How much should I value the purchase of a property management company?

Real Estate Investor · Huntington Beach, CA · Member since 2008 · 14 posts · 12 votes

I am aggressively looking for property management companies for sale in Orange County CA. I have seen pricing vary. It typically falls into 6 months of gross management fees on the low end and a year and a half of gross management fees.

Has anyone seen any different ways to value these businesses?

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Account Closed
Homeowner · Signal Hill, CA · Member since 2015 · 521 posts · 70 votes
11y
net
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Bryant HullBusiness Member
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Real Estate Investor · Huntington Beach, CA · Member since 2008 · 14 posts · 12 votes
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One year of net? What are you suggesting? Thanks
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Sky Mikesell
Principal · Charlotte, NC · Member since 2010 · 200 posts · 89 votes
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1% of gross management fees for one year is standard fair here in north carolina. i would imagine you could get away with a little less in your area based on facts rents are higher.
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Bryant HullBusiness Member
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Real Estate Investor · Huntington Beach, CA · Member since 2008 · 14 posts · 12 votes
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Originally posted by @Sky Mikesell:

1% of gross management fees for one year is standard fair here in north carolina. i would imagine you could get away with a little less in your area based on facts rents are higher.
So if I am buying a company that is grossing $100,000, according to your math I should only pay $1000.
I would do that deal any chance I could get not sure if you are joking or if you misunderstood the question.
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Sky Mikesell
Principal · Charlotte, NC · Member since 2010 · 200 posts · 89 votes
11y
haha let me clarify...
Property rents for $1000 per month.
Management company fee is 8% of gross collected rents = $80 per month
as a buyer of a property management company you would pay 1-1.25 for that income stream... which is an annualized number.
$80 * 12= $960 *1 = $960 or 80 * 12 = $960 *1.25 =$1200 that would be the "value" of that one account. obviously if they are a property manager they are hopefully going to have more then one account so you would quantify that number. :)
that should make more sense then my first post.
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Bryant HullBusiness Member
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Real Estate Investor · Huntington Beach, CA · Member since 2008 · 14 posts · 12 votes
11y
Originally posted by @Sky Mikesell:

