This is the question everyone wants to know. They like to ask it, “So how much are you going to give me for my company?”
Or, “What’s the most you’ll pay me for my company?” To which I usually answer, “What’s the least you’re willing to take?” Ha!
Everyone believes there is a lot of science to what a company sells for, and maybe that is true in some bigger businesses. But I believe purchasing a small to medium sized property management company is more of an art than science.
That is why it is so hard to give a formula, which is what many people desire.
What I would like to do is give you some insight into how we will view your business when we are deciding on a price.
Intuitively, you know two things: Every one of us runs our business just a little bit differently and for us (gkhouses) to be successful we must run on one platform or system across our markets.
While that may be scary for some, and for others they worry about losing owners with too many changes, that is the reality of anyone who is attempting to build a multi-city operation. For us to create long term value by purchasing your company, we have to switch your company over to the way we do business.
Therefore, we pay a premium for companies where we think that will be easier. I address some of the things you can do to increase the value of your company in an FAQ below.
The next thing that is important to understand is that, unless your company is north of 1000 units, we don’t pay too much attention to the expenses you incur. We have a pretty good idea, from running our business for the last 9 years what it will cost us to run a business your size.
That doesn’t mean we don’t ask for all the expenses, because we do. At a minimum, we need to know what “systems” will need to be wound down after the transition and what that is going to cost us to keep them up and running while we do that.
The good news for you though is that you get your company valued on revenue versus some EBITDA multiplier – which typically doesn’t benefit a small business owner.
As with any transaction, we do our best to work out a fair deal. What we think is fair and what you think is fair may not overlap anywhere. And that’s ok, we expect that to happen from a few conversations. However, we have had a number of relationships that have consummated in a sale.
We’ve divided the process into some distinct steps. I’ll do my best to outline each step in the process.
1. Initial Contact
When a potential seller reaches out to us, it usually starts with an email or a phone conversation. During that conversation, we attempt to better understand your business. Because we are also operators like you, we can ask some specific questions about your business and begin to draw some basic conclusions about it.
This is also the time for you to get some of your specific questions answered. But, just like an owner who is calling you who wants to know what his/her house will rent for, it’s very hard for us to gauge an exact number of what we would pay without diving into some more information.
Much like speed dating, you can decide if you want to go on a 2nd date with us and we are making that same determination. Before we invest any amount of time, we both need to get some “non-negotiables” out of the way. This initial contact is the time to discuss the non-negotiables for both of us.
We have had several owners who leave it here. They are just starting to think about selling their company and trying to wrap their brains around the process and what their company is worth. We are totally fine with it. We aren’t going to take it any faster than you would like to go.
2. Financial Information Exchange
(Note: Sometimes this is actually step 3 and we do the Site Visit as step 2. A lot depends on what seems to make sense after our contact)
This step generally starts with us sending you a Non-disclosure Agreement (NDA). This outlines under what assumptions we are going to receive the information and makes sure before we see anything proprietary or private that we have an understanding of the relationship we are entering into.
Once the NDA is signed by both of us, we have a list of information we would like to get from you that allows us to make a determination of what we would pay for your business. While this is not everything we will need throughout the course of this process, it does do a lot towards getting us started. Here’s a list of items we sent someone recently.
- 3 years of income statements – Please highlight any personal expenses that we can take out that don’t transfer to us
- 12/31/16 Balance Sheet
- Rent roll with leasing fee, management fees, any other fees as a line item. If you feel uneasy giving us the property addresses, feel free to rename them property 1, 2, etc.
- Breakout of gross fees from Management fees, leasing, hoa, etc. (could be part of #1 or #2)
- Salaries and benefits of the current employees
3. Site Visit
I really enjoy coming and seeing someone else in this industry’s operation.
As many as I visit, I always learn something new and find myself impressed by the creativity of entrepreneurs.
I don’t need to spend a ton of time with you. Sometimes I spend some of the day with the potential seller riding around looking at the city and then go to the office after everyone has left. It really is whatever you feel comfortable doing.
