How To Buy Or Sell A Property Management Company: A Comprehensive Guide (5 steps)

Understanding how to buy or sell a property management company is a critical step in your real estate journey.

The property management industry has witnessed significant growth and evolution over the past few decades. Traditionally, property management was seen as a straightforward task, primarily focused on maintaining properties and ensuring rent collection.

However, in today’s complex real estate landscape, the role of a property manager has expanded exponentially. They are not just custodians of properties; they are crucial intermediaries between landlords and tenants, ensuring smooth operations, legal compliance, and optimal financial performance of real estate assets.

As urbanization increases and the real estate market becomes more dynamic, the demand for professional property management has soared. Property owners, whether they have a single rental property or a vast portfolio, recognize the challenges of self-management in this ever-evolving environment.

This is where property management companies come into play. They bring expertise, systems, and scalability, taking the burden off property owners and ensuring that properties are managed efficiently and profitably. In the current real estate climate, the value and importance of these companies cannot be overstated.

They are not just service providers; they are strategic partners that can significantly influence the success of real estate investments. As we delve deeper into the intricacies of buying or selling a property management company, we’ll explore the nuances that make these businesses so valuable and sought-after in today’s market.

5 Essential Steps on How to Buy or Sell a Property Management Company

Step 1: Conduct a Thorough Valuation

Before you even think about how to buy or sell a property management company, you need to know its worth. Hire a professional to conduct a business valuation, taking into account assets, liabilities, and future revenue projections.

Step 2: Assemble Your Team

Whether you’re buying or selling, you’ll need a team of experts. This should include a business broker experienced in property management companies, a lawyer, and an accountant. They will guide you through the complexities of how to buy or sell a property management company.

Step 3: Prepare All Necessary Documents

When it comes to how to buy or sell a property management company, documentation is key. Prepare all financial statements, contracts, and other essential documents. Buyers will want to scrutinize these thoroughly.

Step 4: Market Your Business or Start Your Search

If you’re selling, list your property management company on reputable business sale platforms like BizBuySell. If you’re buying, this is also a good place to start your search. Networking within industry circles can also provide leads on how to buy or sell a property management company.

Step 5: Negotiate and Close the Deal

Once you have a buyer or seller, it’s time to negotiate. This is where your team of experts will prove invaluable. Once terms are agreed upon, contracts can be signed and the transaction finalized.

Understanding the Value of a Property Management Company:

The real estate sector is vast, with numerous facets and niches. Within this expanse, property management companies have carved out a significant and indispensable role. But what exactly gives a property management company its value? Let’s delve deeper into the intricacies that determine the worth of these vital entities in the real estate ecosystem.

1. How Property Management Companies Operate and Generate Revenue: At their core, property management companies act as intermediaries between property owners and tenants. They handle the day-to-day operations of properties, ensuring that everything runs seamlessly.

This includes tasks such as collecting rent, handling maintenance requests, conducting regular property inspections, and managing tenant relationships. In return for these services, they charge property owners a management fee, usually a percentage of the monthly rent. Additionally, many companies also offer tenant placement services, charging a fee for finding and vetting suitable tenants. These consistent revenue streams, coupled with ancillary services like property upkeep or renovations, contribute to the financial health of the company.

2. The Intangible Assets: While the tangible financial aspects are crucial, the intangible assets of a property management company often hold immeasurable value.

• Reputation: In the world of property management, reputation is paramount. A company known for its professionalism, ethical standards, and efficiency can command higher fees and attract premium clients. Positive reviews, client testimonials, and industry accolades all contribute to building a strong and favorable reputation in the market.
• Client Relationships: Long-standing relationships with property owners and tenants are a testament to a company’s service quality and reliability. These relationships not only ensure recurring revenue but also lead to referrals, expanding the company’s client base without significant marketing expenditure.
• Operational Systems: The operational backbone of a property management company, which includes its management software, operational protocols, and employee training programs, can significantly influence its value. Efficient systems lead to streamlined operations, reduced overheads, and increased client satisfaction.

In essence, the value of a property management company lies not just in its balance sheets but also in the intangible assets it has cultivated over the years.

Recognizing and nurturing these aspects can significantly enhance the company’s overall worth, making it a lucrative proposition for potential buyers or investors. Whether it’s the trust built with clients or the efficiency of operational systems, every facet plays a crucial role in determining the true value of a property management company.

Preparation Steps for Sellers:

In the dynamic world of real estate, selling a property management company is not merely a transaction; it’s a strategic move that requires meticulous preparation and foresight.

Ensuring that the business is presented in the best light can significantly influence the sale price and terms of the deal. Here’s a closer look at the essential preparatory steps sellers should undertake:

1. Conducting a Thorough Business Valuation: Before listing a property management company for sale, it’s imperative to understand its true value.

This goes beyond just looking at the bottom line. A comprehensive business valuation considers various factors, including the company’s client base, reputation, operational efficiency, and growth potential. Employing the expertise of a professional business valuator can provide an objective and accurate assessment, helping sellers set a competitive and realistic asking price.

2. Organizing Financial Records and Client Contracts: Transparency is key when selling a business. Potential buyers will want a clear picture of the company’s financial health, operational procedures, and client relationships.

Therefore, sellers should ensure that all financial statements, tax records, and client contracts are well-organized and up-to-date. This not only speeds up the due diligence process but also instills confidence in potential buyers about the company’s management and operational practices.

