Mike Catalano and Steve Rozenberg joined Alex on The Property Management Show to talk about growth through acquisitions. Mike Catalano is one of the most experienced property management owners to talk about acquisitions, and Steve Rozenberg runs a tightly systemized company and is thinking about acquisitions as part of his growth strategy.
Alex and Mike spent some time talking about acquisitions in 2015.
A lot has changed since then, and a lot hasn’t.
Why Would Anyone Want to Acquire a Property Management Company?
Steve has a successful company and is growing organically. He executes well. So why would he suddenly be interested in acquiring new companies? Many people would see it as an unnecessary headache.
But, you don’t have to grow one way or the other. You can use both strategies to grow – organic marketing and new business acquisition. When you’re trying to grow your property management company, you have to look at all the avenues. Adopting a growth through acquisition strategy doesn’t mean you have to stop pursuing your organic growth.
If you’re thinking about expanding into a new city, for example, acquisitions can get the momentum moving. It provides instant doors, an immediate presence, and a lot of momentum. You don’t have to build in a new market one property at a time.
When you have a strategy of both organic marketing growth to attract new leads, you win on every level. Your organic growth is steady and your growth through acquisition is immediate.
When should you not acquire companies? When you don’t have solid systems and procedures in place, and you cannot support the growth internally. As they say in the airline industry, that will get you to the crash site quicker. Acquisitions help you capture a market share, and you have to be procedural.
Before you buy: Operations and Sales/Marketing
When you’re buying another company, you need to know that the operations are in place. From there, you’ll decide what you’re going to change and what you’re going to keep. Once you know a company is set up operationally, take a look at their sales and marketing. Before you do any new marketing, you’ll want to make sure you have the capacity to support the new business it will bring in. You don’t want to bombard the staff you’ve kept on board.
Operationally, you want a company that has a structure allowing them to stand on their own. Structural soundness is essential before you acquire. And, every single company runs differently. Sometimes, you can learn from the companies you acquire. For example, you might buy a company with value-added fees and services that you never heard of before. Then, you can incorporate those into the rest of your business.
Evaluating the brand value is a little more complicated than evaluating a company’s operational soundness. You can look at the website, reputation online, and how long they’ve been in business. If a company has been around for 25 years with a percolating website, that’s valuable. But, it’s hard to quantify brand value.
The industry is learning metrics. Understanding value per door and the cost and value of the leads that are acquired every month are valuable tools in evaluating a brand. People are tracking more in this industry than they ever have before. So, the day will come when it’s easier to put a value on each brand. Some companies know their numbers and can talk about lifetime customer value and profitability. But, not all companies can currently say what their acquisitions costs are or how much they spend per lead.
Until it becomes easier to identify brand value, don’t evaluate for current opportunity. Evaluate for future opportunity.
Did you get that? Evaluate for future opportunity, not current opportunity.
Remember, that company’s reputation might be strong and you don’t have to change the name or intrude upon their brand. If they have a company name in the area that people recognize and embrace, leave it alone. They’ve been in business for a long time, so changing their name to yours won’t help you.
What is a Property Management Company Worth?
Property management companies are worth whatever a buyer is willing to pay.
Currently, the industry standard is pretty wide, and every acquisition is different. In general terms, your company is worth between 8 and 18 times the monthly gross revenue.
When you think about your monthly gross revenue, you’re not just talking about management fees anymore. It includes any consistent income on anything – from management fees to leasing fees to late fees, pet fees, etc. A sample size of two or three years is also required to make these calculations.
The amount that company owners are willing to sell for often depends the motivation behind the sale.
There’s now a generation of property management company owners getting out of the business. They often have lower valuations because they made their money, they ran a good company for a while, and they’re ready to exit. The newer companies that are operationally strong often want to exit in order to make money. So, they’re going to have a higher valuation. It’s a mixed bag, always.
It’s important to be selective.
Out of an average of 10 companies that Mike looks at, he probably buys one.
If it doesn’t fit, don’t force it. You have to be careful with what you buy or you’ll run into problems.
The Deal: How Property Management Companies are Acquired
Cold calling is one way to find companies who are interested in selling. You can also speak at events, and let people know you do this. Banks hold trust accounts and they know who wants to sell. Talk to different groups like NARPM, PM Grow and Broker/Owner. Let your colleagues know that you’re looking to buy.
Social media works, too. Facebook groups are full of people you’re trying to reach and hoping to target. You can share some information so people know you’re an authority; maybe put out an eBook. People can read it and take a look and ask questions.
Integrating an Acquired Company with Your Own
Integrating a new company can be a challenge, especially if you have a lot of momentum and depth and you’re able to execute with your existing company. It can be difficult to bring in a new part of your business that does things differently.
But, there are many ways to make it work, and it really depends on the company you’re acquiring.
Mike’s new strategy is that he doesn’t initially change anything. The accounting is integrated because it helps the company flow smoothly. But, there’s no change to pricing, and none of the property management systems are disrupted. Things run smoothly for a while and the employees are comfortable and productive. Then, new things may be introduced. The website is integrated. Contracts are changed.
This strategy has helped Mike keep a 100 percent retention rate in his last two acquisitions, which is pretty remarkable. So, for companies that are running well on their own, there’s not any reason to force the integration right away.
If the company is not aligning or there are problems that need to be addressed right away, you can work with an immediate integration and change all the contracts. Sometimes, that’s the only way to do it. It depends on the team and the alignment between the buyer and seller.
Don’t fix what isn’t broken.
You can buy a company and do nothing to it, and you’ll still make money. But, if you buy a company that’s underperforming, you can systemize it on the back end and make it scalable. You’ll want to look at it on a case-by-case basis.
Owners need to be notified when ownership changes, and that also depends on the seller. Letters are sent out to tenants, and then Mike works with his sellers to notify the owners. Sometimes the seller makes a phone call, sometimes they make the phone call together, and sometime Mike calls to introduce himself and does it on his own. The goal is to keep it as personal as possible.
Let the clients know there won’t be any changes. They need a familiar face, so consider keeping the owner on staff for a few hours every week. Then, that time commitment can taper off. Keeping your clients makes the profit higher for the buyer and the seller.
There’s a lot more to talk about when it comes to acquiring property management companies.
Contact Steve at firstname.lastname@example.org. He wants to acquire property management companies in Texas, the Midwest, or even in the east. Mike can be reached at email@example.com. He’s looking to stay in California, but will make an acquisition work anywhere.