My goal is just to visualize the operation. While it is easy to understand one on paper, it is so important to see it operating in real life. Maybe it is because I’m such a visual person.
4. Letter of Intent
If we’ve worked out #2 and #3 and we are aligned on when a possible transaction could take place, then it is time for us to make an offer to you. We do that in the form of a Letter of Intent (LOI).
This letter is very simply a 4 or 5 page document that outlines that our intent is to purchase the business, on a certain date, under certain circumstances (for more on this, see another FAQ). If you agree with the Letter, then you would sign it. This does not make your business “under contract” in the selling a house sense of the word. It is really more like us making a promise to do our best to work towards this deal.
5. Due Dilligence/Contract
This is typically the longest part of the process. Getting everybody happy with language seems to take a little time – it is also when the attorneys usually get heavily involved. There’s usually more than one contract that needs to get worked out, which is a little different. Typically there is an asset purchase agreement, goodwill purchase agreement and an agreement not to compete at a minimum.
This is also the time we will invest in performing some auditing of our financial information, property management software, leases, management agreements, etc.
After the due dilligence and contract are completed, now closing is typically imminent.
I’ve had closings take place in the property management office between just the two of us and some that have taken place at an attorney’s office similar to purchasing a house. A lot of it depends on how big the transaction is. Either way, the closing is generally less stressful and eventful than step 5, because all the hard work is worked out at that point. Closing is generally more of a formality.
I think it is very interesting the aftermath of the closing. Each seller responds to selling the business in a different way. Some are proud, some are sad. Most have a bit of both emotions.
I generally say the same thing to everyone after closing . . . selling your business is a big deal. In a country where only 5% of the business that are started make it, you’ve built a business that has enough value that someone is willing to pay a lot of money for it. You should be proud.
Finding great people is one of the hardest parts of what we do. If you have great people, then we want to keep them. I urge you to check out our careers site on our website if you get a minute. It explains what we are looking for in team members.
The biggest challenge we’ve seen with keeping team members is that they’ve learned one way of doing things. The longer they’ve been with you, then the more ingrained they are in doing things a certain way and they are resistant to change. That being said, if they are really smart and really motivated to change and stay, then they will have that opportunity.
We would like to interview each employee in the first week (after we close on the business). We have an interview process we call, “The Grinder” that we think identifies “A players”. We’ll run your team through that process.
After we run them through the process, we can determine if they will be able to stay or won’t fit in with what we are doing.
If they don’t fit, we will be very transparent with them about that and even pay them a healthy severance. Bottom line is we want all your employees to land on their feet, whether that is with us or with a competitor in the property management industry, so you can feel good about selling your business.
Here is a quick list of things we believe add value to your company.
- Positive reviews
- Set systems and processes
- You are not the main point of contact for everything that happens at your business
- Running on a property management software platform
- Up to date financials that are correct
- Consistent organic growth of the portfolio you manage
- Long term clients
These are typically the exact opposite of the question above, but here is a quick list.
- An abundance of negative reviews
- The business is run without set systems and processes
- One person is the air traffic controller and practically is the business
- No property management software or one that isn’t utilized
- Financials are behind and don’t appear to be correct
- Losing a lot of owners
When you ask this question, you are really asking one of two questions. The first is, “How do you pay for my company?” Do I get money, IOU’s, poker chips?
Or, are you purchasing the assets of my company (i.e. asset purchase) or are you purchasing the company stock (stock purchase)?
I’ll try to answer both of them.
How do you pay for my company?
We’ve structured the financing a number of different ways. Many of them depend on the seller’s goal and tolerance for risk (in exchange for a return). If you want money, we have ways of giving you all cash at closing. If you want to owner finance it, we have ways of doing that too, which will net you more money than an upfront cash purchase.
Our offers are typically structured where you have options. Unless we know exactly which way you want it (Like, “Gimme all my money at closing!”), then we outline different scenarios and let you choose.