3. Identifying Potential Challenges and Addressing Them Prior to Listing: Every business has its set of challenges, and property management companies are no exception. It could be a fluctuating client retention rate, pending legal disputes, or outdated operational software. Instead of hoping that potential buyers will overlook these issues, proactive sellers address them head-on.

By identifying and rectifying potential challenges before listing, sellers can present a more streamlined and efficient business model, making the company more attractive to prospective buyers.

In conclusion, the sale of a property management company is a significant decision that can have lasting implications. Proper preparation not only ensures a smoother sale process but also maximizes the value sellers derive from the transaction.

By taking these preparatory steps seriously, sellers position themselves and their businesses for optimal success in the competitive real estate market.

Key Considerations for Buyers:

Purchasing a property management company is a significant investment, requiring meticulous planning and analysis. While the allure of a ready-made client base and operational systems might be tempting, diving in without thorough evaluation can lead to unforeseen challenges. To ensure a sound investment, potential buyers must pay heed to certain critical factors before finalizing their decision.

1. Assessing the Company’s Client Retention Rate and Reputation: One of the most telling indicators of a property management company’s performance is its client retention rate. A high retention rate signifies client satisfaction and trust in the company’s services. It reflects consistent service delivery, effective communication, and the ability to address client concerns promptly. Additionally, the company’s reputation in the industry speaks volumes. Buyers should look for accolades, client testimonials, and industry recognitions. Engaging in conversations with existing clients can also provide invaluable insights into their experiences and satisfaction levels.

2. Evaluating the Existing Team and Operational Processes: The strength of a property management company lies in its team. A skilled, experienced, and cohesive team can be a game-changer. Buyers should assess the qualifications, expertise, and morale of the current staff. High employee turnover rates could be a red flag, pointing to potential management or operational issues. Equally important are the company’s operational processes. Efficient systems, from tenant screening to maintenance request handling, indicate a well-oiled machine that can ensure smooth transitions and continued success post-acquisition.

3. Due Diligence: Reviewing Financials, Contracts, and Potential Liabilities: No acquisition should proceed without comprehensive due diligence. Buyers must scrutinize the company’s financial records, looking for consistent revenue streams, profitability trends, and any outstanding debts or liabilities. It’s also crucial to review existing client contracts. These contracts can reveal terms of service, fee structures, and any potential liabilities or pending disputes. Additionally, understanding the company’s legal standing, including any past or ongoing litigations, can prevent unforeseen complications down the line.

In conclusion, while the prospect of acquiring a property management company comes with immense potential, it’s paramount for buyers to approach the process with caution and diligence. Taking the time to understand the intricacies of the company, from its financial health to its operational prowess, can pave the way for a successful acquisition and a prosperous future in the property management realm.

Negotiating and Finalizing the Deal:

The process of buying or selling a property management company culminates in the negotiation phase. This is the juncture where both parties come together to hammer out the specifics, ensuring that the transaction is both fair and beneficial. While it can be a complex and sometimes challenging process, approaching it with a clear strategy and understanding can significantly streamline the proceedings.

1. Determining a Fair Price: Methods and Factors to Consider: Valuating a property management company goes beyond just looking at its current revenue. Factors such as the company’s growth trajectory, the stability of its client base, and the potential for future expansion play crucial roles. Common methods for valuation include the discounted cash flow analysis, which forecasts the company’s future earnings, and the comparison method, which evaluates similar companies in the market. It’s also vital to consider intangible assets, such as brand reputation, client relationships, and operational systems, as they can significantly impact the company’s worth.

2. Structuring the Deal: Asset Sale vs. Stock/Share Sale: The structure of the sale is pivotal and can have varying implications for both parties. In an asset sale, the buyer is purchasing individual assets of the company, such as client contracts, equipment, or real estate. This method often favors buyers as it allows them to allocate the purchase price to specific assets, potentially providing tax benefits. Conversely, a stock or share sale involves buying ownership stakes in the company. While this can be simpler and quicker, it means the buyer assumes all assets and liabilities of the company. Both parties should consult with financial and legal advisors to determine the most advantageous structure for their unique circumstances.

3. Importance of a Clear and Comprehensive Purchase Agreement: Once the deal’s structure and price are settled, it’s imperative to draft a comprehensive purchase agreement. This document should detail every aspect of the sale, from the assets being acquired to any contingencies or warranties. It should also outline the terms of payment and any post-sale involvement of the seller, such as training or transitional assistance. A well-drafted agreement provides a roadmap for the transaction, ensuring that both parties’ interests are protected and potential disputes are minimized.

In essence, the negotiation and finalization phase is a delicate balance of ensuring a fair deal while safeguarding future interests. By being diligent, informed, and strategic, both buyers and sellers can navigate this phase successfully, paving the way for a prosperous new chapter in the realm of property management.

Transition and Integration Post-Purchase:

The acquisition of a property management company doesn’t conclude with the finalization of the deal. The subsequent phase, involving transition and integration, is crucial to the long-term success of the purchase. This stage determines how effectively the acquired company gets assimilated, especially if the buyer already owns an existing business in the same domain. It’s a sensitive period that requires meticulous planning, clear communication, and a focus on ensuring continuity for clients and employees.

1. Ensuring a Smooth Transition for Clients and Staff: Clients and staff are the backbone of any property management company. Post-purchase, it’s vital to prioritize their experience and ensure minimal disruptions. For clients, this could mean maintaining the same points of contact, ensuring that service quality remains unchanged, and addressing any concerns promptly. For staff, it involves clear communication about any changes in roles, retaining key personnel, and possibly offering training sessions to familiarize them with new systems or practices.

