BUYING OR SELLING A PROPERTY
MANAGEMENT OR BROKERAGE
BUSINESS
A Presentation to NARPM
April 11, 2016
Buying or Selling a Business
• Why buy or sell a property management or brokerage business
• Valuation models
• Price and terms
• Deal Structure
• Things to watch out for
Deal Terms
• Almost always a Non-Compete, Non-solicitation agreement will be
required by the purchaser
• They can be enforceable depending on jurisdiction as far as noncompete goes but non-solicitation is almost always enforceable
Deal Terms
• What is being purchased?
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Contracts for management (Property management)
Furniture fixtures and equipment
Listing and pending contracts (brokerage)
Trade names and electronic addresses
Non-compete agreement
May also assume certain liabilities such as office and equipment leases
Why buy or sell
• Growing your business
• Eliminating competition
• Entering new markets
• Exiting the business
Valuation models
• The Income Approach
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Look at last twelve months of Net Operating Income (NOI)
Examine the last three years of NOI
Adjust for Owners compensation and non-recurring items
Apply a multiple
• Multiples vary based on size, location, concentration of business, encumbrances,
consistency of NOI, breadth and depth of buyer pool, etc.
Valuation models
• The Gross Margin Approach
• For brokerage a percent of Gross Margin or Company Revenue
• For Property Management a multiple of Gross Margin
• Percentages vary based on same terms as does the Income Approach
Valuation models
• It is important to note that one of the factors that impacts the
valuation multiples whether Income Approach or Gross Margin
Approach is the terms of the transaction
• Simply stated the higher the price sought by the seller the more
generous the terms will normally be – and the inverse is equally true
in that the more attractive the price then for the buyer then the more
attractive the terms are for the seller
Price and Terms
• Example is a high multiple of NOI or percentage of Gross Margin
sough may need to offer terms that include less cash down and more
years to pay for the deal
• Alternatively we have seen sellers want more cash, accept lower price
and shorter terms for payment of the balance owing
Deal Structure
• Asset acquisition
• Preferred by buyers and all purchasers should focus on this form
• Exception can be when seller is a “C” type corporation
• Some tax advantage to purchaser and limitations on liability
• Stock acquisition
• Most tax advantages accrue to the seller
• Retention of liability by purchaser a real issue
• Indemnification provisions will generally be onerous
Deal Structure
• What can be used for acquisition?
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Cash
Notes
Earn out
Stock in purchasers
Phantom stock
Employment compensation
Deal Structure
• Acquisitions are the most common form of the combination of two
firms
• Mergers are far more rare
• Key to mergers is asking two questions:
• Would you chose to be in business with your prospective partners anyway
• The toughest part is defining roles, authority and compensation of the
partners
Things to watch out for
• Always determine why someone wants to sell? What is their real
reason
• What are their goals for themselves after a deal is done
• When they are unwilling to take any risk in a deal through future
contingent payments they may be signaling something important
• What are family or other personal considerations
• Is the brand name important? How can you maintain or protect it?
Things to watch out for
• Can they produce clear and concise records for their business
• Are their policies for agents or employees consistent with yours
• Are your cultures in sync or at odds with each other
• What will be the role of the seller after a deal is done
• The longer a deal is under discussion the more risk of leaks or
growing disagreement between the parties