Looking to sell, buy, or acquire a property management company? Or maybe it’s not something immediately on your radar, but you want to be ready down the road.
With the market volatility right now, many business owners are looking toward their long-term goals. Maybe they want to expand to new markets. Maybe they want out of the game altogether. Or, maybe they simply want to get a clear valuation of their company to be ready for market changes.
Today we’re talking with Jock McNeill, the VP of Acquisitions at PURE Property Management, about how to value a property management company. Jock has completed over 70 property management acquisitions and has tons of insight into valuation models and buying and selling property management companies.
Key Learning Objectives:
- What top factors drive the value of a PMC?
- Do specific business models work better for acquisitions?
- How do you calculate the value of a PMC?
- How do you increase the value of your PMC before a sale?
- How to sell your PMC
- How to buy a PMC
Meet the Expert: Jock McNeill, PURE Property Management
Jock McNeill is the VP of Acquisitions at PURE Property Management, Inc. In his role, Jock has completed over 70 acquisitions at PURE and even more prior to joining PURE. Within the property management industry, Jock has years of insight and advice to share.
Factors that drive the value of Property Management Company
McNeill says: “Several factors help us determine the value of a property management company, including revenue, profit margins, average rents, portfolio diversity, growth potential, leadership, and their team and team structure.”
You can think of these as success metrics in determining “What is my company valuation?” Here are the most important factors to consider.
Well-Defined Strategy and Goal
With an industry as fragmented and complex as property management, PMCs should show a clear strategic plan for differentiating their niche in the market. What is their unique value proposition in their area, and how do they sell clients on that value?
For your own PMC, ensure that you know why a client should work with you. How are you different from other PMCs, and who is your ideal client? Having a clear business plan from the outset helps define your strategy and goal.
Profitability
Before valuing a property management company, you need to determine profitability. Evaluate financial metrics like gross revenue, profit margins, cash flow or EBITDA, and debt-to-income ratios.
McNeill explains how they evaluate this at PURE: “We evaluate proforma financial statements and arrive at a percent profitability based on adjustments we can make by removing ‘seller benefits’ such as vehicle leases, personal expenses, etc.”
Two of the biggest red flags in terms of valuation, says McNeill, are “low revenue per door managed and low profit margins. [These] can keep a business on the lower end of the valuation scale. These are often driven by low average rents and high labor costs.”
Business Model and Team Structure
Speaking of high labor costs, determining overhead costs is a critical part of the valuation.
McNeill explains, “PURE uses our experience in running multiple branches of varying sizes to determine the best way to staff and run an office. That experience influences the assumptions we use to determine how a company will perform as a PURE branch.”
At PURE, they look for PMCs with portfolio or pod structures. “Portfolio or pod-structured companies fit best with our model, so they are more attractive,” says McNeill. “Most of the companies we evaluate are portfolio or hybrid supported by virtual assistants.”
Proximity to Key Markets
A key indicator for buyers is to look for PMCs in markets where there’s plenty of demand for real estate services. Does the area have strong population growth? Lots of single-family homes? Your region’s Comprehensive Annual Financial Report (CAFR) is a good resource for identifying what areas are heating up or cooling down in the rental market.
It’s also key to see a demonstrated network within those key markets. Property management is still largely driven by personal contacts and business relationships. Having strong contacts and connections in key markets is an important sign of growth potential.
Future Growth Potential
And, of course, signs of growth potential are critical to a PMC’s valuation. Many buyers are thinking about company value related to size.
According to McNeill, “Growth potential can influence how we approach a deal. If we can grow organically and quickly in a market, that can be very attractive. What a seller may perceive to be a problem in their business can be the acquirer’s opportunity. Maybe the issue is as simple as better systems, we can help with that.”
Growth potential can be in the form of the real estate market in the area, but also opportunities to grow the business with existing properties. We’ll explore strategies like ancillary property management fees and services in the section on how to increase the value of a PMC.