2. Merging Systems and Operations for Buyers with Existing Businesses: If the buyer is already operating in the property management sector, integration becomes a pivotal task. This involves combining different operational systems, from client management software to financial tracking tools. Identifying redundancies, streamlining processes, and adopting the best practices from each company can lead to a more efficient and cohesive operation. It’s also a time to evaluate the company’s existing vendor relationships, contracts, and operational protocols to determine the best way forward.

3. Communication Strategies to Retain Clients and Maintain Company Reputation: Clear and proactive communication is the cornerstone of a successful transition. Clients should be informed about the change in ownership, reassured about the continuity of services, and provided with channels to voice any queries or concerns. Regular updates, personalized outreach, and even face-to-face meetings can go a long way in building trust. Similarly, maintaining open lines of communication with employees can boost morale and ensure they feel valued and informed during the transition.

In conclusion, the post-purchase phase is as critical as the acquisition itself. With a focus on people, processes, and proactive communication, buyers can ensure that the transition is smooth, setting the stage for continued success and growth in the property management industry.

The intricate process of buying or selling a property management company is a journey that demands more than just a financial transaction; it encapsulates the culmination of years of hard work, brand building, client relationships, and operational intricacies. As we’ve navigated through the various stages of this journey, one underlying theme stands out prominently: the undeniable importance of thorough research, meticulous preparation, and rigorous due diligence.

For sellers, understanding the true value of their company goes beyond just financial statements. It’s about recognizing the worth of intangible assets like reputation, client trust, and operational systems. On the flip side, buyers are not just acquiring a business; they are stepping into a legacy, a set of values, and a framework that has its own unique rhythm. This underscores the necessity of a comprehensive evaluation, not just of tangible assets and liabilities but of the company’s culture, its personnel, and its reputation in the market.

But, while individual research and groundwork are pivotal, the complexities of such transactions also highlight the significance of seeking professional guidance. Engaging with lawyers ensures legal compliances are met and protects rights during negotiations. Accountants help in deciphering financial health, ensuring there are no hidden liabilities, and structuring the deal in a tax-efficient manner. Business brokers, with their market knowledge, can often bridge the gap between buyers and sellers, ensuring both parties get a fair deal.

To sum up, whether you’re on the brink of selling a property management company you’ve nurtured over the years or you’re an aspiring buyer eager to venture into the realm of property management, the journey is filled with challenges and opportunities. But, with due diligence, proper guidance, and a commitment to understanding the intricacies of the industry, it’s a journey that promises substantial rewards. Embrace the process, consult with professionals, and stride forward with confidence and clarity.

References

When considering the complex process of buying or selling a property management company, it’s crucial to be well-informed and prepared. The National Association of Residential Property Managers (NARPM) offers a wealth of resources, including industry standards and ethical guidelines, that can help you navigate this transition successfully. Additionally, platforms like BizBuySell provide a marketplace specifically designed for buying and selling businesses in this sector. By leveraging these resources, you can ensure a smoother, more profitable transaction.

How to Buy and Sell a Property Management Company

The real estate industry is ever-evolving, with new opportunities emerging for both investors and property managers. One of the areas that has seen significant growth over the years is property management, particularly in regions like Las Vegas. If you’re considering entering this arena or expanding your existing portfolio, understanding the nuances of rental management is crucial.

Las Vegas, known for its vibrant nightlife and casinos, is also becoming a hub for rental properties. Investors and property managers are finding lucrative opportunities in this market. But beyond the traditional rentals, there’s also a growing interest in Section 8 housing. For those unfamiliar, Section 8 investments offer a chance for property managers and landlords to partner with the government, providing housing options for low-income families.

Whether you’re looking to buy or sell a property management company, it’s vital to be informed about the different facets of the industry. From understanding rental management best practices to navigating the complexities of Section 8 housing, equipping yourself with knowledge will position you for success.

Exploring the World of Property Management Transactions:

For those who prefer a visual dive into the nuances of buying or selling a property management company, we’ve embedded a highly informative YouTube video below. This video, curated by industry experts, offers a comprehensive walkthrough of the entire process, enriched with real-life examples, expert interviews, and actionable insights. Whether you’re a seasoned property manager considering an exit or an investor looking to enter the market, this video serves as an invaluable resource, breaking down complex topics into easily digestible segments. We highly recommend taking the time to watch and gather additional perspectives on this intricate subject.

Video: How To Buy Or Sell A Property Management Company

Diving Deeper with the Video Transcript:

For our readers who appreciate detail and wish to delve deeper into the intricacies of buying or selling a property management company, we’re providing the full transcript of the embedded podcast video. This transcript offers a word-by-word account of the entire discussion, ensuring that you don’t miss out on any vital information or insights. Whether you prefer reading at your own pace, referencing specific sections, or simply ensuring clarity on certain points, the transcript is an invaluable resource. It’s perfect for those who wish to fully grasp the subject matter and have a tangible reference at their fingertips.

hello and welcome to the property management show I’m your host Alex Olson anko my day job is a CEO for in half a

0:07marketing company that works exclusively with fee-based property management companies I spent the last seven years

0:13of my life helping property management companies become more successful by improving sales marketing and

0:19operational efficiency on this show we’ll deconstruct success into its key components and invite subject-matter

0:25experts to help you improve every facet of your business thank you for tuning in

0:30and enjoy the show

0:47so the topic today is how to buy or sell a property management company it’s a

