Whether you’re preparing to exit or looking to purchase a property management company, knowing how to value the company is vital.
In fact, in both cases, it’s the very first step you need to take.
Valuing your property management company helps you know if you’re where you want to get the payout you desire.
Valuing another’s property management company for a potential acquisition is a major factor in deciding if the company would be a good investment.
No matter what side you’re on– even if you’re just curious about the value of your own company for a future potential sale– we’ll cover everything below.
We’ll also talk about:
- The sale and purchase process for a property management company
- As well as touch on ways to increase the value of your company and put it in the best shape possible for the maximum evaluation
Let’s start from the top.
How to value a property management company
Valuing a property management company can seem a bit complex at first, but it really just comes down to a few (mostly) straightforward calculations.
Those factors include:
Run a comparison
First, before you get into the major calculations to check the health of the business, you’ll need to run a comparison of it to other companies in the area.
A comparison is important because it gives you a benchmark to refer to when valuing a business, whether that be yours or one you’re considering purchasing.
Add up assets
Next, let’s get into the calculations related to the business. Simple addition here, you’ll add up all of the company’s assets.
This can include things like:
- Office building
- Property (if the company owns any)
Knowing your profit margin is just good business in any industry, but it’s also vital for valuing a property management business you’re buying or selling.
How much should you look for? A positive profit margin is essential. Anything less might be a no-go.
Look for 20% or above to be considered in the green.
If you’re not there and it’s your company, you’ll need to take a look at your accounting to find out where the issue is and fix it before investors will likely be willing to consider purchasing the business.
Figure out the debt-to-income ratio
Debt-to-income ratio refers to the difference between the company’s debt and its income.
Think of it as a metric similar to profit, in that it is another way for a business to show how healthy they are by proving they’re making more than they’re spending.
Here again you’ll want to know your percentage, which should be anywhere from 0-5% (the percent referring to how much debt you have relative to the business’ income).
Higher than that and the business is considered debt-heavy by typical standards.
However, be careful to take into consideration the business’ situation if you’re the one purchasing.
If the business is in a growth stage and they’ve recently taken on funding for the purpose of growing the business, a higher percentage can be acceptable.
Look at overhead costs
Beyond debt-to-income ratio, you’ll also want to know the business’ overhead.
Overhead refers to the operating expenses of a business. Notable ones include:
- Office lease
- Software fees
- Equipment rentals
Anything the business pays for on a regular basis– whether weekly, monthly, or annually– that is used to aid in the business’ operation should be included here.
Project future growth
Now that you’ve got much of the critical information related to the company, let’s look ahead to the future.
It’s not enough just to take stock of the business now– what does the future hold?
This is where the numbers can get a bit more complicated because you’re looking at patterns and information outside the business itself.
Here are some examples:
- Market: Where is the company located? Is the area growing or stagnant?
- Local economy: Related to the market but focusing less on the growth or reduction in the population and more on the general financial health of the area. Is the city building new developments? Shopping centers or other entertainment properties?
- Services: Are there untapped revenue opportunities the business can employ such as additional services it doesn’t yet offer?
How to increase the value of your property management company before sale
Now that you have a basic idea of how to value your or another’s property management company, let’s shift focus.
If you’re looking to exit, what can you do to increase the value of your property management company before a proposed sale?
Here are a few quick ideas.
Invest in your business infrastructure
Anything that you invest in that is tied to the infrastructure of the business will be seen as a value-add for investors.
That’s because reinvesting in the business is likely to make it stronger and healthier.
Some ways to do that include:
- Technology: New software, updated devices, etc.
- People: This doesn’t necessarily mean more employees, as this adds to your overhead. However, it does mean investing in your team i.e. training, onboarding, and more.
Build your own in-house maintenance team
With coordination between maintenance companies being a huge time sink (and sometimes unreliable), especially in a busy rental market, launching your own in-house maintenance company can be a huge benefit.
Self-sufficiency is a boon that investors love, and having your own in-house maintenance team you can call on at a moment’s notice has all kinds of benefits that makes managing the property easier and far less time-consuming.
Add ancillary services
Adding ancillary services is a useful way to increase the value of your business.
Depending on what you already include, adding additional services that you don’t yet offer can be great sources of additional revenue for each and every client.
That makes each client more profitable– which makes your business look way better on paper to investors.
Work on the intangibles
Beyond adding additional services or expanding the business’ capability, there are other things that can and do matter that are harder to define.
However, they have a real impact on how your business is evaluated.
