How to Value and Sell a Property Management Company
If you’re the owner of a property management company, you may have thought about planning your exit.
Selling the business is probably your most lucrative option.
After all, you deserve credit for all the years of work you put into growing the company.
Or, like some business owners, you’ve grown the business to a point where you could benefit from the additional capital of a private equity group or other investor.
Whatever your reason for considering a sale, you’re in the right place.
In this blog, we’ll discuss:
- How property management companies are valued
- What impacts their value
- Who you could sell to
- Who you can hire to represent you in the transaction
Let’s get started.
Valuing Your Property Management Company
The best way to value a property management company is by using the multiple of earnings method. Depending on the size of your business, there are two main earnings metrics that may be used: A multiple of SDE or a multiple of EBITDA.
Seller’s Discretionary Earnings (SDE) shows potential buyers the total financial benefit of owning and operating a business.
Certain expenses like depreciation, officer’s salary, benefits, non-recurring expenses, and other discretionary items (like an owner’s vehicle or fuel expenses) are added back into the net profit to give potential buyers an idea of how much money the business will make them.
Once the SDE has been determined, a multiple will be applied to the earnings to determine the purchase price of the business. Multiples are determined by using the comparable sales of similar businesses and determining a range that best applies to your business.
The multiple applied to your business will depend on the amount of risk seen in acquiring your business; lower risk equals a higher multiple, higher risk equals a lower multiple.
To learn more about SDE, check out our blog “Seller’s Discretionary Earnings (SDE) Explained With Examples.”
MIDSTREET TIPEarnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is similar to SDE conceptually, but it's more often used to value larger businesses (with more than $1 million in earnings). The main difference between SDE and EBITDA is that EBITDA does not show the financial benefit to an owner/operator, but rather to buyers/investors.
Many of the add-backs in an SDE valuation are also added back in an EBITDA valuation, but instead of adding back the current officer’s salary, EBITDA adds back a fair-market officer’s salary.
NOTEBecause business owners may pay themselves above (or below) a fair market salary, and the buyer of the business will be hiring someone to fill that role, it's important for the buyer to know the difference between the current owner's salary and the salary a new manager will be paid. For this reason, a fair-market officer's salary is added back to the valuation to determine that difference and reflect it in the business's earnings.
EBITDA valued businesses normally command higher valuation multiples because they generate more profit and are thus seen as less risky acquisitions. Buyers are also usually willing to pay more for a business they don’t have to personally operate.
Property Management Value Misconceptions
We’ve seen business brokers/M&A advisors and CPAs (Certified Public Accountants) with accurate and inaccurate valuations.
One of the main reasons for this is the misconception that a business should be valued on a percentage (usually ≈ 40%) or multiple of the business’s sales or revenue plus inventory, which isn’t often a valid valuation method.
Think about it. If a company doing $3 million in revenue with $300,000 in inventory was valued using this method, that company would be worth $1.5 million.
If the owner of that company was overpaying employees or underpricing work, they could actually be losing money. As you may have guessed, no one would be willing to pay $1.5 million to lose money.
There are also certain industries that require much more working capital to operate. For example, we’ve seen a distribution company with close to $20 million in revenue with earnings of $500,000. Using the 40% of revenue + inventory method, that business would be valued greater than $8 million.
Would you pay more than $8 million for a business that only made $500,000 per year? Maybe if it was a very low-risk investment. But probably not.
Even though revenue is a good way to determine the size of a business, it isn’t the best way to value one. For this reason, a multiple of SDE or EBITDA provides the best, most comparable business valuations.
What Impacts Your Property Management Multiple?
Arriving at a multiple to value your business is more of an art than a science. Basically what you’re trying to do here is pull a list of recently sold property management companies as similar to yours as possible, identifying the highest multiple and lowest multiple, and taking out any outliers.
Next, you'll look at all the factors that make up your business and rate their attractiveness to a potential buyer. The better you rate, the closer you are to the higher end of the range. The worse you rate, the closer you are to the lower end.
Here are the factors that impact the multiple you’ll receive:
Besides increasing your business’s earnings, the number one factor that will determine whether you get a high or low multiple depends on your level of involvement in the business.
When speaking with owners about their businesses, we often find that owners are proud to share that they take customer calls, quote projects, manage the books, create work orders, etc. While an owner certainly should be proud of their ability to grow a business while holding so much responsibility, it isn’t what buyers want to hear.
