Terms to Know

August 22, 2024

If you’re selling your company (or just thinking about it), chances are you’re doing it for the first time. We’ve prepared a helpful list of terms that you’ll come across during the course of listing your business and negotiating a deal. Understanding these phrases and how they apply to transactions will help you when you talk to your broker, your attorney, and the seller.

Pertaining to Your Business

  • Gross Revenue: Top-line sales numbers for your business during a specific year.  This includes income from management fees, leasing fees, renewal fees, late fees, application fees, and any other revenue streams that contribute to your operations. This is a number that many business owners believe to be the most important, but in reality, the next two terms are what buyers care about.
  • Net Revenue: Revenue after expenses have been deducted. Generally, this is calculated by subtracting the cost of goods sold to include salaries and wages, office expenses, and any other operating costs. .
  • Earnings Before Interest Taxes Depreciation and Amortization (EBITDA): EBITDA is a measure of a company’s overall financial performance and profitability. The usual shortcut to calculate EBITDA is to start with operating profit, also called earnings before interest and tax (EBIT) and then add back depreciation and amortization. It’s an important figure for a buyer in the due diligence process. 
  • Add backs: Getting your books in order to get ready to sell means making sure all your business expenses are easily provable and well documented. Add backs are expenses that the current business has incurreds that won’t necessarily pass on to the new owner and therefore get added back when calculating the owner benefit of a business. Personal expenses, one-time expenses, and other costs should be eliminated (added back) to normalize the current company’s cash flow before putting it on the market.
  • Debt to Income Ratio: This is the calculation of all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

Business Broker Terms

  • Opinion of Value: A broker’s opinion of value is one way to price a business in the current market. It’s provided at the business owner’s request and is usually a less formal document than the official appraisal listed below.  This may be sufficient in the event of a cash purchase or owner financing situation.
  • A broker’s price opinion of value and a Business Appraisal each provide a way to assess the estimated market value of a property. By contrast, an appraisal is a formal report prepared by a licensed state appraiser pursuant to established, often data-driven metrics for determining value.  This may be required by financial institutions if a Buyer is pursuing financing for the purchase.
  • Owner Benefit (also commonly called Seller’s Discretionary Earnings or (SDE): This is the amount of money, or the overall benefit, a new owner can reasonably expect to earn annually after all company expenses are paid.

Buyer Terms

  • Letter of Intent: The easiest way to understand the Letter of Intent is to think of it as a one-page summary of the deal points. It’s usually not legally binding, but it does declare the intent of the two parties to do business and work toward a contract. The LOI is different from an Offer Letter, which is legally binding and lays out the terms of purchase.
  • Due Diligence: The process of, and timeframe for, investigating a company’s business, legal, and financial position in advance of a deal, along with any contingencies that might affect the sale. This process, occurring after a Letter of Intent and Non-Disclosure Agreement are in place, may take months while the buyer and their team of professionals assess whether the company is financially sound and a good fit for the buyer’s goals. Some items the buyer will as for at this stage would be
    • Profit and loss statements
    • Payroll documentation
    • Tax returns for usually 3 years
  • Owner Financing: Often referred to a sellers note, this is a transactional model where the seller gets a down payment on the business at the time of closing and then finances the deal with the buyer over time. Effectively, the Seller is serving as the bank for a portion of the sale. This is common and is can be required by the primarily lender (bank).
  • Private Equity: Private Equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors. These firms will buy a company with potential for the express purpose of growing it and selling it later, usually in 3-5 years.

Clawback 

As the name indicates, it is a contractual provision that allows for the buyer to take back money already paid to the seller.  It is a maneuver done to assure the buyer that facts are accurately represented. 

Growing Your Property Management Business Through Micro-Acquisitions

July 19, 2024

Our company has identified the need for a program that allows realtors to refer small portfolios to free up their time to concentrate on sales. Internally, we’re calling these “micro-acquisitions” since they are manageable chunks and simpler to work with agents as growth partners instead of a more formal buyout. Externally, we present it as a vehicle for Realtors to provide better value to their clients without forgoing all of the revenue. Perhaps this growth strategy works for you. 

Many Realtors get into property management by accident.  It’s at the request of an owner with whom they have a relationship, and that client thinks that all real estate functions are the same….but we know better. Maybe the owner didn’t get the offer they’d hoped for, maybe some maintenance was needed, or it could have been one of a million other reasons that kept it on the market. Perhaps the owner is moving away temporarily but planning to return to the property eventually, or they just wanted to build an investment portfolio and assumed their agent could handle it. These are just a few of the scenarios in which a Realtor may take on the management of the property when it’s not their core business – or competency.

Is it worth the Realtor’s time and risk?

Realtors are unlikely to have the necessary infrastructure in place to manage properties, so they’re trying to use disjointed screening systems, inconsistent forms from different places, and processes that aren’t adequate or haven’t changed much over the years. It’s a part-time gig, so it’s a matter of fitting in the duties of a property manager between prospecting, buyer consultations, showings, and closings.  You know, the full-time job that brings in the real money.

