Valuing a Property Management Company
I previously wrote about how PM firms are valued as part of my “Introduction to Residential Property Management (For Buyers & Founders)” post. But I get this question so often, I thought it would be worth making a separate, longer article on the topic. If you would like to hear me evaluate in real-time 2 actual property management companies listed for sale, check out episode 38 of the Acquisitions Anonymous podcast where I was a guest.
Note: The following discussion does not apply to condo or association management companies. I’m assuming purely rental property management.
Transaction Types
Property management companies (like many small businesses) can be purchased in one of two ways:
Stock sale. The buyer purchases shares of the business and steps into the shoes of the seller. In this way, the buyer is assuming all the past liabilities of the current business owner. However, this might be the preferred option if the buyer wants to retain the existing brand, existing contracts & vendor relationships. Depreciation of long-lived assets is not reset.
Asset sale. The buyer purchases a “book of business” from the seller. Also known as Goodwill. In essence, the buyer is paying for the property management agreements (contracts). Ideally the existing contracts are assignable, otherwise the seller needs to get agreement from each individual client. Deprecation does reset (goodwill is typically depreciated over 15 years).
Valuation Factors
Factors affecting property management company value:
Age of the business
Size of the business (total units under management)
Customer concentration (units per client)
Property mix (Single Family vs Multifamily)
Property quality (A class, B class, etc) & average rents
Management fee structure & standardization across clients
Existing management fees relative to market rate
Average client tenure with the firm
Quality of bookkeeping & accounting (ideally, conforming to the NARPM Accounting Standard)
Company reputation in the local market (Google reviews, etc)
Reputation of the seller
Involvement of the seller in day-to-day activities
Revenue makeup (brokerage income, maintenance income, etc)
Willingness of seller to sign a non-compete clause
Payment terms / seller financing
Clawback provision terms (details below)
Pricing
Per-unit. The buyer pays the seller a flat rate per unit under management (eg, $1,200 per unit). So a company with 250 units under management might sell for $300,000 in this example.
Multiple of gross revenue. The buyer pays the seller a multiple on gross revenue from management (maintenance, brokerage & other revenue is typically excluded). So if the company generates $600,000 a year from management fees, the buyer may agree to pay 0.8x gross revenue, or $480,000.
A larger company (over 500 units) may be valued using more traditional SMB methods such as a multiple on earnings/EBITDA. This is especially true if the seller is not involved in day-to-day management activity.
Clawback Provision
It’s common for the buyer to include a clawback provision in the purchase agreement. A clawback provision will discount the purchase price for units that churn out (leave) within a specified time period (usually 6 months to one year). This provision is designed to protect the buyer from paying full price for accounts that leave within a certain time period (because the buyer has not had a chance to “make back” their money on those accounts). This is often a pointe of contention between the buyer and the seller. Naturally the seller will want as short of a clawback provision as possible.
One suggestion here is to tie the purchase price to a fraction of the revenue generated by the accounts over a period of time. For example, 25% of the gross revenue for 5 consecutive quarters. This helps to better align the interests of the buyer and the seller.
Working With a Business Brokerage?
There are a few business brokers that specialize in working with property management companies. I compiled a short list of them here.
I hope you found this collection of information useful!
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I’m Peter Lohmann, CEO and founder of RL Property Management, a residential property management company located in Columbus Ohio. If you enjoyed this article, you can connect with me on Twitter, subscribe to my podcast Owner Occupied, or sign up for my mailing list.