0:54quite a vast topic and I have I think a person or a guest here who is certainly

1:00able to speak to to the topic and clarify many many different things that

1:08that I guess confused the issue as not a lot of in the grand scheme of things not a lot of property management companies

1:14are being sold and bought every year so there are very very few experts out there and I have a guest here his name

1:21is Mike Catalano he is a CEO and the president of company called real estate

1:26connections here in a Bay Area he’s also an angel investor and a good friend Mike

1:32welcome to the show make sure help me out appreciate it hey good to hear from you so let’s start

1:38with a question that I I wonder myself what the answer would be in that is why

1:45people buy a property management company why would you buy a property management company what’s some of the reasons

1:50behind this well you know it’s the fastest way to grow your business I mean

1:56it’s always great to grow organically and to advertise of course online and

2:02word of mouth and through you know lots of people get referrals through real estate agents and those are great to

2:09maintain your company and to help grow it at a decent pace but the quickest way

2:14is to buy one gotcha so you saying that buying a company is essentially either

2:21expedite the growth of your own company it’s the fastest way to grow your own company yeah absolutely

2:27I mean if Google can guarantee you that you’re gonna get 200 properties in the

2:32year and you can do that all in one time by purchasing one for close to or the

2:37price that you would pay Google and I think it’d be a good buy gotcha now how so let’s say for those out there who

2:46will potentially want to grow their companies through aquas ish ins how would you go out and find a property

2:51management company for sale yeah that’s an interesting one because they’re hard to come by

2:56you know wore them out through the industry what I do I used to not really tell a

3:03whole lot of people that was interested in purchasing and many years ago I mentioned it in a networking group

3:10because I always thought it was a little arrogant in a way of saying that you’re gonna buy somebody’s company and it’s

3:15personal right its parties and you don’t want to come across that way but I also found out by letting people know people

3:22do open to it and come talk to you about it so I let people in networking groups

3:28that I knew lately let your local chapters local and maybe state chapters

3:33of narkom know banks that hold trust accounts for property management companies I mean there’s not a whole lot

3:39of them so obviously the bank that you use to hold your trust account they’re important to let know as well I came

3:47across a few business brokers that I was putting offers in on certain ones I let

3:52them know that I’m always open to looking so it really became a word-of-mouth thing to find out about

3:58him for the most part so that’s the initial notion of you kind of keeping it

4:04to yourself was a and when do you so limited it takes them back when was the

4:11first time that you bought a company I mean how many years ago did you buy a first company so I actually helped a

4:17company that I worked for when I was in my early 20s purchased one and that’s how I helped them actually purchase a

4:24handful of them and those were the first ones that I went through so I wasn’t actually the owner of that particular

4:30company you know early on in my my years but I went through that purchase with

4:36them I was I was director of operations of a large property management firm so I went through the operations part of the

4:42purchase and that’s how I first started doing it and also later on in my years

4:48we purchased them at my company as well so it’s changed a ton over the years on how it works the evaluations have

4:54changed how to find them of change how many people might be buying or selling him has changed but that’s how it all

5:01started really cool and so a few years after that here you are in our podcast

5:06you know being an expert on the subject so by the way I appreciate you taking the time yes um it’s it’s a great

5:12subject I think is it always comes up in every normal event that I’ve ever been to it’s really come up and it’s a real

5:19interest to a lot of people on how you do it and we’ll get into it a little more but unfortunately it’s not a

5:24perfect science to it it really comes down to what makes sense for you as you know are pretty management company owner

5:29I I’m with you on this well what is the perfect signs these days things are shifting and changing so fast but you

5:36know there’s some fundamental kind of frameworks that we can apply to a lot of these things I think buying and

5:41purchasing a company will have its framework and of course there’s a dynamic shifts of the components but I

5:47think the framework we can we can put it together and and at least allow people

5:53some sort of a foundation when they’re looking at these things there so really

5:58I think a question I get a lot and I just got this on as a comment one of our blogs you know how do you evaluate a

6:05property management company yes and that’s why it comes down to being pretty interesting because about when you let

6:12when you evaluate a company to purchase you have to evaluate it what it’s worth to you right a lot of times that people

6:21are selling it we’ll set a price so you have a price set you have a general understanding of what they’re looking

6:26for then you have to really dive in deep into your finances what does it add as it makes sense for you if I’m when I go

6:34to purchase one generally I can absorb a lot of the properties so that in turn

6:40will make me allow allow me to pay more because I will make more off of it in the long run I mean you’re not going to

6:46make money right off the bat generally because you have to come down with what the payment and and how you structure

6:52that is up to you as well there are a few areas where you can just say generalities of how you set prices

6:58people do multipliers it could be taking the property management contracts

7:04monthly contracts and doing a monthly multiplier on that you know if a company

7:10has you know 100 properties at $100 per month and that’s $10,000 a month in

7:16property management contracts and then you do a multiplier I mean that could be anywhere from eight to sixteen

7:22I mean it really depends on the seller or the buyer the area that you’re in so

7:28all of those come to become a factor and then you also have to take into consideration any other revenue that

7:34they may have but that’s a starting point as one of those multiplier you could also do yearly revenue as well and

7:42do it that’s obviously a smaller multiplier of one to two maybe then those are just basics and like I said it

7:48comes down to what makes sense for you but those are kind of the standards of what I’ve seen how people break it down

7:54because really you’re buying the property management contracts that’s the most important thing when you’re doing

8:00this if you’re a property management company they may have a maintenance department that could cost you okay get