Most Realtors could have vendors for some repairs, but this differs from a team of trusted and reliable service partners they can call on 24/7 when work has to be done NOW. They may have to start from scratch when they’re looking to have larger projects done on a property. In fact, most Realtors tell us that property management, although it might bring in some extra income, is a hassle and almost always more trouble than it’s worth.

That’s where a professional property manager can help. These companies can be allies to a sales agent because they have the full-time staff, refined processes, and sufficient resources to manage properties as they should be handled. They can ensure the property is maintained on an ongoing basis, repaired when needed, and occupied quickly when a lease ends or a tenant moves out. 

For Property Management Companies: How it works

We pay you for management contracts.  When we agree to buy out the property management agreements, we remind our Realtor partners that we keep up with current local laws and other guidelines for fair housing and anti-discrimination. We have the right professional liability insurance, and we take on the risk for the rental, making sure the process is compliant and that the property owner isn’t unnecessarily exposed to risk of loss or civil action.

The key to success with this method of growing your portfolio is ensuring your structure is prepared to take on additional properties without needing significant capital investment. Depending on your current size and capacity, your definition of “micro-acquisition” may vary from the next company. Because you’re buying out the agreements and taking on more owners and tenants, you’ll need to assess whether or not you need to increase your staff or incur other expenses for ongoing operations.  You’re betting on the contracts being renewed and retaining tenants to extend income for the next lease term as well, so if you’re losing money on the current term, the acquisition is not helping your company grow.

Second, we promise our Realtor partners that we only care about property management. If and when the property is designated for sale, it goes back to the Realtor so they can handle the transactions and earn the commission. It’s a win/win for the agent and the property management company. The owner significantly reduces their risk and liability while benefiting from the Realtor’s sales expertise and the property manager’s management experience.

As part of this growth strategy, we’ve crafted a letter to prospective Realtors and other professionals to introduce the idea and start productive discussions. If you’d like a copy of the letter, email me at [email protected], and I’ll send it to you!

 

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 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.

Is This The Ideal Time to Sell Your Property Management Company?

October 31, 2023

If you’ve been thinking about selling your business within the next year or so, some of the challenges starting to face the market might actually make this the right time to list it. Here are some of the factors you should consider.

Business brokers across almost every industry agree that many owners wait too long to start the sale of their companies. The ideal time to sell is when you’ve almost reached peak profitability, but still have some gas in the tank for a good push. Knowing when you’ve reached peak profitability is both an art and a science, and if you wait too late to start the sale process, it’s just that…too late.  A lot of owners choose to take all the profit they can while they can, and when they see the company’s profits start to decline, they list the company for sale. That’s a huge mistake!

Buyers are looking for companies that still have room to grow, so a company whose financials are showing a downward trend simply isn’t as attractive to the market, and even less attractive to lenders who might consider financing the purchase. Another reason you should sell when you’re making the most money (at the top of the market cycle and/or shortly after a huge upward trend) is that your sale price is generally based off of a multiple of earnings or bottom line profit. So when you sell, you’ll earn 3 X (or whatever the multiple is) for every dollar of your profitability. We’ve just come off of 3-ish years or record rent increases, and your revenues should be higher than ever.  Imagine if that increase in profit could be quickly multiplied between 3 -5 times… 

Inflation Rate

Asking Rents YoY Nationally

If you’ve been regularly raising rents to keep up with market rates and not bogged yourself down with additional expenses over the last few years, you’re probably more profitable than you’ve ever been. Even with inflation peaking at about 9%, raising all of your operational costs, rents have risen about 19% on average nationally. High-interest rates have kept many potential home buyers (and sellers) on the sidelines, meaning demand for rentals should remain high for at least the next year or so, or until rates are seen to be stable.

Of course, we can’t forget that the high cost of money right now also affects your ability to find a buyer for your business. High-interest rates make it harder to find financing, which shrinks the pool of prospects for your business if you aren’t positioned correctly and working with someone who knows how to work with banks to verify and highlight the value of your company.  The riff-raff buyers will be looking for smaller companies to buy or hoping to get a steep discount on companies they might have paid full price for a few years ago, but those aren’t the buyers you want anyway. The good news is that the buyers who drop out of the market leave a pool of stronger, more qualified buyers with more resources and generally more business sense to identify value. A professional broker has built a network of those quality buyers and also knows how to identify additional buyers to be screened and qualified before getting too far into the process. 

Savvy buyers will be looking at profitability and potential, and if the numbers make sense, they will always be ready to acquire a business that’s a good fit for their needs. Don’t be scared to hit the market.  Be aware of your timing, and consult with the expert who can provide the same guidance you’ve given to your clients over the years.

Whatever is ahead for the economy, we know it’s cyclical. If you’ve planned on staying in your business for a few years, your best decision might be to buckle down, look for opportunities and ride it out through the next cycle.  But if you’ve been considering a sale within the next year, now might be the right time to make a move.

If you’re interested in what your company might be worth, click here or a complimentary assessment.

Patrick HurleyAbout 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.