For decades, the size and profitability of a commercial real estate firm’s property management business have been at the core of the agency’s overall 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 may have already received 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 term deal at multiples that do not come close to acknowledging the blood, sweat and tears that went into the original aggregation of the properties.
What is it that creates that extra value that makes all the hard work worthwhile?
Tax minimisation in many small- to medium-sized businesses is often at the forefront of the director’s mind 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, which in turn demonstrates 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 that are reliant on one or two key clients in a specific property category.
Actively seeking to grow your business in the areas it might be underweight will 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 purchasers 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 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.
Every commercial real estate principal understands 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 longstanding arrangement with a trusted client.
Documenting your fee entitlements, duties and responsibilities is 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.
Commercial property agencies have 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 the more ambitious people in your company’s ranks to ride off into the sunset with clients you thought were loyal to your company.
Bringing key personnel into the process and incentivising their involvement will generally yield better results, as opposed to them resenting the fact that 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 time frames 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, normally acquisitive groups may not be 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, culminating in a better multiple for your business and a greater reward for the years of toil that went into building the business in the first place.