8:07some revenue in their in their pocket they could have sales they can have

8:13leasing fees there are other things that come involved in and if they are going to add those into the purchase you

8:19really need to see three years of consistency of those I don’t want to see

8:25a one-off of $200,000 remodel of their maintenance that they never had before and they do stuff their sale because of

8:30that so really I looked at the property management first their contracts and then I moved from that to other revenue

8:38they may have and that could add the price up if it does come out of being a

8:43consistency over a few years times two years time gotcha but so so portfolio than other sources

8:50of income with with I guess a bit of a timeline of what they have been doing

8:57for the last three years in other words seeing it either a consistent growth or a consistent revenue before you can put

9:03any kind of price on these additional revenue streams is that right yeah that’s correct and really like I said you have a starting point of doing a

9:09multiplier and I like I said I like the monthly I like taking the manage of the

9:15property management contracts finding out what they’re making per month on those contracts and I like doing a multiplier of that that’s my that’s the

9:22starting point that gives you a number person selling it a company they may

9:28already have their numbers the number set and then you can work words from there but that’s kind of the

9:34standard way that I start and then go from there gotcha let me ask you this um and this I

9:40haven’t heard an answer to this question I I really didn’t really I think you and I never discussed this or we didn’t

9:46discuss it in detail but I want to know so yeah we’re talking let’s let’s put it

9:52out there um what about the brand value so think about your own company think about the amount of money you’ve

9:59invested over time in building your your website your brand building your marketing having this almost to a level

10:07where it’s automated and consistent and you can look at your business right

10:12you’re your own business real estate connections and you can fairly predict how many properties new properties

10:18you’re gonna get for the next year because you have that long history of new you know new business acquisition

10:23through marketing through referrals and other channels how does that come into play when you price yeah so I think that

10:29you have two different ways you have valuing the property management company and purchasing and then evaluating the

10:35company so when you’re purchasing the company you have a numbers that you’re

10:41working with first and then you have the evaluation of the company itself so you’re looking at that company’s

10:47reputation who the broker is do you know them will they be easy to work with will

10:53that company if you’re bringing over because you can either be buying the entire company or just buying the

10:58contracts if you’re buying the company the branding of that company is important if they’ve been out a long-standing relationship in the

11:05industry for many years then yeah that’s gonna mean something and if you think that their name alone is gonna bring you

11:11value then that’s something you’re gonna have to look at you know you could check

11:17the reputation online how many years that they’ve been on in business the

11:23property locations that they have will come into play as well the conditions of those properties will come into play so

11:30and it’s difficult cuz if you’re buying 500 units you’re not going to be able to go look at 500 properties your seller

11:36fernanda high you have to kind of take a handful of them as well and then you’re gonna look into you know dive deep into their books and that comes into the due

11:42diligence stage the branding of a company is important if you are buying that full company you know there are have been times where I

11:49purchased the company itself with the name and there’s other times it just purchased the contracts because you’re

11:55not interested in the name or that person is interested in keeping that name for the future gotcha

12:02so so it really depends can we say that what from what I’ve seen and we have you

12:09know hundreds of clients across the whole United States I work with property managers for a long time I’ve seen a lot of companies bought and sold and we have

12:15customers who bought and sold companies and and we have new management comes in and then they still work with us and we

12:21have the continuity of relationship sometimes they don’t but what I see a lot is a company of smaller companies

12:28with less established brands usually I’ve valued on the basis of their portfolio of their management contracts

12:36larger companies can have a you know a

12:41much much different valuation based on the additional revenue streams we and I just discussed based on the brand value

12:48so that that’s the general kind of what form what I’ve seen have you seen less

12:54smaller companies actually be able to value their brand and get a higher price

13:01yeah I would say I have in the past right now this market is so hot everybody wants to buy one so I feel the

13:07evaluations are pretty similar if you’re buying a larger company the one thing that they’re gonna have is everything in

13:14place if you have a mom-and-pop shop which there’s nothing wrong with that at all there’s lots of good really good

13:20ones out there and that’s what they choose to stay smaller because it’s easier to manage but when you get into the larger companies they have usually

13:27their policies and procedures are set the office dynamics are all set up so

13:33you can come in and basically work with them directly and implement things more quickly by having them implement you and

13:40they’re probably having a soft property management software in place they probably have their accounting more in place because they have to because of

13:47how large they are so sometimes I could see that easier to evaluate because

13:52they’ll have all the numbers right in front of you so I think that’s a good thing but right now be

13:57cuz of the market and and and how people realize that you can actually make money in property management the evaluations I

14:05feel I’ve been pretty similar all around gotcha yeah it’s uh it’s just that that

14:11appeal of consistent recurring revenue with you know with it with the absolute

14:18great opportunity for additional revenue sources I’d say it’s a big appeal for the property manager business for me and

14:23many people many other people yeah I mean that’s that’s why you see a lot of realtors now getting into it because you

14:29know with low inventory not nothing to buy nothing to sell there’s a lot of Realtors that are getting into the

14:34property management industry because of the monthly recurring revenue yep gotcha

14:40so let’s talk about actually structuring that the transactions how are they typically structured yeah so those vary

14:48as well you gotta remember you’re dealing with two different entities sometimes most of the time the seller of

14:56the company has never been through a transaction of selling their company or purchasing another company so there’s a

15:04lot of lot of learning curves that I’ve learned in over time but in general you know you want to have obviously agree on

15:11a purchase price generally I put together a letter of intent that has the main points of the contract that we’re