Do you do an asset purchase or a stock purchase?
The answer to the 2nd question is, to date, we’ve only done asset purchases. Which means we purchase the assets of the business – typically management agreements, computers, servers, furniture needed to run the business from the company you own and will continue to own. In addition, we purchase your Goodwill (which has some tax benefits) and a Non-Compete Agreement.
Most of the implications of this, you will need to check with your attorney and CPA, because I’m not either.
Our company has a leadership development program we’ve been running for the last couple of years. The goal of that program is to develop leaders to come and run the business you sell us.
If you’d like to check out one we just did a feature on an excellent Team Leader, Mat Cox, in Chattanooga, click here.
We will have an acquisition team that will handle the first 60 days of the transition. Our goal is to get our systems and processes implemented and to WOW your owners with how well we are handling everything. Owner’s get heightened senses when we tell them we purchased your company and while that window is open, we want to knock their socks off!
While the new team leader will be running the show from day one, he or she will be “in charge” officially when the acquisition team leaves.
Rest assured that we have vetted some of the most talented individuals we could find. You will be very impressed with the team that runs your business.
Yes and no. I think you will like us the most the day we have the site visit with you and then two years after we acquired your company. In the middle, it has its ups and downs like any relationship where money is involved. Here is an interesting graph I found gauging emotion during a real estate deal at different points in the process, from offer all the way to close.
As you can see, it is an emotional roller coaster for both of us . . . And keep in mind this just gets us to closing!
It becomes really hard to go from negotiating with someone, to being on their team. Because we are purchasing the businesses that you’ve owned as your baby for so long, it is typically hard for people to detach themselves and remain objective about the process; both before and after closing.
I believe those who are objective, have had a much more positive experience with us. Those that can’t do that would tell you their experience has been less than stellar.
Truth be told we are always learning and changing our processes to come up with the best way to do this. Much like riding a bike, we haven’t been always perfect, but there is no one that tries harder at being perfect than we do.
Ideally, we want you to be our biggest fans after the closing!
Owners typically don’t have an opinion when they find out we’ve purchased the company. What it does is raise their awareness of us. We believe that is why we have to raise our game too.
Most Owners are flexible and hopeful with us for 90 days to get our systems converted. But they are watching very closely to see what is going on. They may be a little more flexible for those 90 days, but they expect things to be awesome after those 90.
We try to make it awesome during the first 90 and awesome after the first 90.
We aren’t perfect though. We actually learned this information by losing Owners in other markets. We are much better than when we started out and continue to strive to get better.
Our due diligence process has gotten better and better as we’ve gone on. Which means it has required more and more from the Sellers.
The good news is there isn’t a ton of information to audit. Management companies, as different as we run them, usually have the same things that need to be audited like security deposit accounts, owner funds accounts, management agreements, and lease agreements.
It is best if you provide us virtual access to this information; whether that be through a property management software, Google Drive or remote login to your server. This will be less burdensome on you.
I will tell you, we like to look at everything. So be prepared and forewarned!
This really depends on how you measure that. We’ve got great leaders in both markets running these businesses. We’ve seen some attrition from Owners leaving, but none that overly surprises us.
We’ve certainly made a ton of mistakes and learned a lot of lessons. We feel like the next few won’t be perfect, but they will be tons better than the ones we’ve done so far.
On a scale of 1-10, I would call them a solid 7.
What can we do better?
I would say execute better and be quicker in the change over to our processes.
If you’d like more information about companies we’ve purchased, click here to see a case study we did on a small company (40 houses), a medium sized company (200 houses) and a large company (500 houses) we purchased in the last 18 months.
If you’d like to discuss more with me about your business and what a sale would look like, please feel free to give me a call on my cell at 205-585-0415 or shoot me an email at [email protected] I’d love to share more about these stories and the new ones we are creating . . . particularly if they can be helpful to you.