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The market for acquiring successful businesses in almost every industry is heating up. Buyers are motivated by companies with strong performance, consistent revenue, and big potential. That’s why they love the idea of buying a property management company. If you’re thinking about your exit strategy, consider these factors.

Buyers acquire companies, but what they’re really doing is buying a cash flow. Property management companies almost always have predictable and robust cash flows that renew monthly. Housing is almost recession-proof; no matter what’s happening in the economy, people still need places to live. In fact, during this time of low inventory and inflation, rents have skyrocketed, meaning that property management companies are seeing higher revenues while other industries are contracting. For every economic downside, such as low housing inventory, inflation, or rising interest rates, there’s an industry that’s benefiting. Right now, property management is that industry.

Property management companies also have enormous potential for growth without many barriers. Almost every market in Florida is growing; According to Realtor.com, in just the past year alone, Florida’s gained more than 200,000 residents, according to the latest census data, second only to Texas in population growth. Over 300,000 moved to the state in 2021. Population growth means growth for property managers. And, at least 61% of rental property owners work with property managers, so as residential units increase, so will the potential for more business.

Vertical growth is also a viable option for property managers. Referrals come from realtors and insurance agents, so if someone is already working in one or more of those industries, it can make great sense for them to take on property management as a way to vertically integrate a complimentary business. Since the properties need cleaning, landscaping, maintenance, and repairs, some property managers acquire companies providing these services as well. People in finance, real estate, and insurance also have the assets and financial expertise to acquire companies and manage them well, so this is a motivated and desirable group of potential buyers that find additional comfort in diversifying their offerings and sources of revenue.

Because it doesn’t take advanced education or multiple professional certifications to be a successful property manager, it enables a larger group of business owners and entrepreneurs to explore the industry. The low barrier to entry means a large and diverse pool of buyers can consider entering the field. Unlike a restaurant, where you need pre-existing industry expertise and must consider specialized components like chefs, food suppliers, hospitality experts, caterers, etc), there are fewer moving parts that can create a tough road to success. A single good hire (licensed broker) and the ability to maintain business practices of the existing company will be most of what they need to succeed.

Buyers want a solid return on investment when they acquire a company, and property management firms produce predictable and reliable returns. NAPRM (The National Association of Residential Property Managers) estimates that on average, property managers have a 20 percent profit margin (compared to 10% of a successful restaurant). But, property managers can increase revenue dramatically by creating and offering value-added or bundled services to property owners and tenants alike. In the organization’s 2022 state of the industry report, NAPRM said that 91 percent of its members expected revenue to grow over the next two years.

Members reported several ways they intended to grow revenue, including:

·       55% will raise rents on new leases

·       48% will raise rents on renewals

·       36% will raise rates and fees for new clients

·       30% will raise rates and fees for existing clients

·       28% will acquire properties in higher-rent communities

·       33% plan to make value-add updates, particularly in multifamily

·       24% plan to expand resident amenities and services

The property management industry offers predictable revenue and returns on investment, low barriers to entry, and plenty of potential for growth and increased revenue. No wonder buyers are considering PM companies to be one of the most attractive targets for acquisition.

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 in a unique position 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 he can. He frequently gives back to the property management community in the form of 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.

Here’s What Buyers Are Looking For

Property management companies have become more and more attractive to buyers in today’s marketplace. We started seeing intense interest in property management companies as appealing acquisition targets shortly after 2008’s “Great Recession” when the housing bubble burst and real estate sales were viewed as inconsistent. When it became harder to buy a home, good people with decent credit were forced to rent and the need for management services did nothing but increase. The industry has become even more attractive to business buyers, and with interest rates on the rise and housing prices high, the buying challenge may begin again.

In addition, the 2020 COVID shutdown picked the winners and losers that still seem to show today. The market taught investors to shift their resources and attention to essential and protected recurring revenue streams as the most relevant investment options. Insurance, property management, and even maintenance companies are seeing the rewards. That’s great news if you happen to own a management company. 

Here’s more of what buyers are looking for.

Revenue per Unit

Buyers want to know you have good assets under management and that they consistently produce. A competitive revenue per unit number signifies a well-run business with properties located in desirable neighborhoods. 