15:18looking to do and we for that over to the company that we’re buying you come

15:23to an agreement on the letter of intent once you come to agreement on that then you put the contract in place now the

15:29contract has to have some structure involved because you know you’re buying the contracts and every like I said it

15:35this is why it gets complicated every company is different on how they set their property management contracts so

15:40I’m a month-to-month some have leasing fees some don’t know leasing fees some are long-term contracts so you have to look at all

15:47those on how you’re going to structure your purchase contract because the goal here for both sides is to keep as many

15:54properties under the management of the new company as possible the more you keep as the buyer the more you’re gonna

15:59make the more that buyer keeps the more the sellers gonna make because what you also want to have is what we call like a

16:05clawback cause and meaning that if you lose any properties over a period of time that person or

16:13that company would that would come off the top basically and that’s maybe sometimes over a six to twelve month

16:20period because you got to remember when you’re buying contracts that individual

16:26owner didn’t choose you you know they chose the other company you that you’re

16:31buying them they’re getting purchased by you so you need to make sure that you can do everything under your power to

16:37keep them under your management and prove to them that you’re the right person and we can go over how there’s things to do in that process as well but

16:45as far the structure on it you you do the contract the purchase price there

16:50will be a contingency phase in there that you’ll need to put in there but so you can do due diligence I generally

16:57bring in an auditor to look at the company at their at their books if they have a property management software that

17:03you can look at that would be great you can really dive into their accounting that’s important you’ll set a deposit

17:11that you would put down and have a company that can escrow it I had Chicago title as for them before it’s usually a

17:18title company is a good company to escrow these these transactions so you can put the deposit in there and then

17:24you set up a pay structure where you can kind of pay overtime and some people

17:30finances for years I don’t generally like to do that but even if you’re gonna pay all cash you still structure it to

17:37where you’re gonna pay over you’ll have payment plans over time because you want to make sure that that company you’re

17:42buying from is actually gonna help you through the process it’s so important that you work together as a team when

17:49doing this otherwise if there’s any type of friction between the two the clients are gonna see it it’s it’s it could fall

17:55apart so you set up a payment you know maybe a small payment at the beginning a larger payment after three months

18:01another larger payment after six months and maybe the full payment after eight or nine months depending on how you want

18:06to structure it and help the transaction is ultimately going got you so that’s interesting so even if you’re paying

18:13cash you say that it’s best to have it structured payments instead of bulk sum

18:19because you want that cooperation on the other end right yeah I’d like to have that I mean if it

18:25like the cases of late you have multiple offers on these things you may have to

18:31come up a little quickly maybe it’s a 30-day close maybe it’s a 60-day close and you’re still closing that’s the

18:37thing you’re gonna close on the transaction but have a plan and paste and plan in place to purchase and send

18:43the money because you’re also with that clawback you need to have money in escrow that you can take things off the

18:49top if you don’t keep all those all those properties there are times where some people say look you have 30 days it

18:56is what it is this is what you get and sometimes you have to do that because of the you know the competition out there

19:02looking to purchase my way is doing it in a perfect world where you can set that up and sometimes you might have to

19:08overpay to do that and I think it’s worth it in some cases but other times a company may say hey look I want a 30 to

19:1445 day clothes at the end of that 30 to 45 days we’re done gotcha I could be away as well gotcha so what

19:23about things that not don’t go so well so can you share potentially you know

19:31without actually you know being naming any teams or anything like that but now can you share some of the things that potentially can go wrong so people can

19:38need to watch out for for buying and or selling their company yeah you know and I want to be careful I’m not gonna name

19:45anybody but if I tell specific stories and somebody listens to it they may know who we’re talking about but like I said

19:52one when you’re valuing the company you look for large one-off sales that they

19:58may have inconsistencies in their numbers over years time because you

20:04don’t want someone to just have a really one really good year and then all of a sudden that drops off I mean there were a lot of sales that happened last year

20:10for property management companies and maybe that’s gonna drop off next year so you have to look at that I also could

20:16say that getting the contract nail down is difficult as well everyone has

20:22different ideas a lot of people want to bring their attorney attorneys involved which i think is okay but I think it’s

20:28important if you do use an attorney try and find one that’s been through a purchase of a property management company before it’s a different type

20:35it’s not just buying a regular company there’s a lot of entities involved and companies have to work really well

20:41together so you want to make sure that that contract doesn’t get overly wordy and and and kind of start tripping over

20:47itself so to speak all right so those are important things and like I said when it comes down to everything the

20:53most important thing is that the two companies work together because if you

21:00like if I was selling my company you know we care about our clients we want to make sure you know we’ve built

21:06these clients over years most of our clients have been with us for 10 plus years we want to make sure we take really good care of them if I’m selling

21:13it’s you know I want to make sure they’re in good hands so I would be through the process with the buyer all

21:19the way through and making sure that my client is happy right gotcha

21:25yep know that that is important that is key now let’s take a take a quick shift

21:31here and talk about actually integrating the new company into your own company so

21:38let’s say you bought a company let’s say it was just a you know a portfolio of

21:43properties you didn’t necessarily acquire brand what is some of the steps that you take to integrate it in your

21:50into your business and have that smooth transition experience for the clients yeah so as well as team yeah the first

21:58thing you want to do is as an owner of the company buying a property management

22:03contracts you want to personally I don’t care if there’s a thousand of them

22:08personally contact each and every client it’s such an important touch I feel that

22:16they say they speak with the owner and who’s taking this their properties over I mean this is a huge asset for them