Imagine this: you're searching to buy a business, and have been presented two different opportunities. One of these opportunities is a business doing $800,000 in SDE. This business’s owner is the first to arrive every day and the last to leave, and they often work 60 hour weeks.
The other opportunity is another business also doing $800,000 in SDE but has a mostly absentee owner. This owner visits the location a couple times a week and attends a few meetings each quarter.
Which one of those businesses would you pay more for? Probably not the one that will require you to work 60-hour weeks. Even if you hired someone to replace that role (a difficult role to hire for), you would have to reduce the earnings of the business, and likely pay less for it.
The same is true for your property management business. If you are the one performing business development, going to every sales meeting, overseeing maintenance crews, taking calls from Homeowner’s Associations (HOAs), etc., a buyer will view that negatively and offer you less for the business.
Most buyers prefer property management companies with management and processes in place to handle those responsibilities, which will be reflected in the multiple they are willing to pay.
Number of Units
Another factor that will determine the multiple you receive for your property management business is the number of units you have, and the concentration of properties under one real estate group or REIT.
For example, if you manage 1,000 properties in the Triangle area of North Carolina, but one investor owns 500 of those properties, there is a higher risk of losing half of your managed properties should the investor decide to use another property management company.
Due to this high risk, buyers will probably offer a lower multiple for the company.
Contrastingly, if your property management company has 1,000 units split between three HOAs, 1 large investor, and 100+ landlords, this presents less risk to a buyer because a high concentration of properties are not associated with one or two key customers.
Types of Property
What type of property your company manages can also affect your multiple depending on the type of buyers who express interest.
For example, another property management company could be interested in acquiring your company because you manage commercial properties, and they want to expand their services to include commercial property management.
In other cases, such as when a commercial real estate group is looking to acquire a property management company, they likely won’t be interested in your company if your primary focus is on residential properties.
When it comes to focusing on commercial vs residential properties, there isn’t necessarily one that is better than the other. It all depends on buyer-business fit.
Even buyers of residential property management companies may not be interested in acquiring a property manager if the residential properties they manage are highly concentrated in single family homes instead of multi family buildings or vacation rentals.
Similarly, a buyer interested in a commercial property management company may not be willing to offer as much depending on if they primarily manage office and retail buildings instead of industrial.
This is one of the reasons we recommend hiring a business broker: they can help test the market and find the best buyer for your company.
A quick note on Property Types
While it’s true that certain buyers for property management companies prefer managing certain types of properties, there are some property types that are generally more sought after than others. In order from most to least desirable, these property types include:
- Large multifamily buildings
- Smaller multifamily buildings
- Single family homes
- Multifamily residential
- Single family homes (HOA)
This isn’t to say a property management company with a higher concentration of multifamily residential contracts couldn’t get a higher multiple than one with more large multifamily building contracts. Generally speaking, however, the list above provides a high-level view on the types of properties a buyer would prefer to manage.
Quality of Contracts
Just like any business, a property management company is more valuable if future business is guaranteed. One of the biggest things that can make a buyer feel comfortable with an acquisition is the term and quality of their management contracts.
Typically, if your contracts are automatically renewed every 12 months, buyers will feel far more comfortable acquiring your company, and may offer you a higher purchase price.
Professional Processes and Procedures in Place
The buyer of any business will prefer to step into ownership with well-established processes and procedures in place.
Property management software like Buildium and AppFolio can make a buyer feel more comfortable knowing there are management systems in place to help them run the company.
Additionally, accounting software like QuickBooks and document signing software like ZipForms or DocuSign can be helpful for a new owner to stay on top of day to day tasks.
One of the main goals many buyers have after an acquisition isn’t just to maintain the company’s profitability, but to grow it.
If your property management company is in a market with a large number of units available for property management services, or there aren’t many other property management companies in your market, this can present a real opportunity for a buyer to expand.
The more you and your broker can quantify the ability to expand, the more you’ll be able to increase the potential value of the business.
If a buyer can reasonably grow profits by taking over a greater market share, they’ll likely be willing to pay more for the business.
Tenure of the Business
Generally speaking, property management companies who have been in business for decades tend to come with better relationships, contracts, and brand recognition.
These can all contribute to a higher multiple.
Location, Location, Location
You’ve heard it concerning real estate, and it’s no surprise that you’re hearing it concerning property management.
Property management companies in locations like Austin, Raleigh-Durham, Orlando, Houston, or Charleston present fantastic growth opportunities due to their rapidly growing rental markets.
Even if your property management company isn’t in one of these large cities, locations with dense or growing population are a plus. Try to center around the “path of progress,” where nearby cities are growing into.
