How to Sell a Property Management Business
In order for property management companies to be successful and competitive, they must stay focused on growth. According to Buildium, 47% of property managers will seek to expand their portfolios in 2022 by making client acquisition a priority.
That means a lot of property management firms will be looking to buy whole businesses that already come with an impressive roster of properties. If your business is attractive enough, you may attract buyers looking to expand their territory.
Selling your property management company for a great price involves gaining a deeper understanding of how it’s valued, and learning how to increase the value before the sale. It’s essential to work with a savvy broker to safeguard yourself as a seller, and earn the most money possible in exchange for your business.
Why The Property Management Market Is Thriving
Property management businesses attract a high level of interest from investment-minded individuals and companies because of the relatively simple profit model and growth potential.
Buyers are attracted to companies that have a portfolio of lucrative, long-term contracts, ensure exceptional service to their clients, and run on solid operating procedures.
Real estate agents are one category of buyers. When they look to expand their investments, property management is a natural fit as it comes with very few overhead costs. Agents also often know how to keep up properties in ways that maintain their value, and know reliable home service contractors they can call on for fulfillment as needed.
Another category of buyers is other property management firms. It’s a chance for them to grow faster than through advertising and direct sales alone. Buying a smaller competitor can instantly add multiple contracts.
What Factors Raise The Value Of A Property Management Business?
Property management businesses with certain attributes are more likely to be sold and fetch a high dollar amount than others. In particular, buyers tend to be most attracted to businesses that are easy to take over and maintain with the least additional effort.
Marketing and Brand
A property manager’s existing brand presence will affect the company’s overall value. If it has a good reputation among clients and has a prominent, up-to-date web presence with great reviews, those are positive aspects for the value of the business as a whole.
An impressive portfolio of properties can increase what buyers might be willing to pay for an acquisition. This is, even more, the case with properties that are in great condition, which will lower risk and reduce the cost of services down the line.
Also, a roster of clients who pay on time means fewer hassles in maintaining recurring monthly revenues.
Firms that represent properties in desirable neighborhoods might be more valuable to buyers who want to strategically improve their brand profile in addition to their portfolios.
Relationships built up over time with high-value clients, contractors, attorneys, and others can mean a lot to buyers and can increase a company’s selling price.
Standard Operating Procedures (SOPs)
Standard operating procedures (SOPs) that all employees are committed to will make it easier for buyers to transition seamlessly to new ownership. It will reduce the time it takes to train staff and conduct quality assurance checks, enabling new owners to stay more focused on revenue-generating activities.
These strategies can make a property management business much more attractive to potential buyers in the pre-sale period. These factors all come into play when your business is evaluated by a professional broker.
In addition, those factors will figure into the calculations made to appraise your business.
Valuation Formulas For Property Management Businesses
The EBITDA and SDE formulas are often used to generate a range of possible values for property management firms.
EBITDA, or “earnings before interest, taxes, depreciation, and amortization,” adds back some expenses to total earnings, as the name suggests.
The SDE, or “seller’s discretionary earnings” balance, measures the value of a business based on the earnings generated from it by the owner. It is mostly used to value smaller businesses with simple leadership structures, such as those with a sole proprietor.
The formula for SDE is as follows:
(Pre-tax, pre-interest earnings) + (such as vehicles, travel costs, and other business expenses) = SDE
SDE adds back business expenses that provide some personal benefit to the owner. The formula shows a buyer what to expect in terms of their potential future earnings.
The result of each formula is calculated with a numerical multiple to arrive at a sales price for the business as a whole. Large property management firms earning revenues of $1 million or more per year may be more likely to be valued using EBITDA and can command higher multiples. Smaller operations are more likely to be valued using SDE.
Once you — and if applicable, your broker — have determined a range of possible list prices for your business, it’s important to complete all of the following steps to ensure the sale and transfer of ownership go smoothly.
Ensuring A Smooth Sale For Your Property Management Company
To ensure the sale happens without obstacles or sudden stops, it’s key to follow an orderly process and avoid cutting corners.
Here are some of the steps you’ll need to consider, from a few months up to a year or more, before putting your property management business on the market:
As the seller, due diligence reviews are important to show the eventual buyer that your company’s fundamentals are strong. It involves a legal and financial review, as well as consolidating all the details of your daily operations, to present to a buyer.
You will want to have a serious buyer sign a nondisclosure agreement (NDA) before revealing sensitive information about your business.
Networking is extremely important in the property management industry, as firms grow based on trust.
Besides attending programs and homeowner’s conferences to meet property owners, increase your professional network by interacting with your city or town’s Chamber of Commerce.
Look into joining local chapters of the National Association of Residential Property Managers (NARPM), Building Owners and Managers Association International (BOMA), and other professional groups for property managers.
Consider events catering to the world of professional real estate, where you may meet realtors, lender representatives, asset managers, contractors, and other valuable contacts.
If you’ve already built up valuable relationships, you can bring that established network to a buyer, which may put you in a position to boost your asking price significantly.
Increasing profits are certainly looked at on a year-to-year basis. However, month-to-month revenue trends are also important, and more-discerning buyers will look at this. Stability and great customer service will influence the number of contracts you can retain on a monthly basis.
Contracts don’t last forever, of course. If you’re dealing with too much volatility, and your financials reflect a constant search for new clients to make up for short-term losses, this may put a buyer with concerns about the health of your business.
Build A Working Relationship With The Buyer
In property management, great working relationships between business buyers and sellers are key. Buyers want to ensure a seamless transition to an expanded portfolio of properties, which can involve many unique client arrangements and sensitive matters.
General procedures for internal operations and client support are critical to carry over as well.
For these reasons, ensure you’ve built the time into your sales process to work closely with a buyer, even for several months, after the deal is done. Besides influencing whether a buyer will work with you, it will help you maintain goodwill in the industry.
If you’re serious about selling, you could access your network to find potential buyers. However, a surefire way to do this is to work with a broker who has experience and contacts in the field.
Why Work With A Broker?
Working with a professional broker is one of the most important aspects of selling a property management firm.
A broker who’s experienced in the industry will understand all the complexities of valuing a property management business, as well as the potential pitfalls when it comes to transferring it to a new owner. They will also have a network and will know what to look for in a serious buyer.
Look no further than Raincatcher for a broker who’s savvy in property management. Our brokers know the ins and outs of the industry and can help you shore up your business fundamentals to put you in the best position to sell.
We can also connect you with buyers such as realtors, larger property management firms, or other entities, who are prepared to build a positive relationship with you as you transfer ownership.
If you’re ready to sell your property management business for the highest amount possible, contact Raincatcher for a professional business valuation today.