22:21it’s super important that it’s going to the right person so I would reach out to

22:27every single client personally give them a call introduce yourself of course you’ll have

22:32letters and introductory stuff that go out as well but you want to have that personal touch so first off you call

22:38every single one of them and tell me who you are tell them how you handle things secondly you don’t want to have a lot of

22:44change don’t go through and have all kinds of different types of contracts for the new

22:50clients you may or may not have them sign a new contract it depends on how you structure the deal and if you do it

22:58make sure it’s the same don’t have more fees in there higher fees or anything

23:03that would scare them off that’s important as well and then I also set up

23:08a meet and greet at the office multiple times because if you have a lot of clients and you’re purchasing their

23:14contracts you need to have multiple times that have them available that let them come into your office see who you

23:20are meet you in person have some refreshments and hors d’oeuvres or something and let them answer it ask any

23:26questions they may have and let them know that you’re a real office and real people and how long you’ve been in the

23:32industry you know and that way you have a smooth transaction to keep as many of those contracts that

23:37you’re purchasing gotcha gotcha and as far as the the actual integration of the

23:47process and system now that you’ve welcomed the clients on board they’re on board and met you at the office a lot of

23:52them got your personal phone call things are going well now how do you actually make sure that your your existing

24:00processes kind of match up with those clients expectations and and you know it’s like so so I think about my

24:07business getting 200 clients all of a sudden wood wood may put a strainer out

24:14to eat right incredible strain our team so how do you deal with that so that’s why when you’re you have this

24:20already kind of set up before the process starts so you have everything ready to go and when you say go now

24:28you’re the management company for these for these clients and it depends too because sometimes when you buy a company

24:34you bring over employees that come over there which is a good thing in some ways but you know it’s an unfortunate you

24:40always can’t keep every employee that you purchase a company for it’s just a nature of an acquisition of a firm but

24:46if you are keeping some of them that’s a familiar face for those clients which is great you already have it set up for

24:52them you have their you know the administrative stuff set out the computer at the desk email all that stuff is already ready to

24:58you bring over all the folders and everything’s already here before you say go and then when you say go we are the

25:05management company you’ve already contacted all the clients then you just have the management of it if you are absorbing some of them you have you know

25:12in our case word portfolio management company if we bought a hundred units and I only brought over one employee from

25:18the other company if they’re only managing 50 years and I have 50 units that I am going to dispersed throughout

25:25my company so they are eight individual manager already knows what they’re managing and they’ve already been

25:31introduced to that client so basically it’s just a smooth transition of managing the property well the important

25:38part is when you do Matt start with the management is if there are cars calls from that client calls in that tenant

25:44that you are super attentive not that you wouldn’t be anyway but you really have to coddle these people at the

25:50beginning these clients at the beginning to make sure they understand that you’re there for them doctrine yeah now that

25:56sounds up I hope that answers the the administrative part of it or how you’re ready to excuse me get things started

26:03it sure does it sure does I mean it’s it sounds like be pre-emptive right to build the capacity in place I mean put

26:10the capacity plan in place before you actually have them come in and then you know when you know when they’re ready to

26:17just fall into the place and the work commences so yeah and it’s different every time because sometimes you may

26:22absorb the entire company because maybe you’re only buying 30 units you’re buying 300 you’re bringing employees

26:29over so you’ve already would have had to talk with those employees you already have their salary set up their desks

26:35setup everything’s all ready to go you already had these talks before you actually take over the management gotcha

26:41I have another question that I haven’t discussed with anybody yet and I’m very curious and I think our listeners will

26:48be as well are you personally would you consider buying a company outside of

26:55your service area number one and number two outside of the state potentially yes

27:00definitely so for us we look to start anywhere in California because that’s

27:07where we’re licensed if you go outside of the state of California you know it gets a little different for

27:13you I mean it I think property management for the most part can be figured out in any state but you have to

27:19make sure you have your licensing in place and you can actually do this I haven’t done one outside of this that

27:27our state I know companies that have and I have talked to people who have done it and it has worked well you will be moving quite

27:36you know flying back and forth and you have to be very involved in setting up shop there for a while but you can

27:42really because of the software’s that are in place the property management software is everyone most everything is

27:47done online they connected it could definitely be done so we’re open to anywhere in California and then I will

27:54look out elsewhere outside of the state but it has to be a perfect situation shortly shortly I got you alright one

28:01last question can we finish with this one last one I think that may help other

28:07companies or other business owners kind of start building their value early so

28:12and the question is this what can companies do now to come up with the

28:18highest valuation best price best exit strategy in the future well the simple

28:24answer is to grow your business as large as possible okay in general you want to

28:30have all your policies and procedures in place you want to have your office running excellent extremely smooth where

28:37you’re not having to do any day-to-day and everything is have earned with it within the office and it’s running

28:43smoothly you want to have your books in order I think that a good idea like I have a CPA come in and do an audit of

28:50your company if you’re gonna sell your company you need to make sure of using QuickBooks or whatever it may be to do

28:57to run your not your property management part your company part right so there’s the property management books that are

29:03maybe through a property management software those are your clients books right then

29:09you have your company books where you’re doing payroll and and your revenue and

29:14things like that so when you’re running your forecasts your balance sheet cash flow statements all those things need to

29:20be in line perfectly so I recommend having a CPA come in and doing an audit of the company and maybe

29:27they’ll do an evaluation I don’t think you have to go do one just for the heck of it but you make sure your books are

