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.
