a serious decision  – or just a reaction to a bad day.

There are plenty of reasons PM company owners don’t make a call to a business broker every time they think about selling. Here are my reactions to some of the remarks I hear most often.

I’m not ready to leave the business for good  – it’s too early to talk about selling. I just had a bad week, and next week will be better. I don’t want to waste a broker’s time if I’m not really ready to sell. This is very common thinking, but next week (or next month or next year), you may have the same thought, and you’ll be that much further down the road. It’s almost never too early to start planning to sell your business; in that way, it’s like estate or retirement planning. The sooner you start thinking about your goals and making a plan to achieve them, the better off you’ll be.  One of the best pieces of advice I ever received was, “build your business to sell, even if you don’t plan to do so”. 

Financial advisors often say, “The best time to start planning for your future was five years ago. The second best time is now.” Even if you’re three years out from selling, you’ll spend those years armed with information that will give you a greater chance of achieving your goals.

I’m worried that if I start discussing my plans, the word will get out and hurt my business. This is a valid and understandable concern. Confidentiality is critical when you’re discussing and planning a sale. You don’t want your clients or competitors to start doubting your commitment to the business. You don’t want your employees to worry about job security and look for other work. You don’t want to attract tire kickers before you’re ready to get serious about a deal.

Those are all important factors, and PM Broker Group understands that better than anyone. Confidentiality is job one for brokers; they couldn’t stay in business if they didn’t handle confidential data properly. You can be assured that your initial conversations won’t become common knowledge, and executing a  Non-disclosure Agreement is common practice to establish a level of comfort and assurance. 

What if my business isn’t as valuable or well-run as I think it is? Many owners worry that once they open up their books to someone else, some shortcomings could be exposed.  It could be a little bit of an ego check, but the worst case result will be identifying areas for improvement. It’s important to know that this first discovery call is very “high-level”, and  about your business in general. We won’t dive into your personal financial situation or how well-organized your filing system is. 

What we will talk about is how healthy your business is now: Are you growing (or planning to?) What are the strengths of your portfolio and your staff? If you could change anything about your business, what would it be?

We’ll also talk about your personal and professional goals. Why are you thinking about selling? When do you believe you’ll be ready to exit the business? What do you need to fund your retirement or the next phase of your life? Would you be willing to stay in the business if you had a partner who could infuse cash and help the business get healthier or bigger?

Knowing what you want and need from a sale is step one. Step two is knowing where you stand right now. How close are you to that goal? A broker’s opinion of value is an informal valuation based on high-level financial analysis and market conditions, as well as looking at comparable companies that have sold within the last year. 

The best part of starting the conversation early…..? If your company is probably not going to sell for what you’d hoped, you’ll still have time to invest resources to grow its value. An experienced broker can also set up consulting services and advise you on what potential buyers are looking for and ways to increase your profitability before you put your company on the market.

Even if you’re not sure this is your year to sell, you’ll come away from your discovery discussions clear on your goals and armed with data. That puts you in the driver’s seat when you do get ready to sell. 

If I can help, a good first step is to get a complimentary and confidential opinion of value. 

If you’re considering putting your property management company on the market, staff may be one of the pieces you’re evaluating. Should you add or subtract staff before the sale? 

The answer will vary between companies and situations because there are multiple sides from which to view it.  Do you have so many people on staff that your NET income is lower than it should be, or do you personally take on so much responsibility that your bottom line appears to be artificially high compared to a new owner who doesn’t intend to be working fully in the business day to day? Do you take on someone new who will have a new boss in a few months, or do you strip your workforce down to the bare minimum so your bottom line will look much more profitable? 

The right thing to do is to assess your workforce and make adjustments that are right for the business right now and also sustainable for a Buyer to carry operations forward. Buyers will look for companies with a structure to keep the business running. They don’t usually want to purchase a “job”; they want to purchase a “company” where they can work on strategy, not manage every detail.

So, this is a great time to look at your current staff and see if they’re working to their full potential. Do you have someone in the field who could take on more responsibility? They may be able to serve as a client or tenant’s first point of contact, do troubleshooting, or supervise other workers in the field. When a new owner takes over, it’s great to know there’s an experienced and trusted second in command. 

