Leaving the Property Management Industry with Cash in Hand

Why Leave This Delightful Industry?

The most obvious reason a Property Manager might want to leave this industry is retirement. However, we find that a growing number are looking for a career change, have tired of the everyday hassles of dealing with business realities, have found property management a distraction from other interests, or have found that the cost of technology and the increasing level of competition are taking a toll.

Options Available

The owner of a property management office can obviously just sunset the business. However, the equity built by creating a clientele would be lost without any compensation. Clients with a personal relationship might feel abandoned and would be inconvenienced by having to find a new manager. So, most Property Managers look to either sell their business or portfolio.

In most cases, it is easier to sell the portfolio than the business. Property management firms have few tangible assets and have potentially legal liabilities that a buyer would not want to purchase. Selling an existing portfolio of clients and the income stream is much more appealing.

What’s Your Business Worth?

There are many ways a business’s value is determined. Buyers will initially focus on revenue, net cash flow, and a multiple of profit. Other considerations include market conditions, competitive position, quality of accounts and projected attrition, staff, trust account balances, client mix, and existing contracts and obligations. Ultimately, the value is what a buyer is willing to pay, and a seller is willing to accept.

Steps to the Sales Process

It all starts with an initial meeting. Each party needs to be forthright about what their goals for a transaction would be. If the goals seem to be in alignment, the two parties will want to sign a non-disclosure agreement so they can share estimates of finances, number of properties managed, and other basic facts about the portfolio. After the preliminary review, the buyer prepares a letter of intent.

The real work by both parties begins at this point. The buyer will want full disclosure of all financials, trust account data, active lease and management agreements, attrition history, personnel information, and any contractual obligations or litigation activity.

The seller must be totally open and forthright about the information shared. Deception at this stage could have both financial and legal consequences in the future.

When the due diligence is completed, a final valuation will be agreed upon, and the formal agreement will be drafted. This agreement should include the financial terms, timing for transition and sale payments, communication responsibilities, and protection for both parties. Generally, the payments to the seller are staged over time, and often include performance guarantees (e.g., attrition rate).

The entire process can take a few weeks or several months, depending on the size of the portfolio and the complexity of the deal. Both parties need to remember that the portfolio is not just a set of numbers or revenue streams. It is composed of real people — property owners who have entrusted their housing asset to the seller, and tenants who rely on the Property Manager to care for their interests. Both need to be treated well during and after the sale, or both the seller and buyer will suffer from higher than expected attrition or other negative consequences.

If you are a Property Manager who is nearing retirement, tired of the business, or find your property management business an impediment to other interests, let other Property Managers know you might consider your options. It costs you nothing to talk, and no commitment is made until after you find someone who shares your objectives.

Now is a good time to consider your options. The property management business is undergoing significant changes and competition will only get tougher in the months and years ahead. This could mean the value of your business will decline over time.

Current editions of the award-winning Residential Resources magazine is sent eleven times a year to members. Join NARPM to receive all of the benefits of membership and receive current editions.

Residential Resources: September 2016 Issue: Volume 27, Number 9