Some examples include:
- Customer reviews
- Market positioning
- Marketing plan and processes
- Company goals and future plans (particularly if you plan on staying with the company after selling)
How to sell a property management company
Selling a property management company isn’t as simple as making a post online then waiting for buyers to roll in.
Besides evaluating your company to get an idea of how much you can ask for, you’ll need to:
1. Analyze the market
Timing is everything when it comes to selling investments, and a company is no different.
In a bull market when things are booming, selling is a good idea because you’ll get the most for your sale.
In a bear market when things are down, selling may not be a good idea depending on how your company is doing.
There are exceptions, as your company doing well is more important than the market itself, but this holds true in most cases.
In either case, you can always engage with local property professionals online and in person to get more information for how much property management companies in the area are going for currently, if buying prices are down or up, and get a good gauge for how much you can ask for.
2. Clean up your books
Clean financial records is one of the most important pieces of information that would-be buyers will want to see to determine if your company is a good investment.
Messy books are one of the fastest ways to get a ‘no’, so you’ll want to take time to clean up your accounting if it’s not already.
Make sure everything is inputted properly in a software like DoorLoop or QuickBooks and labeled properly.
Ensure that the client-side and business-sides are separate and your accounts are organized, with security deposits in their own secure trust account.
Anything that’s not in its proper place should be cleaned up as much as possible in preparation for a sale.
3. Create detailed historical records
Closely related to this, you also want detailed records for your entire business, not just the financial side.
In every way you can imagine, you want to show potential investors that your business is clean, organized, and everything is accounted for.
That includes copies of lease agreements and applications, revenue and expense reports from not just this but years prior, your P&L, etc.
4. Decide on a sale method
Once you’ve got everything in order, it’s time to decide on one of three methods for selling your property management business.
- Asset sale: You receive cash for the full sale amount and fully exit the company
- Over-time exit (variation of asset sale): This refers to a sale where you as the owner get multiple large installment payouts over a period of time while you then assist in the transition for training.
- Stock sale: This is where the buyer purchases all the shares in the company, in most cases with you agreeing to remain with it long-term in a high-level (often CEO or executive advisory) position.
There are small variations within these sale methods, but these are the three major methods used when selling a property management company.
How to buy a property management company
If you’re looking to purchase a property management company, many of the points in the previous section can apply in the reverse:
- Analyze the market, so you’re purchasing in a profitable area
- Make sure the companies you’re considering have clean books and records as a whole, including their financial reports from at least a few years back
- And have an idea going into the process how you’d prefer to purchase, as that can and will likely affect what company you purchase
Here are a few additional points to keep in mind:
1. Have a clear understanding of your focus and purchase companies that fit that model
As a property management company, high-quality doors are always welcome.
However, there are many types of properties, and you need to know what the focus is of your portfolio.
Purchasing any old property that looks great might work out if you get lucky, but it’s just as likely that you’ll be over your head if you dip into a market that you have less experience in.
By niching down to a particular type of property or market, you can make the most of you and your team’s expertise and ensure that 1) you’re making a good investment and 2) that you can make the most of the property itself after the sale.
2. Have a clear vision of the role the company is going to play in your organization
You might be purchasing a property management company to acquire their doors and have your own team manage them.
You also might want to have the existing team stay in place, or repurpose them for other management needs.
Still other options are available to you, one version of which you’ll need to decide on before purchasing the company.
You need a clear vision for how that company and its portfolio will integrate with your existing company and portfolio in advance so that you know whether it will be a fit or not.
3. Have a nose for sniffing out issues
Whether you’re looking to buy your first property management company or you’re in charge of acquisitions at a large organization, you need to have a keen sense for noticing inconsistent details and red flags.
Big or potential red flags include:
- Overdue rent
- A pattern of late rent payments
- High turnover
- High number of maintenance requests
- Or high number of repair needs without record of consistent investment to fix those repairs (expect a big out-of-pocket expense after purchasing)
These aren’t the only red flags you could encounter, keep in mind.
However, they are some of the largest and most costly should you miss them or purchase the company anyway.
Remember that the goal is to assess the overall health of the company. It doesn’t have to be perfect, but it should be in good shape.
It likely won’t be in perfect shape and that’s fine. You should be looking for companies whose issues are things you have a solution to, such as better rent collection infrastructure.
Buy or sell– the numbers matter
Whether you’re planning on making an acquisition or exiting your current company, the devil is truly in the details.
Knowing the books, having clear records, looking for and– in the case of a sale, remedying– red flags are all vital elements you should consider before acting.