Is there someone on your staff who is ready to take on sales with restructured compensation? The possible combination of salary and additional commission income is an appealing opportunity and a powerful retention tool. Investing in their licensing could pay off through the growth of your portfolio and by rewarding and retaining a talented employee. The same skill set may be applied to business development and used in recruiting and interviewing staff—another set of tasks taken off your plate so you can focus on growing the company. 

Your reorganization doesn’t have to consist entirely of hiring or firing; you can also consider outsourcing some of the work. Hire a payroll company, an on-call specialty maintenance group, or a virtual assistant. These solutions cost a fraction of a full-time (or even part-time) hire, and the new owner can easily make changes when they take over.

The point is to ensure you’re not doing work that could be delegated or paying unnecessarily for value you’re not receiving. When you get your staffing right, you’ll know that the company can run smoothly without your input 24/7. One of the first questions Buyers will ask is some version of ”How many hours does the owner work in the business?”  Y

As a quick touch on the other side of the equation, this is the time to fire your problems! Your restructuring should include cleaning the house of things plaguing you and could poison the sale.  If you have a toxic or underperforming worker, let them go now.  If you have someone who’s been “about to retire” for quite some time, use this to recapture that revenue.  You’ll have time to find and train NECESSARY employees, and likely someone with more potential who will save you and the new owner a lot of time and headaches when they take over. 

Preparing for a sale is your chance to upgrade talent, reorganize your workload, make it more efficient, and eliminate some of your problems. Almost certainly, the investments you make in efficiency and the recaptured waste will pay off in multiples when you get an offer. 

About Patrick Hurley:

He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is uniquely positioned to help others in the industry find their exit.  He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.

Patrick still meets with every client and passes along as much knowledge as possible. He frequently gives back to the property management community through professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family.  

In his bestseller, The Seven Habits of Highly Effective People, Stephen Covey wrote, “Begin with the end in mind.” Covey meant that effective people start any project by defining clear measures of success and a plan to achieve them. Business owners who know they want to sell their business and retire someday should start planning for their exit years before that day comes.

That means keeping an eye on value the whole time you’re building and running the business. As you get nearer to retirement, you’ll be able to calculate how much you’ll need to get for the business to afford the lifestyle you want and what you might need to do in order to reach that goal.

Your financial advisor is one of the most important partners on your team as you plan for retirement. We spoke with Kendall Park, a Certified Financial Planner with Raymond James & Associates Inc., who talked about how he helps owners prepare. “We can estimate the amount needed for retirement in a couple of ways,” he says. “One is to ask the owner how much he’s been earning in salary over the past few years, and how much he’d like to be making in retirement. Let’s say that number is $200,000 a year. The calculation for that is $200,000 X 5%, which means he’ll need to have $4 million in his retirement account to achieve that number. Then we work from there to figure out how to get to that number.”

Park says that for most business owners, the bulk of their net worth is the value of their company. That means its sale will, at least in large part, fund their retirement, although they often explore other options, such as selling off part of the company or leaving it to family. “The tricky part,” Park says, “is understanding the business’s true value. Just as in real estate, you don’t know how much an asset is worth until you find out what someone’s willing to pay for it.”

Property Management Business broker Patrick Hurley suggests getting a complimentary opinion of value before you meet with your financial advisor. You’ll need this vital information to understand your retirement picture. Park agrees that it can help you get a realistic picture of your financial situation.

“Some owners come in with a number in their heads,” he says. “Sometimes it’s based on data, but sometimes, it’s just wishful thinking.” Owners who may have gotten opinions of value, even offers, before the COVID pandemic may find that the market has changed, and they’ll have to adjust their expectations.

“When we create a ballpark estimate of market value,” Park says, “we go with the lowest realistic price. Then we see if that selling price (minus the debt and tax the owner might owe) will meet the owner’s needs for retirement. If not, they may need to work for a few more years than they thought to grow the company’s value before putting it up for sale.”

Patrick Hurley works with owners to help them understand how buyers will value their company. It’s always a delicate discussion, he says, because owners naturally consider blood, sweat, and tears when talking about the value of what they’ve built. On the other hand, buyers only care about cash flow, profitability, and potential for growth.

