Faced with today's current consolidation/acquisition frenzy and increasing numbers of buyouts spurred by the actions of key employees, more than ever before, owners of property management companiesare searching for the answer to the question being asked throughout the industry, "What's my business really worth?"
Findings from the just-released research study, Valuing a Property Management Company, developed by the Institute of Real Estate Management Foundation, in association with Willamette Management Associates, indicated that as the industry is changing and diversifying, property management companies are utilizing more varied methods in an effort to determine an accurate assessment of the value of their businesses.
The survey also indicated that, while half of respondents utilized multiples of gross revenue to determine value in their transactions, the other half used a calculation based on net income. This differs from the results of a similar 1988 study, in which the respondents indicated the most common rule of thumb was a percentage of revenues. As the property management industry becomes more diverse, it is more difficult to apply broad rules of thumb to determine value.
The study was distributed to nearly 9,400 Certified Property Manager(r) (CPM(r)) members and more than 600 business brokers in the United States.
When trying to determine the value of a property management company, it is essential to define the purpose and objective of the valuation as well as understand the varied methods and definitions of valuation which can be utilized. Speaking before a group of property management professionals during IREM's Mid-Year Conference held in Chicago last June, Robert Shweihs, managing director of Willamette Management Associates, a valuation consulting, economic analysis and financial advisory firm, explains that it is essential to identify the purpose of the valuation.
"It's important for property management companies to recognize the different opportunities available when identifying the value of their businesses," Shweihs explains. "A lot of people believe the value of a business is a single number, and that it's the same number regardless of why the value is required. In the business valuation world, that's simply not true. There are a whole range of values."
Not all property management company owners want to obtain the highest maximum value of their business, Shweihs says. For example, in situations where there are partner or shareholder disputes, marital dissolutions, or in cases where an owner wants to gift shares of the company to their children or heirs in which the gift is subject to reporting and tax compliance, the highest possible value is not desirable.
However, those company owners who wish to obtain a maximum value for their business can help themselves by taking specific actions to increase the dollar amount. Typically, in such cases, the valuation requires an analysis that takes into account the historical financial performance of the company based on a business cycle of at least five years, owner's compensation, non recurring items, and related party expenses. Intangible assets such as customer and employee relationships and the local competitive environment are also considered.
Shweihs suggests that those property management company owners desiring a maximum value for their businesses consider the following actions:
* For company owners looking to sell in the near future, consider taking a pay cut. In this way, the savings can flow to the bottom line, thereby increasing the total company's earnings.
* Take a close look at insurance liability settlements. Those that are in the company's favor should be recognized as such in its income statement.
* Prepare a schedule of relationships with owners and tenants (testimonial letters are a plus). By documenting that these are long-term relationships, you can add value to an intangible asset. Are tenants paying rents above or below market? Are they renewing regularly? When properly documented, this information can be a seller's advantage.
Today's real estate management industry is maturing and consolidating. Smaller companies are diversifying their range of client services in order to generate additional revenue. Meanwhile, larger companies are busy merging with and acquiring other large companies so that they can service clients on an international scale. These changes have resulted in a broader range in values for property management companies.
When looking to maximize the value of their businesses, today's property management company owners must recognize the strengths of their organization, and more importantly, document and manage them effectively.
When determining your company's value, it is essential to identify specifically the purpose and objective of the valuation and understand the varied valuation methods, as well as the definitions of value that are used in business today. With careful preparation and documentation, you are sure to determine exactly what your business is worth.