How to Calculate the Value of a PM Company
Next, how do you start calculating the value of a PMC? Another resource we love is this piece by Peter Lohmann on valuing a property management company. In it, he lists all the factors you need to keep in mind when valuing your own or another PMC.
To get started, write down your answers to the following questions. (This could refer to your PMC that you want to sell or a PMC you are interested in purchasing.)
- How old is the business?
- What is the size of the business (total units under management)?
- What is the customer concentration (units per client)?
- What type of rental property mix does the PMC manage (Single Family vs. Multifamily)?
- What is the rental property quality (A class, B class, etc.) & average rents?
- What is the management fee structure & is it standardized across clients?
- What existing management fees does the business have relative to the market rate?
- What is the average investor/client tenure with the company?
- What standards does the company have for the quality of bookkeeping & accounting (ideally, conforming to the NARPM Accounting Standard)?
- What is the company's reputation in the local market (Google reviews, etc.)?
- What is the involvement of the seller (or yourself) in day-to-day activities?
- What is the revenue makeup (brokerage income, maintenance income, etc.)?
- What is your willingness/the willingness of the seller to sign a non-compete clause?
- What payment terms/seller financing?
- Are there clawback provision terms?
Increasing the value of a property management company before the sale
For owners of a PMC looking to sell, your first goal is obviously to increase the value of your business as much as possible before the sale.
Keep in mind, though, that increasing your company value doesn’t need to become a barrier to selling. In fact, McNeill warns not to be too perfectionistic on that front.
“One of the biggest misconceptions is that valuation is only based on revenue, and you have to have your business in perfect condition to sell,” McNeill says. “There are many factors that influence valuation, but for PURE, revenue and profit margins are most important. We’ve also seen a lot of potential sellers stall in early discussions because they want to wait to get their shop in order, implement new initiatives, or clean up their books. It isn’t always necessary, and trust me, we’ve seen it all.”
Here are some industry tips for increasing your PMC’s value to buyers or investors.
Invest in your business infrastructure
By this, we mean that you should invest in technology and people. Reinvesting in your business will make it healthier and more valuable to potential investors.
On the tech side, you could adopt new property management software, update your current tech infrastructure, or integrate the newest AI-enabled tools.
On the people side, you don’t necessarily need to hire more employees. Rather, ensure that the people on your team are as equipped as possible. Invest in excellent recruiting and onboarding processes, ensure you have robust training programs, etc.
Integrate ancillary services
We’ve talked a lot on our blog about how to develop ancillary programs to drive income. Ancillary fees aren’t just a cash grab – they’re a way to add needed value for residents and investors while driving profit for your PMC.
Ancillary property management services can include things like:
- Renter’s insurance programs
- Credit-building
- Supportive services like air filter delivery
- Resident rewards
- And more!
One of the best value-added services is to integrate a resident benefits package into your program.
Develop marketing strategies
You should be able to show potential investors that you have a strong marketing plan that has proven to grow your business over time. Your marketing strategy should include a content plan, distribution, social media strategies, networking events, and more.
Pay attention to things like your reviews and online reputation as well. Marketing your property management company well will pay off in dividends when you are ready to sell.
How to sell a property management company
Completing a thorough valuation is just the first step in selling a property management company. If you’ve done the work to value your PMC, the next steps will be much easier.
Whether you're looking to retire or simply move on to a new business venture, selling your property management company requires careful planning and execution – with the following steps.
Identify potential buyers
The next step after valuing your PMC is to identify potential buyers. The field of possible buyers may include other property management firms in your area, real estate investors, or even individual buyers looking to enter the industry.
Determine how you want to sell
In his article on valuing your PMC, Lohmann outlines the two different transaction types in how a property management company can be purchased:
- A stock sale. In a stock sale, the buyer will purchase shares of your business. They take on all past liabilities of your company but also get to hold onto your brand, contracts, and vendor relationships. The depreciation of long-lived assets is not reset.
