I am looking at purchasing a property management company. Im currently in the process of reviewing the companies financials. I am hoping to gain advise on how to value a business, particularly a property management company.
their net profit on paper for say, last year or the most recent quarter.
and why they're for sale. those 2 would be the values id look at 1st.
This is a complicated question. First, I would suggest picking up the book "The Practical Guide to Buying and Selling Property Management" on www.landlordsource.com. This is a great how-to explanation along with customizable forms for purchasing the business.
A couple of concerns:
1. Are you buying the entire business or are you just buying "accounts"? The entire business would most likely consist of the LLC, possibly a brokerage and all other assets/information possessed by the seller along with the managed properties. Accounts are only the right to manage the properties purchased. Buying a business typically includes the seller signing a non-compete after so you don't have to worry about them stealing your clients after you paid for them. Also, make sure you are properly licensed and have sponsorship options for running the business...no need to lose business or revenue for not complying with law.
2. The rule of thumb for purchasing accounts is somewhere around $1000 per account (this is very conservative in most areas) however prices tend to be a lot lower for smaller mom and pop shops.
3. Make sure you account for attrition of properties for a certain window of time after purchase (typically 6-12 months). This way any final payments to the seller can account for the accounts you lost during the review time.
4. Would the seller be staying on for a certain time frame to help ease the transition and train you?
5. Are assets included in the sale?
6. Are current employees willing to stay on to help make the transition smooth?
Valuation of property management business are difficult, especially with the lack of public comparables available. I got the $1000 rule of thumb from the President of Real Property Management after doing many PM acquisitions. Perhaps you could look at the return you are expecting for your money and base your offer/negotiation on that - I am not aware of consistent multiples of revenue, or EBITDA etc. to come up with a solid valuation.
You could also ask the brokerage how they arrived at their valuation and what other similar companies have sold for.
I agree with Nathan's assessment but not sure that the $1000 per account has any relevance. If the accounts are single family or individual units that might be a fair value. We are actively looking to purchase a management company and have not seen anything priced like that. For example we are looking at one firm with over 2000 units under management but that only represents 6 accounts. I can tell you that $6,000 would not even get me a lunch invitation.
The biggest concern you should have is the longevity of the accounts after the transition. I would follow the rule of thumb that most professional services firms such as accountant, lawyer, doctors etc have which is 1.5 to 2.5 time net annual earnings. Additionally, I would setup a formula to ensure that the owner and employees are rewarded for contributing to that continuity. ie backend load some of the price including employee loyalty bonuses.
Nicolas at AHC Capital
Nicolas, thanks for the information. This echoes what my CPA is valuing the business at. But I do have a question, would would it be typical to add back the owner salary to the net annual income and then multiply that by 1.5 to 2.5? I keep hearing that this is a standard practice, to add back the owner salary to the net income. But I do have to pay myself something since I will be working so shouldn't that be accounted for? And it appears you work for a capital investment company is there a particular reason you're looking to purchase a management company. I ask because I'm looking for any data you may have on the long term investment potential of property management companies and/or the need for property managers in the future?
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