The quantity of properties isn’t necessarily the only driving factor in contract purchasing decisions. Even with a handful of properties in the right location with higher rents, someone is always willing to add them to their portfolio under their existing company. Thirty to fifty units would likely be the minimum number if a buyer is wanting to be an owner/operator, but 100+ units creates enough scale to support a full-time manager and perhaps even an in-house maintenance crew to supply additional revenue streams. It’s important to note that the more units under management, the higher multiple a buyer will be willing to pay, but no matter the size of your business, you likely have a sellable asset. 

In some cases, a skilled broker with a large buyer index can increase the benefit to smaller property management companies by packaging them together. This attracts middle-market buyers with deeper pockets.  With the right strategy and knowledge, this can work for competitors in the same market, or even larger firms in separate markets who are willing to strategically align.

Revenue streams

Every business needs multiple revenue streams to be healthy. To maximize your business sale price, make sure you’re charging and tracking these, and other, functions:

• Management fees
• Leasing fees
• Renewal fees
• Inspection fees
• Technology fees
• Tenant application fee
• Tenant administration fee
• Tenant online payment fee
• Tenant lease change/alteration fee (like swapping a roommate or subleasing)
• Etc

Not only should you be collecting these fees, but they should also be competitive in the market. One example is tenant application fees. If your competitors are charging $75 and you are only charging $25, you’re leaving $50 on the table. Consider this example:

1000 tenant applications annually x $50 = $50,000. That’s $50,000 more topline revenue without doing any more work!  Are you maximizing revenues to increase the salability of your business?

Client concentration

If a large percentage of your business comes from one customer or one relationship, that can be problematic and scare potential buyers. No matter how solid you think the relationship is, a new buyer will be apprehensive. If that business dries up due to a dispute, personality conflict, or act of God, the company is in trouble and this is a risk that educated buyers take into consideration

Savvy business owners look to have a well-rounded customer mix where losing one or two relationships doesn’t put the business in financial chaos and disrupt operations. In other investment arenas, it might be referred to as “diversification”. The fewer eggs that are in one basket, the better.

Geographic area

Properties condensed together typically have a higher profit margin because they are easier to coordinate services. Buyers are looking for ease of operation, so they don’t have to carry unnecessary overhead and stress personnel unnecessarily.

Competition

Every market has competition, but not every market has the same amount. Buyers will want to know how much market share you have. Is it a market they can dominate? Or is it a market where they’ll have to discount every property just to get the deals? How are you positioned, and how can you improve that prior to a sale?  Do you need to consult on this to be ahead of the conversation?

Clean books

Nothing turns off a buyer faster than sloppy record keeping. Clean books with only legitimate expenses accurately illustrate the Seller’s Discretionary Earnings (SDE). This is the most popular way for valuing companies to determine the legitimate benefit an owner receives for owning and running a business. Your sale number will likely be calculated as a multiple of your SDE. Buyers will want to look back at three years of tax returns and the current P&L to understand how the business is trending. 

The question I get frequently is, “Is now a good time to sell my company?” While there is rarely a bad market in which to sell a successful and profitable business, my response is always the same. “Have you done all you can to prepare your business for sale”?   If you’re burnt out or ready to retire, then the time is right no matter what and we can help.  If you’ve run a well-oiled machine and the business will demand the highest possible multiple in today’s market, we have access to the most qualified buyers, and we can help.  If you’re ready to exit, but we need to work on the bottom line to position yourself better, we can help. There rarely isn’t a good time to sell, and we likely have access to far more buyers than there are good businesses to buy on the market. Remember, larger companies would prefer to use their available capital to buy you out rather than spending time and marketing dollars to grow organically. 

For readers of this article, I’m offering a complimentary opinion of value. No strings attached and no obligation. I’ve found that it’s important to know “your number” so you can begin to wrap your mind around what life outside of your business might be like. I encourage you to discuss the value of your business with your significant other and business team. If you want to move forward after that, I’m here to find you the right buyer and help you get to the closing table. 

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 in a unique position 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 he can. He frequently gives back to the property management community in the form of 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.