- Asset sale, also known as Goodwill. In this case, the buyer buys your “book of business.” They’re paying for the property management agreements or contracts your PMC holds. If any of your contracts aren’t assignable, you’ll need to get an individual agreement from those investors.
Prepare your PMC for a sale
Next, you'll want to prepare your property management company for sale. This may include making necessary upgrades to your facilities, improving your management processes, and ensuring that all financial records are up-to-date and accurate.
According to McNeill, the question you should ask yourself is: “How can I best tell the story of my company to a potential buyer? Are my financials detailed, and can I show a buyer I have great margins (or how they can achieve them)?”
Work with a qualified broker or attorney
Finally, when it comes time to negotiate a sale, it's important to work with a qualified business broker or attorney who can help you navigate the complex legal and financial aspects of the sale. With their guidance, you can ensure that you get the best possible price for your property management company while also protecting your interests and ensuring a smooth transition of ownership for your employees and clients.
How to buy a property management company
But what if you’re on the buying side? Buying a property management company can be a great investment opportunity, but you can’t sleep on due diligence. Before you start the process of purchasing a property management company, there are several key steps you should take to ensure that you make an informed and profitable decision.
Research thoroughly & find a PMC that fits
The first step in buying a property management company is–like with anything–to do your homework. Thorough research on PMCs involves identifying potential acquisition targets, analyzing their financial performance, and evaluating their market position.
You'll want to look at factors such as revenue growth, profit margins, and client retention rates, as well as any potential growth opportunities that may make the company more valuable in the future. Basically, everything we covered in the sections above!
If you already run a PMC, you want to make sure the business model can integrate with your structure. But again, McNeill cautions against being too rigid on this one.
“We have yet to see a company that does everything the PURE way after over 60 acquisitions. Our partner integration team jumps in quickly and has a plan in place before we close a deal. If a seller has already implemented similar ancillary revenue models, such as a resident benefit package, etc., it means we can optimize that faster than rolling it out from scratch. Our proven platform includes the people, processes, relationships, and technology to consolidate, tech-enable, and optimize the companies we acquire carefully and thoughtfully. We have an all-star team of industry insiders, innovators, and leaders already in place, so when we bring on new teams, the integration is pretty smooth.”
Conduct due diligence and identify liabilities
Okay, so let’s say you’ve identified a potential PMC you’d like to buy. Now it’s time for due diligence. This involves reviewing financial records, contracts, and legal documents to ensure that there are no hidden liabilities or risks associated with the company. Additionally, you'll want to evaluate the quality of the company's management team, as well as its operational processes and systems.
Determine fair market value
After completing the due diligence process, you'll need to determine the fair market value of the property management company. This involves taking into account a range of factors, including its current and projected financial performance, market position, and growth potential. Once you have a clear understanding of the company's value, you can begin the negotiation process with the seller.
Work toward a smooth transition
Finally, once the sale is complete, it's important to take steps to ensure a smooth transition of ownership. This may involve working with the existing management team to establish clear roles and responsibilities, as well as communicating with clients and stakeholders to ensure that they are aware of the change in ownership.
According to McNeill: “A buyer should make sure they have the foundation in place to integrate an acquisition into their existing operation. Look for opportunities to add value for the clients and residents, and that will turn into value for you as a buyer. Anything you can do to create a simple and satisfying experience for clients and residents will help with the anxiety that can come with a sale.”
Conclusion
Ultimately, the value of a property management company will depend on a range of factors, and there is no one-size-fits-all approach to valuation. But the bottom line is that by following a structured and analytical approach, you can feel confident in your valuation, which will help you make informed decisions about buying or selling the business.
Whether you're a business owner looking to sell your property management company or an investor looking to make an acquisition, a proper valuation is essential to ensuring a successful transaction.
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November 17, 2023