29:33in place because that’s where the real details get done is when the company comes in to do their due diligence

29:39that’s buying you will look through your company books and very closely so what I

29:45what I get sorry man oh sorry I’m what I hear is so far two things you know a grow your

29:51business consistently and you know reliably have that growth kind of over

29:58time be a kind of proven historical growth and an ability for your business

30:04to scale up so you could potentially price that into your future sale price

30:09as a brand and as a solid history of growth but also you know girl number of

30:14units let’s face it portfolio being the biggest value a valuable asset in your company right grow number of owners but

30:20also have your books in order to have you company financials your profit and loss statement your balance sheet your

30:26payroll all those things organized and maybe it’s a good idea as a business

30:32owner to another business owner I would say to some of these people some of the folks that just starting out their property management companies or kind of

30:38got their first 50 hundred units I would say you know invest money in someone really good help let them come in and

30:46actually set your systems your set your accounting systems for your own company

30:52not for the property management stuff but for your own company to make sure you track the financials make sure that

30:57financials are recorded properly and you know I would audit my own books about every every quarter so just to make sure

31:03I do it right and in the long run as mike says this will help you you know it’s helped you

31:09get the highest price for your business when you’re ready to do it and I think that it’s important to have those set up

31:15there’s a lot of companies out there the owner the company does a lot of the day-to-day stuff they’re doing a lot of

31:20the property management they’re doing some of the leasing and there’s nothing wrong with that of course but it’s very

31:26difficult to do all of that and keep your company books going as well you’re basically doing two and sometimes three

31:32jobs when you are smaller and it takes time to get to that point of where you can let go but I noticed

31:39that once you let go a little bit you actually can grow the company more quickly because you’re concentrating on your own company and it’s super

31:46important if you are gonna sell your company that you are so organized when the company comes in to look at it that

31:51you you they want to see that office running like a machine when they come in and then the books looking really good

31:57so that’s that’s important as well I think the one thing I wanted to touch upon Alexes before we end up here is how and

32:07we kind of touched upon a little bit and what’s the best way if you are gonna sell your company or worse did you house

32:13what’s the best way to approach it and that’s one thing I wanted to just touch upon because I’ve seen some interesting

32:19ways that people have done it I think the most the most effective one that

32:26I’ve ever seen was a company did an email blast to the local chapter of NAR

32:31boom hmm and an entire blast and he had all their books together they had a little bit of

32:37a financial book that I can just think it showed everyone before they go into

32:43the actual numbers but they just say hey this is my prices so we’re looking to do we have offer set on this date and that

32:49brought them 15 offers which I thought was really interesting the other way you

32:56can do it of course is word of mouth and you know I just wanted to touch upon that because that was an interesting poem point that if I was to sell my

33:04company there’s two ways I would go about it one would be to do a blast like that to the NAR poem chapters and

33:09secondly I would probably contact the brokers that I know that would be well

33:14versed in purchasing companies that I think would fit well with the company God you see what actually contact you

33:21competitors and offer them an opportunity to buy into yeah I think so the competitor thing is early in my ears

33:28I kept everything close to the vest I didn’t want to tell anybody anything and now that we’ve been more established

33:35I’ve gotten more involved in narkom and I’m more willing to talk to people about anything and open up a little bit more and discuss things so the competitors

33:42you know I mean we don’t talk every day but we do have competitors here in in my area that we have

33:48discussions on maybe once or twice a year and you need to keep those relationships positive and if it does

33:54come to the point where I wanted to sell I would have you know probably three companies right now for sure that I

34:00would contact maybe four mmm very interesting so keep your competitors you know in non-pom is the

34:05best organization you know for those who not a part of it you know National Association of residential property managers you know it is it is such an

34:13incredible way I mean it’s it’s just hard to imagine how how you know competitors come together share ideas

34:20and actually benefit at the end of the day benefit each other and benefit their clients with new ideas new processes new

34:27systems new technologies new opportunities and because of NAR pom I think part of the reason why property

34:33management is finally getting the technology deserves from a vendors is part of it is not them because property

34:40managers so closely associated is that technologists like you know like the appFolio people like the building team

34:46like us for in half we can come in and we can we can actually have a very closely knit associated group of people

34:53that we can offer our products to and and have some kind of a some kind of a

34:59serious demand in place for us to continue to improve innovate and I think Northam is a large part of the success

35:07that property management industry had over the last few years you know went from obscurity into real real serious

35:14and in and a great business to be in yeah and I think that with technology colliding with this industry finally

35:20because it’s always been a very stubborn industry as far as technology goes I think that alone will help your company

35:26if if I came into a company and I saw that they they were working with the marketing agency like four-and-a-half

35:32they they used appFolio or Bill diem or a company like that and they had that in

35:37place and they have all this technology and and they’re on the forefront of technology to me that would make them a more sought-after company to purchase as

35:44well gotcha well so let’s I think we had a great discussion Mike I appreciate all of your

35:51time so let’s leave it this if people have a question or they need a bit of

35:57advice can they get in touch with you yeah absolutely I need more happy and I have done it over the last

36:03few years spoken to people about evaluating companies and discussing if it makes

36:09sense because it’s so hard to sit here and talk about how to evaluate and what makes the most sense for each individual

36:15there’s just too many variables involved always happy to talk it’s just a discussion 100% available thank you Mike

36:23I really appreciate your time and Mike’s contact inputs gonna be in the show notes thank you everyone for your time

36:29and we’ll see you next time all right thanks for having me on Alex appreciate it