What Is A Property Management Company?
A property management company operates one or more real estate properties for a fee on behalf of the owner. The property may be communal property owned by a Home Owner Association (HOA) or private residences (such as townhomes, condos, or single family homes) owned by the landlord. The property management company collects HOA dues or rents from tenants along with a wide variety of other tasks such as budgeting and financial disbursements, tenant screening, overseeing maintenance and renovation projects, and lease management. In Florida, property management companies will typically need a Community Association Management (CAM) license when operating on behalf of an entity with units of at least 10 dwellings or an annual budget of at least $100K.
Selling Property Management Firms
The great majority of its revenue is regular, predictable, and recurring which uniquely sets property management companies apart from most other businesses. Absent another generational housing recession similar to 2008, the income generated by property management companies is quite stable in the sense of being resistant to ordinary fluctuations in the business cycle. Key steps to take prior selling property management firms include obtaining an organized set of historical financial records, developing a transitional plan to convey the customer base and key staff to the buyer, and hiring an experienced business broker with experience in confidentially targeting strategic buyers in order to maximize the purchase price. The regular and recurring revenue should be highlighted by the broker and is always a key selling point.
Valuing Property Management Firms
- Because of its recurring revenue and stable profits, property management companies are highly sought after by both industry participants and by experienced entrepreneurs.
- The median multiple paid by buyers for property management companies in Florida is 2.6 x its annual owner benefit or adjusted profits, a premium compared to 2.25 x the annual owner benefit paid for other service businesses.
- Since property management companies have very little if any tangible assets (such as equipment), its intangible assets or profit generating capabilities comprise the valuation when it comes time to sell.
- The expected future profits that a buyer expects to receive from a property management company is a function of the company’s customer relationships and ongoing service contracts which will transfer over to the buyer after the sale.
- When the ongoing service contracts are longstanding and spread out over a large amount of customers who are timely payors, then the valuation of the business should increase.
- Additionally, large property management companies with an operational structure in place that is not reliant on the participation of the owner will also sell for a premium valuation.
- A competent and dedicated staff of experienced employees who can communicate with its customers and manage the properties means that customers are less likely to cancel and the business has the capabilities to expand in the future.
- A quality list of contractors as referral sources is also quite valuable for property management companies when dealing with larger maintenance issues.
- Further, a property management company not reliant on the owner’s direct personal relationships with customers means that the customer base is far more likely to remain intact after the sale.
- This in turn gives the buyer more confidence about the sustainability of the current profits and will result in a higher valuation.
Customer Contracts of Property Management Companies
A key component when valuing a property management business is its customer contracts. Virtually all customer contracts in the property management industry are performance-based, meaning the customer may cancel by giving the contractually provided cancellation notice (typically 30-90 days). Even though the contracts are not locked in place, longstanding contractual relationships give the buyer more trust that the customers will not cancel after the closing. Most customer contracts also allow the property management company to transfer the contract to another corporate entity. This is very helpful when it comes time to sell since customer consent is not required to transfer the contract. Even so, as a practical matter, customers should be transferred to the buyer after the sale in a smooth and seamless manner so that the customer relationships are not disturbed.
Confidentiality of Property Management Business Sales
The greatest fear for property management business owners is the cancellation of important customer accounts. When customers are aware of a potential sale, then they are much more likely to cancel since they naturally fear for the stability and quality of the service they will receive in the future. Moreover, staff members may also quit if they are aware that a future sale of the business may impair their current employment status. It is therefore of paramount importance that property management businesses be sold confidentially through a professional business broker. This specifically means that all publicly placed advertisements not disclose the identity of the business, all prospective buyers sign a Non-Disclosure Agreement (NDA) and are properly qualified, and no customer or staff member of the business is exposed to the pending sale at any point until closing (without the prior consent of the seller).
Because of their recurring nature in an attractive industry, property management businesses make outstanding acquisition targets. So long as the customer base and the competitive advantages (trained staff, reputation for quality, and referral sources of contractors) remain intact after the closing, then property management businesses are likely to sell for premium valuation multiples when presented and sold in a confidential manner.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.