This is especially true due to the growing number of millennials who are opting to rent instead of buy homes in recent years.
Quality of Properties
Properties with low vacancies and turnover rates, low number of outstanding rent payments, etc. are far more secure for property management companies. It comes back to the guarantee vs risk associated with profits.
A property management company managing properties with low vacancy and turnover rates, on-time rent payments, and higher revenue per-unit will have more guaranteed earnings, thus making the company worth more to a buyer.
Selling Your Property Management Company
Now that you know a bit more about what impacts the value of your property management company, you may be wondering who you’ll actually sell the business to to. Lucky for you, property management is an industry that can fill the needs of individual, strategic, or private equity buyers.
Who you end up selling to depends on the size of your business and your goals for the sale. Let’s take a look at what each of these buyer types bring to the table.
Selling to a Competitor
As you can imagine, other property management companies are constantly trying to expand their reach and secure more contracts. One of the quickest ways for them to do this is to purchase another property management company in their market.
A big part of purchasing a property management company is acquiring more contracts, which can take a long time to do organically. Buying another company for their contracts is an attractive way for a growing property management company to quickly expand.
Property management franchises like Real Property Management, Property Management, Inc. and All County Property Management could be willing to pay a premium for your business if you have enough quality contracts. Again, you’ll never really know until you go out to market and solicit their interest. Remember, it all comes down to buyer/business fit.
Selling to a Strategic Buyer
Strategic buyers are businesses in an industry related to yours who could benefit from acquiring your property management company.
Selling to a strategic buyer could be a great opportunity for you to get the most out of your sale. This is particularly true in property management considering the many different buyers who could benefit from acquiring your company, like private equity groups, other property management companies, or even home service companies such as HVAC and plumbing contractors.
These companies regularly use property management services and see value in acquiring your company to reduce their costs and gain access to new revenue streams.
Selling to a Private Equity Group
Private equity buyers can also be some of the best potential buyers for your business depending on what your post-sale goals are.
If you’re ready to retire and walk away for good, private equity buyers may not be the best fit as many of them require an equity roll-over, which would likely keep you involved in the business for the next 3-7 years.
The goal of a private equity buyer is to acquire your property management company, and use their operational expertise and access to capital to grow it before selling to a larger private equity group or strategic buyer.
This can be advantageous for you because it allows you to sell a portion of your company for what it’s worth today, and profit from selling your minority stake in the future (the second bite of the apple).
For example, let’s say you make $1 million from selling 80% of your property management company to private equity today.
After five years growing the business, the private equity group sells to another buyer at three times the original purchase price. Theoretically, you could take home an additional $750,000 from the second sale of your business, raising your seller net from $1 million to $1.75 million (not including the salary you’ll be paid each year until the company is sold).
Selling to an Individual
If your property management company's earnings are between $250,000 and $2 million, an individual buyer could be a great fit to buy the business.
Individual buyers are generally purchasing a business for the first time and will likely need an extensive training period after an acquisition to successfully take over operations.
How Much Will It Cost to Sell Your Property Management Company?
If you’re ready to sell your property management company, one of your first questions is probably, “how much does it cost?”
The answer depends on the size of the operation and who you employ to help you sell it.
For smaller companies (Main Street businesses doing less than $1 million in revenue), a business broker might charge you 10% of the sale price.
MidStreet companies ($1-$25 million in revenue) are often sold by business brokers or M&A advisors, who may use a version of the Double Lehman model, a scaled percentages that increases over a certain purchase price threshold (i.e. 5% for an $11 million target valuation with any amount exceeding $11 million earning 8%), or a flat percentage (5-10% depending on purchase price).
Interested in calculating an example success fee?
Download our Success Fee Calculator below!
Speak With an Experienced Broker or M&A Advisor
To learn more about who to hire to sell your business, who to sell your business to, how much it will cost, and more useful information, check out these resources:
- Business Broker vs. M&A Advisor – Which One is Right for You?
- Business Broker Pricing and Fees
- How Much do M&A Advisors Charge?
- Who Should Be on Your Team of Advisors When Selling Your Business?
- The 5 Types of Buyers for Your Business
Remember, buyers are willing to pay more for a business that has high earnings, and a significant amount of recurring revenue. Any changes you can implement over the next few years to make your property management company a more secure investment for buyers will inevitably increase the amount a buyer is willing to pay.
If you’re still curious about what it takes to sell your property management company, contact us today. We’d be glad to offer our services and provide a free business valuation.