For decades the size and profitability of a Commercial Real Estate Firm’s property management business has been at the core of the overall agency’s value.
Many partners and directors of these companies see their commercial rent roll as forming part of their retirement plan or superannuation, should they ever decide to sell completely or sell their shares internally to the next generation of property professionals.
But selling these businesses in a manner that realises their full value is no easy proposition.
Many people reading this article, may have already been the recipient of offers to purchase their businesses. And many will know the relatively unattractive nature of “Earn Out” based deals, which see the asset change hands over a “three year terms deal” at multiples that don’t come close to acknowledging the blood, sweat and tears that went into the original aggregation of the properties.
So what is it that creates that extra value that makes all the hard work worthwhile?
Profitability
Tax minimisation in many small to medium sized businesses, is often at the forefront of the director’s minds as June 30 approaches every year. Prepayments and expense loading, in an endeavour to skinny down the business’s profits, to ensure that no more than necessary is remitted to the ATO.
At the same time however, it diminishes the true picture to any potential purchaser who might be running an eye over the financials.
Given that many of the tax minimisation exercises are merely tax deferral, it is often better to be proud of the business’s profitability and actively seek to maximise the reportable number. In turn demonstrating to a potential purchaser that the revenues are healthy and sustainable.
Broaden the Base
When determining the multiple to be applied to a commercial property management business, there is always more to it than just what the market deems appropriate at the time.
Businesses with a good spread of clients across a diverse range of property types are generally a better investment than those reliant on one or two key clients in a very specific property category.
Actively seeking to grow your business in the areas it might be under weight, will ultimately present a more attractive proposition to a potential purchaser.
Good Financial Systems
This issue more than any other, will determine the premium that might be associated with the sale of your commercial rent roll.
Handling your client’s money can be the most critical part of any Commercial Real Estate firm’s operation. And with strong legislation governing the administration of Trust Accounts and the obvious commercial risk associated with mismanaging other people’s funds, most potential purchaser’s need to understand that the firm’s financial trust account management is robust and efficient.
Using the right Trust Accounting Software and having a well-structured and documented system (with good checks and balances) reduces the perceived risk in transitioning the rent roll to its new home.
Using the services of an outsource specialist Trust Accounting firm can also greatly enhance the portability of the management rent roll and remove the reliance on one or two key accounting staff agreeing to move to the merged structure.
Good Documentation
Every Commercial Real Estate Principal reading this will understand the difficulties in maintaining up to date and signed management agreements and written authorities.
Very often there is no written agreement at all and only a long standing arrangement with a trusted client.
Documenting your fee entitlements, duties and responsibilities is absolutely paramount.
Management agreements should also contain a robust assignment provision, that gives any prospective purchaser a reasonable expectation that the business they are buying can be easily transferred.
Key Personnel
Commercial Property Agency has always been reliant on good people at the coal face. And maintaining their engagement during the sale process will generally have a huge impact on the successful assignment of the agency agreements to the purchaser.
Business sales often produce the perfect opportunity for those more ambitious people in your company’s ranks to ride off into the sunset with management clients that you thought were aligned to your company.
Bringing key personnel into the process and incentivising their involvement, will generally yield much better results. As opposed to them resenting the fact the boss just got richer.
Structuring the Deal
Most Sale and Purchase Agreements will insist on some lock in contract period for the Principal or other key Directors.
Be careful that the timeframes proposed are realistic and the terms of the employment contract are sustainable.
Being prepared to stay in the business longer will give the purchaser greater comfort.
At the same time however, vendors of commercial property management businesses need to appreciate that the new purchaser will have their own ideas about how to run what was once your business.
Including clear and workable provisions in the agreement, that determine who has control of what during the transition period, will have a large impact on the success of the business migration.
The Wash Up
Selling your business is often dictated by market conditions.
In these more constrained economic times, many normally acquisitive groups are not actively pursuing purchase opportunities. But as soon as market conditions improve we are again likely to see mergers and acquisitions in the commercial real estate space gather momentum.
Now is the perfect time to be laying the foundation and structuring the business in the areas detailed above for potential sale.
Some positive action today, could provide a substantial value enhancement in the medium term.
Ultimately culminating in a better multiple for your business, and a greater reward for the years of toil that went in to building the business in the first place.
