Property Management Company for sale - How to value

Investor · Houston, TX · Member since 2017 · 129 posts · 62 votes

I've been offered to purchase a property management company and I'm hoping to get some advice on how to property calculate the purchase price. It's approximately 200 doors with about 12k/mo. in gross revenue.

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Charlie MacPherson

China, ME · Member since 2014 · 3k+ posts · 4k+ votes

@Marshall Hooper Generally a business is sold at a multiple of "owner's discretionary income" (sometimes called net profit) with adjustments made for inventory and assets.

For example, I'm selling a few gas stations right now. In order to arrive at the sale price, we break the sale into two components - real estate and the business.

The real estate value should ideally come from a commercial appraiser, but if the seller doesn't want to pay several thousand to the appraiser, we can approximate the cost by either tax assessment, recent comps or the last purchase price. Then we look at the P&L and in the case of gas stations, use a 3X multiplier.

So if the real estate is valued at $1M and the business produces $100K in net revenue for the owner, the sales price would be $1M + $300K = $1.3M, plus inventory.

BTW, the gross revenue is a meaningless number. $12K gross with $11.9K in expenses is not especially interesting. $12K gross with $1K in expenses is a whole different kettle of fish.

One other note. Sellers will often say that they don't report all of their sales in order to avoid (evade) taxes. I strongly advise buyers not to consider such claims unless there is rock solid evidence to back it up.

That would call for forensic accounting, like verifying inventory purchased to back up the claimed sales. For example, you would have to review purchase orders and match them against accounts payable and bank statements showing that those checks cleared. In the case of a gas station, we would look at how much gas was purchased and verify the claimed delivery numbers with the supplier. We could skip checking bank statements because terms are normally anywhere from same-day to a few days.

Good luck with your purchase - and if you open a PM company in metro Boston, don't lose my number!

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Kim Meredith HamptonBusiness Member
Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
8y
Marshall,
Feel free to PM me and I will give you a couple of scenarios, and also some questions to ask to help in the Evaluation
[email protected]407-448-6679 Podcast Guest on Show The Key to Scoring Discounted Deals in One of America’s Hottest Markets
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Charlie MacPherson
China, ME · Member since 2014 · 3k+ posts · 4k+ votes
8y
@Marshall Hooper Generally a business is sold at a multiple of "owner's discretionary income" (sometimes called net profit) with adjustments made for inventory and assets.
For example, I'm selling a few gas stations right now. In order to arrive at the sale price, we break the sale into two components - real estate and the business.
The real estate value should ideally come from a commercial appraiser, but if the seller doesn't want to pay several thousand to the appraiser, we can approximate the cost by either tax assessment, recent comps or the last purchase price. Then we look at the P&L and in the case of gas stations, use a 3X multiplier.
So if the real estate is valued at $1M and the business produces $100K in net revenue for the owner, the sales price would be $1M + $300K = $1.3M, plus inventory.
BTW, the gross revenue is a meaningless number. $12K gross with $11.9K in expenses is not especially interesting. $12K gross with $1K in expenses is a whole different kettle of fish.
One other note. Sellers will often say that they don't report all of their sales in order to avoid (evade) taxes. I strongly advise buyers not to consider such claims unless there is rock solid evidence to back it up.
That would call for forensic accounting, like verifying inventory purchased to back up the claimed sales. For example, you would have to review purchase orders and match them against accounts payable and bank statements showing that those checks cleared. In the case of a gas station, we would look at how much gas was purchased and verify the claimed delivery numbers with the supplier. We could skip checking bank statements because terms are normally anywhere from same-day to a few days.
Good luck with your purchase - and if you open a PM company in metro Boston, don't lose my number!
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Marshall Hooper
OP
Investor · Houston, TX · Member since 2017 · 129 posts · 62 votes
8y
Thanks Charlie, I actually found a thread on this from about 7 months ago with some great tips as well. Good luck on the sale of those gas stations!
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Rich Givone
Member since 2018 · 2 posts · 0 votes
7y
I'm a residential investor in northeastern PA (an hour north of Philly) self-managing the 7 homes I started buying back in 2011 and I am now looking to buy an existing residential property management company to accelerate what started as a gradual move into RE investment & management. Is anyone aware of forum for such a transaction, either tucked aware here on BiggerPockets, or someplace else?
Thanks in advance.
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Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
3X-5X income. Furniture, lease.
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Robert GilstrapPro Member
Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
7y
@Marshall Hooper $12k in gross revenue for 200 doors is really low. That can mean an opportunity for you potentially but definitely affects the price you pay. Are these really low end units with super low rents? This is only $720 of gross income per year per door or $60/mo per door. Assuming nothing changes then what are you willing to pay now for $720 a year from now? Don't forget to factor in all the work and headache that has to be put in in order to get that $720 over the next 12 months.
Lots of questions to be answered: what do the leases look like? what do the management agreements look like, do they have termination clauses or can owners walk at anytime? If so then the value is even lower because many will leave.
When buying structure as either big discount for cash up front or the better bet is always to do a payout over 12 months min. with a clawback for doors that don't stay. I know one guy said 3-5X income but I don't know anybody paying that much. I see 1 to 1.5X income but even then that is over time.
[email protected]770-480-7301
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