Bigger companies are worth more and are more likely to get offers with multiples, a ratio calculated by dividing the market or estimated value of a company by the value on the financial statements. Multiples are most often based on researching sales of companies of comparable size and profitability, but they’re hard to predict years in advance.

Hurley’s best advice for an owner is to create a plan that includes specifics: the age at which you want to retire, the yearly income you’ll need to support your lifestyle for the rest of your life, the estimated value of your total assets (including and especially your company) and information about your debt and tax situation. Working with your financial advisor and a business broker means you’ll be able to create a clear picture of how close you are to achieving your dream.

About the author: Patrick Hurley

He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is uniquely positioned to help others in the industry find their exit.  He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.

Patrick still meets with every client and passes along as much knowledge as possible. He frequently gives back to the property management community through professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family. 

You’ve probably heard of the 80/20 Rule (FUN FACT – also called the Pareto Principle, after the Italian sociologist and economist Vilfredo Pareto, who wrote about it in 1906), which states that in almost any situation you can name, 80% of the consequences come from 20% of the causes. For example, you tend to wear 20% of your wardrobe 80% of the time, or a little closer to home for PM’s,  80% of a company’s sales are generated by 20% of its clients.

And, most likely, 80% of your everyday headaches are caused by 20% of your property portfolio. What if we told you that could be fixed? It can, and we can help.

Your Options

You have a couple of options. One is to fire your bottom 20%.  The problem is that you get nothing in return and that 20% might be what makes you “profitable”.  Another option is to identify and SELL them for an instant monetary injection, more available time for your other clients, and maybe even to reinvest to take your business to the next level. 

First, you must be able to define the “bottom” 20% of your portfolio. Many factors could make them ones you’d rather not deal with: difficult owners, difficult tenants, properties that aren’t profitable, aren’t geographically favorable, or don’t fit into your core property profile.

Difficult owners make more work for you and your staff. They might be micromanagers or penny-pinchers. They might take up too much of your time for the money you’re making from their properties. Similarly, difficult tenants might also take up time with petty complaints, causing damage to units, breaking rules, or paying rent routinely late. Not all PM’s want to handle student properties, for instance, but they can find their way into your portfolio.

You might sort your properties by revenue and analyze where you’re spending your resources. Are you spending too much time, energy, and staff hours on unprofitable outlier properties? You should be utilizing resources where your return is optimal. But it’s easy to get so busy that you haven’t really thought about it.

You may also be spending time and energy on properties that don’t fit your expertise, core location, type of property, or vision for the future. You can define your “bottom” in any way that makes sense, but it’s important that you define it and track it as you operate and direct your business. 

Sell the bottom 20%?

Although they might not be the best fit for you, your defined 20% still has value. They may be very attractive to another company that has a slightly different focus or someone just getting into the business.  To put it in a slightly rough and recognized way, it’s true that one man’s (or woman’s) trash can be another’s treasure.

However you define it: by units, revenue, owner mix, or labor costs, selling off your “bottom” 20% may make a big difference in your company. You may need less staff, or the staff you retain may become more efficient since they’re working on what matters most.  It can really grow your bottom line.

It’s almost a guarantee that someone is interested in buying your identified properties, but don’t forget that your client mix matters too. The value of an appropriate “properties per owner” ratio is an important thing to keep in mind.  If you have just one owner with 20 properties, that’s a significant risk to a buyer because that one owner could represent a big portion of the management contracts they just purchased. It’s much better if this package of properties has multiple owners, and a PPO between 2-5 units. This way, if one or more decide not to do business with the new owner, it’s not devastating. 

Another bonus of selling the bottom 20% of your portfolio is that you may find more buyers for a smaller group of properties. The price will be affordable for smaller companies trying to grow or individuals who want to get into the business. That’s good news for the seller because it drives the price up and can result in getting better terms. 

The only question left is what to do with the proceeds. Reinvest in your company or put them in your pocket? Only you can answer that question, but it sure would be nice to cash that check and have fewer headaches, wouldn’t it?

If I can help speak with you about analyzing your bottom 20% and how to determine their worth, let us know.  I look forward to hearing from you. 

About the author: Patrick Hurley

He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is uniquely positioned to help others in the industry find their exit.  He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.

Patrick still meets with every client and passes along as much knowledge as possible. He frequently gives back to the property management community through professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family.