Getting the Best Sales Price for a Property Management Firm
These 4 simple steps can dramatically increase the value of your Property Management firm.
Over the course of our 19 years completing M&A transactions in the Southeast, we have often been asked, “What types of businesses are buyers interested in? What industries are the easiest to sell?”. If we had to compile a list of the most sought-after types of businesses, Property Management firms would be in the Top 10. We are typically able to find a qualified buyer for a Property Management business within 7 months, but sometimes as quickly as 2 weeks! The high interest in this industry in addition to a flourishing economy has created a Seller’s Market, and the conditions are better than ever. Due to our improving financial atmosphere, sellers almost always receive a full cash offer, without an earn out. If you have been thinking of selling your Property Management for a while now, this could be the right time for you.
Property Management businesses are often thought of as a ‘hidden industry’ but as more commercial and residential associations are looking to outsource their management needs, Property Management businesses have grown significantly over the past 30 years. Only 36,000 associated-governed communities existed in America in 1980, and due to a major influx in the housing market and population growth, there are well over 328,000 communities today. The industry is relatively unregulated, giving business owners and property managers more freedom to expand and grow. Competition in the Property Management field is generally low, and expenses are easier to manage than in most industries. Property Management firms often see profit margins as high as 28.6%, making this one of the most profitable industries to purchase a business in. As mentioned before, buyers are extremely interested in acquiring a Property Management firm, but before you decide to sell, there are a few simple steps you can take to ensure you get the highest price possible for your business. To get an idea of how the price is calculated, we have included some formulas below. Please keep in mind that only a business broker can tell you the true value of your business, and that these formulas are merely a guide.
- 3-5x SDE
- 1x Annual Revenue
Now that you have an idea of how Property Management companies are valued, you can begin making changes within your own firm to increase the value. In addition to increasing revenues & SDE, business owners can also try these four tips to raise the value of their Property Management firm and ultimately secure a higher sales price.
In an unregulated industry such as this one, it is easy for professionals to start their own firm and encroach on your established accounts. One step you can take now that will reassure a potential buyer is to implement non-compete agreements with your property managers prior to your exit. Non-competition agreements are not always standard in the industry, but we have met business owners who did not take the precaution, and ended up losing 40% of their business to a former employee. Not only would this be tragic to you as the current owner, but this could potentially make or break the deal with a buyer down the road.
The easiest way to implement a non-competition program is to have employees sign an agreement during the hiring process. Non-compete contracts are often issued to new employees during the hiring process and are simple to make standard practice going forward. Asking tenured employees to sign a non-compete can be trickier and may require some negotiation, but in the long run, this will assure buyers that your business is lower risk and will be a good investment.
Expansion through M&A
Business experts are predicting Mergers & Acquisitions to be one of the biggest growth mechanisms for businesses this year, and the Property Management industry can definitely capitalize on it. One of the benefits of owning a Property Management company is that you do not need to physically be in the city of your properties. When sourcing buyers for this type of business, we often market to the entire country and more times than not, the buyer who purchases the business is not from the city the properties are in, nor do they have to move there after the sale.
Using M&A to expand your business is a proven growth method. As opposed to starting a new business in a different city, you can purchase an existing business that already has clients and revenue in place, and expand your territory into a new market. The only downside is time; expanding might push back your sales date by a few years but even expanding into one new city can raise the price of your business exponentially.
Certified staff members are always a bonus to buyers. In an industry with very little governance, having designated property managers on your team can really set your business apart. There are four main types of designations that can help raise the value of your Property Management business:
- Certified Manager of Community Associations (CMCA)
- Association Management Specialist (AMS)
- Professional Community Association Manager (PCAM)
- Large-Scale Manager (LSM)
Each designation requires specific course enrollment, industry experience and member dues to become and remain certified. The program is actually very affordable, with first time fees being under $500 and renewal fees in the $80-$200 range. Not only do these designations give your business more credibility in your industry, but certain organizations also include a roster of Certified Professionals on their page, giving your business exposure from an accredited industry leader. By investing in employee designations now, you are not only building your reputation in the community, but you are creating a more sustainable company. As a seller, you want to create a business that can function as you transition out and by developing a team of educated staff, a new buyer can easily take over where you left off.
The Property Management sector has grown considerably but remains an underdeveloped industry. Regulations and laws are moving to catch up with this field and in the meantime, it might serve your company well to join an established association. There are several different membership organizations within the Property Management sector and oftentimes, these associations allow you to network, attend conventions, offer discounts on designation classes and help with marketing programs. If you are thinking about joining an organization, here are some of the larger industry associations with some beneficial features for members:
- Community Association Institute
- National Property Management Association
- Institute of Real Estate Management
- Property Management Association
- Vacation Rental Managers Association
As the member of an official organization, your business will instantly have more visibility to potential clients and buyers, and buyers will view your business as an industry leader that is always learning and values ethics.
Knowing the value of your Property Management company is important, even if you are not ready to sell for another 1-2 years. Taking these steps to increase the value of your company will not only set you up for a higher sales price when you are ready to sell, but will also help you in other financial situations. Should you need to take out a loan or if you just want to get an idea of how to better run your business and increase revenue, these tips can help you. Knowing what your business is worth is a crucial part of growing and at Viking Mergers, we can tell you. The professionals at Viking have appraised Property Management businesses, just like yours, for 20 years and for no charge, we can value your business and advise you on when the best time to sell is. Prepare yourself for the future; take these steps to increase the value of your business so that when it comes time to sell, the years of hard work will all be worth it.