Property Management Company for sale - How to value

[Marshall Hooper]

I've been offered to purchase a property management company and I'm hoping to get some advice on how to property calculate the purchase price. It's approximately 200 doors with about 12k/mo. in gross revenue. 

[Charlie MacPherson]

@Marshall Hooper Generally a business is sold at a multiple of "owner's discretionary income" (sometimes called net profit) with adjustments made for inventory and assets.  

For example, I'm selling a few gas stations right now.  In order to arrive at the sale price, we break the sale into two components - real estate and the business.  

The real estate value should ideally come from a commercial appraiser, but if the seller doesn't want to pay several thousand to the appraiser, we can approximate the cost by either tax assessment, recent comps or the last purchase price.  Then we look at the P&L and in the case of gas stations, use a 3X multiplier.

So if the real estate is valued at $1M and the business produces $100K in net revenue for the owner, the sales price would be $1M + $300K = $1.3M, plus inventory.

BTW, the gross revenue is a meaningless number.  $12K gross with $11.9K in expenses is not especially interesting.  $12K gross with $1K in expenses is a whole different kettle of fish.

One other note.  Sellers will often say that they don't report all of their sales in order to avoid (evade) taxes.  I strongly advise buyers not to consider such claims unless there is rock solid evidence to back it up.  

That would call for forensic accounting, like verifying inventory purchased to back up the claimed sales.  For example, you would have to review purchase orders and match them against accounts payable and bank statements showing that those checks cleared.  In the case of a gas station, we would look at how much gas was purchased and verify the claimed delivery numbers with the supplier.  We could skip checking bank statements because terms are normally anywhere from same-day to a few days.  

Good luck with your purchase - and if you open a PM company in metro Boston, don't lose my number!