Buying a property management company

[Al Phillips]

I own a property management company and manage about 115 properties.  A dear friend of mine has passed away and her heirs are now selling her property management company.  She has approximately 120 properties.  Does anyone have any idea what a company like that is worth?  They collect about $10,000/mo in management fees.    They would like to sell it and I would like to buy it but have no idea how much her company is worth.  

[Michael Le]

Take this with a grain of salt since I'm only regurgitating what I've heard on podcasts and read in articles, but usually small businesses like this sell for some multiple of income - something like 3x. The multiple is higher if it is a more well-known brand, etc. So if It's Joe's CPA company it's going to be one thing but if it's State Farm insurance then it will be something else. What the number is for a property management company in Michigan I have no idea. You probably should hire a consultant for that - to protect yourself from overpaying and from the heirs claiming you stole the company from them.

[Richard White]

Since it seems your company is pretty comparable to the one you're interested in, how would you value your own? I would assume your management style will affect the numbers and bring them closer in line with your own, so what would you sell yours for?

[Eric Gardiner]

I bet it will value out at 1.5 to 2.0 x annual income. I would talk to a CPA or business broker to comfirm. 

[Jarrod Kohl]

Typically I would say 1-2x gross income and maybe 3x the profits. 

However, it depends if you are then also inheriting a staff and would need to worry about ownership changes.  AKA set something up so that you pay a portion up front and then the rest out over time depending on retention. If they are not in long term contracts you may lose some and if you pay X for 120 properties and end up with 65 properties over the next year, you paid to much.

[Ronald Rohde]

You need to examine the PM contracts to see how far into the future they extend, also see what provisions they have to terminate in the event of ownership change. don't count on the full $10k of revenue to continue.

[Tracy Streich]

$800-$1200 per door is typical or 1 x gross.  This matches up with 120 properties at $1000 per door and $120,000 per year in revenue.   Keep in mind you are only buying contracts and you have no relationship with the person under contract.   PM contracts are very easy to walk away from.   I suggest Paying partial down say 50% and then paying out the additional on a payment scale over the next 36 months based on overall retention.   If some of the contracts leave you take that off the end payments.   Make sure you are ready to double the number of properties you are managing!

[Matthew Whitaker]

Hey Al,

We are actively purchasing property management companies and I agree with Tracy's advice.  There are a number of factors that could move that needle up or down though.  Customer concentration, lack of systems, etc.  

You are welcome to pm me if you have any specific questions.  We've learned a lot, made a lot of mistakes, and finally figured some things out that could probably help!

mw

[Andrew Johnson]

Al Phillips It sounds like you’re buying contracts more than a “business”. Once you lease office space, set up systems, advertise for vacancies, etc. how much of that $120K really ends up as profit? Keep in mind, you don’t buy her (guessing she does most of the work) so what will you have to pay someone to do her work? Will you do it yourself? Will you pay someone $50K per year? What happens to your cost structure when you have to pay to replace her? Do you have excess hours/capacity so it will cost you $0 more to service the portfolio? Anyway, you get my point. Odds are you’ll want an earn out of some sort as I’d imagine some portion of her base will leave when the “company” is sold. Or they leave because they had a great relationship with her and not you.

[Keith Weigand]

@Eric Gardiner and @Jarrod Kohl are more in the ball park. I have sold 2 technology companies in the past. Some valuations are done as a multiplier. Also consider the synergy (if any).  Although technology valuation is different, many aspects are the same. Do thorough DD. Understand what you are actually buying. If you determine you are buying contracts, make sure those contracts will stay in place. As part of DD, contact all customers and chat. Get a feel for them and their current satisfaction. Keep in mind that you will be able to combine some expenses, actually reducing the expense on their books. Consider structuring the deal so the seller still is involved for a period of time. This helps with transition and putting existing customer's fears at ease. Put together a note with the seller as well. There are so many things to consider. I'm no expert but I am open to share my lessons.

[Chris Grizzaffi]

@Al Phillips, I have just been invited to purchase a similar business - really, just the property management contracts on 70 single-family home - and I was wondering how this worked out for you. Did you find an ideal valuation method and a win-win method of acquisition?

I would be new to property management. I am a broker in Texas with a couple rental properties of my own, and while I have had interest in property management, I am just starting down this road.

Thanks in advance! -cg

[Karen Rittenhouse]

@Al Phillips This is HIGHLY negotiable so decide what it's worth to you and start from there.

We sold our company based on the value of the monthly leases and how long was left on those leases. Averaged about 90% of monthly lease payment times number of contracts. It was heavily negotiated due to being higher end rentals that paid average of 10% monthly fees plus all the incidental fees the new company was charging. Higher lease payments were closer to 100 percent of 1 months lease payment and lower end were closer to 75% of monthly lease payments.

Clear as mud? I hope this helps.

[Nathan Gesner]

Somewhere around 1 - 1.5 times the annual gross is pretty common. You can reduce the price if you're not buying the actual business (equipment, web sites, good will, etc.).

I was considering the purchase of some management contracts recently and planned to make a low offer because I know the quality of the management contracts are weaker than mine. Someone pointed out that I could spend that same money growing organically through marketing rather than spending it to buy a potential mess. That makes good sense.

[Mark Bellamy]

As someone who owns a property management company, and who has purchased several other PM companies, I should point out that the gross income of $10,000 per month for 120 doors is very low. A healthy margin would be $1,400 to $1,800 per month per door, plus any profit you can make from ancillary businesses such as a maintenance division. I wouldn't pay more than about $500 per door at that rate. Be very careful because she may not have been charging enough to make a profit once you calculate in paying a property manager and office expenses and other costs of running a business. Most property management companies do not even turn a profit. Don't take on doors just to grow without carefully examining whether you will make a profit worth the investment and time. 

Also be advised that the average industry turn rate from attrition is about four years. Plan on having to replace 25% of those doors every year through sales efforts.

[Donald Leske]

I got an offer for my 490 doors, just the assets, for $1.1m. That can equal about $200k per 100 doors. My fees and contracts are downloadable from my site and we have been BBB A+ rated for years. It pays to be clean and clear of debt.

[Justin Tahilramani]

You may consider buying the entire company and operating it as a separate entity. Having two PM companies in the same market may be beneficial as long as you can find a way to avoid duplicating expenses. You could hold onto the 2nd PM company - strip all the top notch clients/properties - then sell the remaining contracts to someone else.

Have you asked them what they want for the business? Usually the first person to present a number during negotiations is at a disadvantage......

[Justin Rossi]

Hello, I am in a similar position to purchase a property management portfolio of roughly 120 doors. We know the owner well, and he is looking to retire soon and wants us to purchase the business. Trying to come up with a solid value seems to be a moving target until I found this thread. It's been a few years, but is everyone in agreement that a fair number is roughly 1.5x gross yearly commissions? Times have changed since 4-6 years ago, so figured I'd bump this conversation. Thanks in advance.

[Michael Smythe]

Suggest you join NARPM where they cover this for members.

[Henry Clark]

I wouldn't go with a standard industry metric.

What are your financial objectives in evaluating an asset?

Cash on Cash

NOI

Payback

Risk Reward.  

Your lifestyle and business interests?

Owner financing.

Subject to 1 year customer retention.

Are there key personnel that make the business run, or will you step in?

Is the business model scalable?  Systems, preventive maintenance, ops procedures documented, automated collection and billing systems, etc.  Or is all of this in a notebook?