The topic of preparing your property management company for a successful exit is a big one, and our guest today is one of the brightest minds in property management. Andrew (Andy) Propst has experience in taking his company, Park Place Property Management, from 200 properties to 4,000 properties in eight years and in just the last year, he has added 700 doors organically, and another 400 through a local portfolio purchase. Andy is also a NARPM past president, and he is now the CEO of HomeRiver Group, a nationwide company that acquires property management companies and their portfolios. Andy will share with us his insights for any owner who is looking to position their property management company for a successful exit.
What Size Do You Need to Be to Meet Your Financial Goals upon Exit?
It’s an important question that 80 percent of property managers don’t ask themselves. People see property management as a source of income, which it is. But everyone who owns a business should eventually prepare to sell it and the sooner you start to prepare, the better. Let’s say you want to exit with $5 million, and the average rent you collect is $1,800. On the open market, you would need 2,000 to 2,500 doors to get out of the business with $5 million. Some people have a lot of doors but don’t earn as much on those doors and that’s going to alter your number.
5 Things to Avoid When You’re Planning an Exit
There are some things we see that trip up the acquisition process. Try to avoid these to make a smoother transition.
- Accounting struggles. Your property management company must reconcile accounts on a monthly basis. Get good reports from your system. Have a trust account balanced and a historical units report available. You need clean financials.
- Unclear data. You need to know how many units you managed six months ago or two years ago. Have transparent, accessible data.
- Inconsistent Formatting. Sometimes, formatting gets in the way. Something as simple as not being consistent with St. versus Street can throw off a whole system.
- Lack of strategic planning. It is rare to see a strategic plan or a budget. These things are important as buyers want to see your future.
- Too many receivables. When owners and tenants owe you money and you’re not collecting, you could have hundreds of thousands of dollars outstanding. That’s a problem when you’re trying to sell your business.
What’s More Important to Buyers – Top Line Vs. Bottom Line Revenue?
When you’re building a business to exit eventually, you need to focus on both top line revenue (gross sales) and bottom line revenue (net income). People base the success of their companies by the number of doors, but who cares how many doors you have if you aren’t making money on them? If you want to sell your company, you need to have a healthy bottom line.
A company like HomeRiver Group buys or evaluates on EBTDA – which stands for Earnings Before Taxes, Depreciation, and Amortization. You get a dollar amount based on your profitability margin. The higher the profitability means a higher payout for your company. The bottom line really matters.
The door count doesn’t matter as much as the overall performance of the company. In Andy’s experience as an acquirer, there is the potential that HomeRiver Group can take a company that’s underperforming and add some efficiencies to make it more profitable. If they can change the performance, they will pay for a brighter future and not focus on profits. There are other companies that do buy per door or based on gross revenue. However, the typical model is to look at the bottom line, add a multiple, and figure out the value of the business. It’s best to not overcomplicate it.
The Flaw in Evaluating Based on a Dollar per Door Method
Some companies have a portfolio of scrappy B or C level multi-family properties. There will be a difference in value for those businesses versus someone who has really paid attention to what they manage and has the best properties. Buying a property management company in an area where the rent is a lot lower and is generally a rougher area is a lot different from buying a property management company that handles rental property in the suburbs of San Diego. It’s important to grow your business door-wise, but it’s more important to have high-quality properties.
Ways To Increase Value in Your Property Management Company
Increase Worth with Value-Add Services
Value-added services are sometimes called ancillary fees and are also a great way to increase a property management company’s market value. It shows continuity and opportunities. The common ratio is 60 percent of revenue from property management fees and 40 percent of revenue from value-add services. Try to aim for a 50/50 ratio when it comes to these figures. Some people might diminish such services, but it’s starting to change as the buyers now value those fees. Property management is an amazing business with recurring revenue that’s hard to match.
Increase Value with a Maintenance Company
Having an in-house maintenance company is valuable as it brings in ancillary business and profit. If it’s done right, it will be attractive to someone interested in buying a property management company. Right now, with the housing market doing so well, it’s hard to find maintenance professionals to do work. Being able to turn over houses in five days is a huge value add and it goes hand in hand with property management.
Fewer people are willing to make this work because maintenance is difficult. You can fake it till you make it with property management. You can’t do that with maintenance. It’s easy to lose your hat. If you want to do something in maintenance, have a great strategic plan in place, have a budget, hire the right people, and do it right. Don’t be afraid to spend money up front. If you don’t get the maintenance part right, your business can suffer. Consult a tax advisor and an attorney and find a mentor who can show you how it’s done successfully. Having a great maintenance company is about making good hires, utilizing technology, and having excellent systems in place. Track your revenue so you can be sure it’s profitable.
Increase Value with a Real Estate Sales Division
Many smart property management owners also do real estate sales. They see that they have clients who are investors, and also tenants who might want to own a home. So, they help their current customers buy properties. If a brokerage division within a property management company drives revenue, it will get the attention of companies buying portfolios. It can be a huge value as acquisition, management, and disposition are three huge revenue sources. Andrew has not done real estate in Boise in the past with Park Place Property Management, but with the sales market as it is, having a brokerage is the next opportunity.
Increase Value By Investing in Technology and Your Employees
It’s never too early to invest in technology and get your systems organized and in place. Some people are successful with virtual assistants. You need a happy team in place, too. A happy team means happy customers and happy shareholders. If a company is going to be purchased, team members can worry about downsizing. But a good team that cares about what they do will be reflected in the bottom line. People are the most important part of your company. HomeRiver has bought companies strictly for the people before. The doors were just a nice bonus. So, cultivate your people and your business and it will reflect in the bottom line.
Other Little-Known Factors That Influence Buyers
This isn’t a make or break decision for your business, but when people evaluate a business to buy, they do look into several factors such as the marketing you do, your growth over time, your future plans for the business, how you position yourself in the market, and your reputation in the area. If you struggle in those areas, it doesn’t mean your business isn’t worth a lot of money. But for companies like HomeRiver Group, it does mean a lot.
Post-Exit Involvement for Property Management Owners
Some property management company owners will still want to contribute, even after selling the business. People who want to exit are not necessarily ready to retire. They simply want to be part of something bigger, because when you’re running a business, you feel lonely. Having that outlet to be heard and have peers is an attractive option for many small business owners. On the flipside, these owners are appealing to companies like HomeRiver Group because their talent is needed.
If you are thinking about selling your business, and would still like to be involved in building it up; it is best to have great operational instincts, be able to communicate effectively, have accounting know-how, and be good at building relationships. If you are able to really participate in the process, and grow the business organically, then you are at a premium.
How to Prepare for an Exit Within a Year
If you want to sell your property management company within the next 12 months, you need to start by going to the trade organizations to which you belong. Go and talk to other property managers, and see what’s going on in the market. See what people are paying for property management companies so you can get an idea. Talk to people trying to do this on a national basis. Have those initial conversations. You can talk to business brokers, accountants, and bankers. All these people are good at helping you understand what your business is worth. Once you come up with a number, let people know what’s happening. You don’t have to contact a business broker. There’s a fee, so if you’re a good salesperson yourself, you may not need it.
That’s a brief look at the value you want to have in your company when you’re getting ready to exit. If you want to talk to Andy, contact him at HomeRiver Group. If you have any questions for us about marketing your property management business to raise its value, contact us at Fourandhalf.