Property Management - How much would you pay?

Question

I am a property manager in Cleveland and my business is thriving. I am in the process of buying another property management company in the Cleveland area to grow my PM business faster. I have the systems in place that I can take a low margin business and make it more profitable.  So my question is what should I pay for a block of business? Looking at it the other way, what would a property manager sell their block of business for?

I have heard that a few months management fees is the going rate. When I get referrals from realtors in northeastern Ohio, I pay them three months worth of property management fees. Is this too much or too little if I am buying a book of business from a property manager all at one time?

Since doing property management in Ohio without a license is illegal, I'm guessing that there are some who might want to get out while they can. Would you pay a different price for PM clients coming over from an unlicensed property manager?

Any advice would be appreciated, especially if you are in the property management business.

Bob Collett · Answer

Dawn

Thanks for the great info... that seems a bit rich. I am surprised that the deal did not go through.

Bob

Dawn Brenengen · Answer

@Bob CollettI considered buying out another local manager in my town, and I offered 1 year of PM fees, which he was close to taking but ultimately he decided not to sell

Bob Collett · Answer

Mike. Thanks for the insights. Good stuff.

Mike Makkar · Answer

@Bob Collett, congrats on your PM business expansion process

I used to do some management consulting moonlighting in a previous career and did such types of evaluations for medium-end businesses. Since you're a seasoned business owner, I assume you're familiar with 3x to 5x of EBITA etc type calculations. Considering this is a services business with no tangible intellectual property and really only a book of business, I'd go with the lower end of the multiplier. Here a quick framework to help structure your thinking process here

Customers: From a business buyer's perspective, I'd look at things from a PM's customer base and the strength of that base. How many owner/customers are you acquiring. And how many of these customers can you keep around for 6 months, 12 months and 3 years from now. Are these single-home reluctant landlords or are they multiple ownership individuals. I would give more weight to out-of-town customers who are less likely to move PMs. Can you grow your customer base? Can you get your existing customers to become more active investors and thereby increase your business, etc?

Employees: Are you acquiring any employees? Operational employees or Sales oriented? Any Mailing lists? I would give more weight to sales oriented employees who can help you find more business rather than operational folks, which you may already have in your existing payroll (unless you're looking at expanding here)

Product: Also, look at the class of properties that is being managed by the new PM. Higher end properties, with higher fees? or lower end? Which area could have an accelerated ROI from a rent increase?

Seller: Lastly, look at the desperation of the seller. How badly do they need the money? Are they going to move on to other industries. Will you have a clause that they cannot start yet another PM business in the 100-mile radius territory?

Its going to be a big spreadsheet, with at least 3 columns; low-end, med-end, high-end price. Evidently you're in the better end of the situation; you will be the one to benefit by driving the negotiation and your creativity on what you can do with the acquisition.

There ya go! A quick 5-minute framework on how to think about this!

Good Luck!

Bob Collett · Answer

Joe

Thanks for the input. I guess if I used your formula, they might have to pay me to take it. Lol.

Bob Collett · Answer

Patrick

Thank you for your suggestion. Yes, I recognize that I can pick up PM clients from my competitors. As a matter of fact, I already get much of my property management business that way. Many Property Managers here in the Cleveland area just collect the PM fees and do little else.  That said, the transition is a challenge when we pick up a client from a PM who is getting the boot, because I have to spend so much time cleaning up their mess.

And yes, I intend to overhaul everything. When I do, my new customers and tenants alike love it. Tenants know when they have a bad property manager. It takes owners a bit longer to figure it out.

I have bought businesses before, so I get the  due diligence stuff. In some cases, an otherwise good PM might want to off-load just part of their book of business because they are smart enough to see the advantage of focusing their efforts in a smaller geographical area.

I wanted to use a gross multiplier because I just want the book of business, not the overhead; and certainly not the liabilities where are likely to be huge. Sure, I would be happy to pick up a good employee in the process, but that is not necessarily have to be part of the deal... I just do not want to pay more than I need to.

Patrick Liska · Answer

Bob, that's great that your business is that busy. sounds like you have a name for yourself already, why buy someones business then ?, just move into their territory. unless you have some no compete clause for the people involved in that business, there is nothing stopping them from opening up under another name. you will need to make sure the business you are buying has the same processes and contracts as you, otherwise you will have to overhaul everything, and existing customers may not like that. but i agree with the above posts, usually what you would pay for a business is what the company is worth (EBITA) and not based on gross revenue for a couple of months

Steve Rozenberg · Answer

Normally it's a multiplier of the revenue the business does annually. You may want to see what it's doing and go with that as a start