Does anyone know how to properly value a property management company? I am considering buying one that has been presented to me. How do I come up with an appropriate offer? What is some of the due diligence that I should do? The company makes roughly 320k in annual management fees, and about 116k in broker/sales commissions from the small brokerage business attached to the management company. Pre-tax income of the two divisions is about 123k, and after tax income is about 84k. If I want a 15 CAP, 84k/.15=560k purchase price. The company has no debt, and manages a portfolio of 250 residential units.
I don't know much about all of the factors involved in giving a business a fair valuation, but a few questions came to mind that I'd be probing if I were you (probably you have already):
- You mentioned that it had 250 units under management, but how many owners? Are the units highly concentrated with a small number of owners? That might present some risk if one or two major clients bolt after the sale.
- How long have the clients been with the business?
- How many of the properties are under a management agreement and what is the average time to renewal for these contracts?
- What does the competition look like in the area? 250 seems like a decent portfolio, but I wonder how it stacks up and what kind of reputation the firm has?
- Can you meet with any of the employees? They might be able to give you some insight into how stable the business really is.
These aren't exactly questions that will give you a number for a valuation, but it seems certain to let you know how hard that number may be.
Sounds like a great opportunity! Good luck!
Thanks, Joe. These are certainly good due diligence questions, some of which I have asked but others that I need to. Thanks for sharing!