haha let me clarify...
Property rents for $1000 per month.
Management company fee is 8% of gross collected rents = $80 per month
as a buyer of a property management company you would pay 1-1.25 for that income stream... which is an annualized number.
$80 * 12= $960 *1 = $960 or 80 * 12 = $960 *1.25 =$1200 that would be the "value" of that one account. obviously if they are a property manager they are hopefully going to have more then one account so you would quantify that number. :)
that should make more sense then my first post.
This makes sense. Essentially it's 100%-125% of annual gross management fees. Thank you for your feedback!
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Lee L.
Investor · Los Angeles, CA · Member since 2014 · 285 posts · 142 votes
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@Bryant Hull It might be better to use EBITDA multiples than just multiples of gross receipts. That way you can also factor in expenses. Companies can vary widely in how they do things, the types of liabilities they have such as staffing, rents, notes, among other things, which play significantly into profit margins. You might also want to look at how established the company is, how established their accounts are, and whether or not the company is growing. If it's a newer company, and projected to grow, you might consider their projected discounted cash flows to evaluate the company. Try to use a few different techniques to see which one is a better fit for you.
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Bryant HullBusiness Member
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Real Estate Investor · Huntington Beach, CA · Member since 2008 · 14 posts · 12 votes
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@Lee L. Thank you for your suggestions this is a good point and may help in negotiations. We are looking to acquire the management contracts and fold them into our existing operation. The expense side would be completely different because we would not be taking on their lease, or any of their expenses. Our current staff would take on the new portfolio so we would not incur any additional payroll expense. Essentially, we are hoping to make their gross our net (or pretty close to it). If their gross numbers are strong but EBITDA is weak this would present an opportunity to negotiate a lower price based on EBITDA. Great input.
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Account Closed
Investor · New York, NY · Member since 2016 · 105 posts · 118 votes
10y
@Bryant Hull did you end up end up finding a company to acquire? If so how did you end up valuing the acquisition?
Curious because I am starting discussions to with my third party management company to buy a stake of the business.
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Stan Vanetten
Concord, NC · Member since 2016 · 1 post · 0 votes
10y
Valuation for Property Management 3X to 5X Seller Discretionary Earnings or 1X to 1.5X Annual Revenue, depending on how well established the brand and reputation is in the market, market share, number of units, scalability, etc...
Transaction Structure, never buy a Property Management business for cash, you must include an earn-out structure or provision to protect the purchase against clients/property owners leaving post-transaction. Transaction structure in this regard can range from 30% hold-back to 1/3, 1/3, 1/3.
I would be curious to hear what others have to say about transaction structure and terms????
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Greg Traub
Residential Real Estate Broker · Orlando, FL · Member since 2011 · 1 post · 0 votes
9y
Clarification question....some are saying gross management fees, others just gross income. If we're just talking about purchasing management contracts (not the entire business) would you consider leasing income in what you consider "gross management fees"? I'm also aggressively looking in the Central Florida area to acquire additional management contracts from other agencies, and was considering just gross management fees time 1-1.5x; but excluding leasing and other income that is not regular.
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Steve Newsom
Investor · Yucaipa, CA · Member since 2014 · 12 posts · 2 votes
9y
Hi Bryant,
So what did you finally settle to evaluate valuations of property management companies?
Steve Newsom
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Kim Meredith HamptonBusiness Member
Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
9y
Bryant Hull good numbers to work with are 1x to 2x of the gross or 3x the net. Deduct out the owner benefit, depreciation etc... We are actually getting ready to close on an acquisition in a couple of weeks, and also merge into our existing office. We already have about 1000 homes, so the scales of economy really work in our favor!!! Be happy to talk if you want to swap some ideas around, could maybe help each other. This is our second acquisition in 3 years. Have looked at many others, but just didn't make sense or we didn't like the way the company operated, kept books (or didn't keep books)!!! Best of luck in your purchase
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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
Just wanted to bump this as I am going to start valuing my small property management business (maybe 10 doors total) to include it into my personal net worth calculation. It seems it is fair to some to value a property management business at 1-1.25 times my gross annual income? Meaning, if I am earning $10,000 annual on gross collected rents, a buyer should pay 1-1.25 times for that income stream? That seems a little low to me, you would make all your money back in about 18 months. I know businesses can be 3x revenue, obviously PM is more client facing so it's unique.
[email protected]732-289-3823
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Rochelle Wilkinson
Property Manager · Phoenix, MD · Member since 2015 · 79 posts · 60 votes
9y
@Peter Tverdov what would you consider a fair percentage for a property manager? I do some management for a family member and wonder if I am being paid too much or too little?
I get a leasing fee ( equal one months rent) and 5% of the collected rent.. however I get no pay for raised rents ( which I determine and raise yearly) nothing for repairs or work done to the apartments. so its basically the 5% and leases.. and since I took over we went from 30 % vacancy to we are at full capacity with a wait list, and I raise the rents by almost 70% in the last 5 years. ( yes you read that right) . I'm told I am being fired soon. and I am scratching my head as they feel they pay me too much.. I really think now that I have the building running smooth and cash flowing I have made it look too easy and they think they can do it themselves.. but I hear it all the time that they pay me too much and I m being fired soon.. HELP!!
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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Peter T. If anything, it's a little high. But I'm no business valuation expert. What you have is more of a "practice" than a "business". If I buy the revenue stream I'm not buying "Peter" with it. I have to now pay a "Peter" to run that revenue stream. Even if I get Peter for minimum wage it's going to cost me more than the entire revenue streams gross revenues. So as a "business" I'm upside down.
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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
Originally posted by @Andrew Johnson:

Peter T. If anything, it's a little high. But I'm no business valuation expert. What you have is more of a "practice" than a "business". If I buy the revenue stream I'm not buying "Peter" with it. I have to now pay a "Peter" to run that revenue stream. Even if I get Peter for minimum wage it's going to cost me more than the entire revenue streams gross revenues. So as a "business" I'm upside down.
I disagree with you. If you already are a PM or already own a PM business then you are buying a book of clients and their revenue stream. This happens all the time. Hence why books of business are typically valued at about 1x value whereas a true bonafide business might be 3x or higher depending on future revenue projections.
[email protected]732-289-3823
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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Peter Tverdov Looks like it's "agree to disagree" on this one! I always look at SDE (discretionary earnings) and if it's a typical PM firm with 30% margins (give or take) then the $100,000 in collected rents should yield $10,000 in revenue (assuming 10% PM costs) which would give a profit (SDE) of $3,000. If I have to replace you with someone else to manage that portfolio that yields $3,000 (without labor costs, profit, etc.) then I'm upside down in a hurry. The irony is that the more client-facing the practice/business is the less value the business has and the more value that you have. So if you walk away (read: sell) the value goes with it. It's incredibly hard to transfer "good will".
What digging I've done has been in valuing professional services practices (same issue: owner does the "labor", has client loyalty, etc.) as well as medical practices (patients loyal to a doctor more than a physical address). The challenge is the assumption that the clients will be retained. The simple fact is that it's incredibly hard to get that. Which is why you end up with lengthy non-competes, 3-year (or longer) earn-outs, staggered payouts based on sustained revenues, etc.
The added challenge is that someone who wants to sell often doesn't want to be obligated to anything for another 3 years but also doesn't want their payout to diminish because clients (in this case property owners) move on to other service providers. So there's a catch-22 in there when you define an "exit".
Again, I'm incredibly happy to be wrong on this one as I'd love to know that I could start managing my 36 doors myself and have a business with a valuation of 1.25x revenues after a year. That would be awesome. I just don't think it's reasonable.
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Nate Garrett
Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
9y
@Andrew Johnson @Peter Tverdov
If you have management contracts in place that allow assignment to another property manager, the value of each contract (asset) is roughly 1.0x annual gross management fees (no leasing).
It is unlikely that you would be able to sell a PM "business" with only 10 contracts. However, you might be able to find a PM company that would pay you the above-mentioned price for the 10 contracts.
Once the company attains 100 (give or take) doors under management, the business itself may have attained a market value of roughly 2-3x seller's discretionary earnings. This is the point in which the entire business becomes marketable because the gross revenues can support a full time property manager. However, most established PM companies would still look to acquire the 100 contracts with a claw-back clause. It would most likely be a new entrant to the PM industry that would buy a company of that size.
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Nate Garrett
Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
9y
I should add that any PPE (property, plant equipment) i.e. real estate, computers, office furniture, vehicles, etc etc would be in addition to the 2-3x SDE if the whole business is sold.
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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
Originally posted by @Andrew Johnson:

@Peter Tverdov Looks like it's "agree to disagree" on this one! I always look at SDE (discretionary earnings) and if it's a typical PM firm with 30% margins (give or take) then the $100,000 in collected rents should yield $10,000 in revenue (assuming 10% PM costs) which would give a profit (SDE) of $3,000. If I have to replace you with someone else to manage that portfolio that yields $3,000 (without labor costs, profit, etc.) then I'm upside down in a hurry. The irony is that the more client-facing the practice/business is the less value the business has and the more value that you have. So if you walk away (read: sell) the value goes with it. It's incredibly hard to transfer "good will".
What digging I've done has been in valuing professional services practices (same issue: owner does the "labor", has client loyalty, etc.) as well as medical practices (patients loyal to a doctor more than a physical address). The challenge is the assumption that the clients will be retained. The simple fact is that it's incredibly hard to get that. Which is why you end up with lengthy non-competes, 3-year (or longer) earn-outs, staggered payouts based on sustained revenues, etc.
The added challenge is that someone who wants to sell often doesn't want to be obligated to anything for another 3 years but also doesn't want their payout to diminish because clients (in this case property owners) move on to other service providers. So there's a catch-22 in there when you define an "exit".
Again, I'm incredibly happy to be wrong on this one as I'd love to know that I could start managing my 36 doors myself and have a business with a valuation of 1.25x revenues after a year. That would be awesome. I just don't think it's reasonable.
So if I am understanding you correctly...I need to scale and have people working for me and THEN the business can become more valuable because its not so much the client (owners) are loyal to me personally but moreso they're loyal to the business and how it operates...
[email protected]732-289-3823
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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Peter Tverdov Yes, that's my perspective anyway. If you want to go out to the extremes, people don't search on Google because of their relationship to Sundar Pinchai. If he retired tomorrow, you'd still use Google to search and advertisers would still use Adwords. I don't know in the PM world if you *need* to have employees to have a sellable business but it sure helps if you're buying a system, people, processes, etc. that can operate with (or without) you.
If your business implodes if you go on vacation for 2 weeks to Europe and leave your phone in the office, it's not much of a business (it's a practice). Again, my perspective, others may wholeheartedly disagree. People still do buy practices but the valuation methods are very different from businesses.
The good part about practices is that they require less fiscal investment and generally can be better "cash cows" than a business. It's a pain to hire people, it's a pain to train people, turnover is a pain, leasing office space is a pain, etc. It's also when you're buying that "machine" that someone has put together, there's added value over a practice. So there really isn't a right or wrong path to take.
And you'd also have to put yourself in the shoes of a potential acquiring company. Would you pay $10,000 for 10 accounts or could you spend $10,000 on advertising and get 10 new accounts? Either way, you get the 10 accounts. I know if someone came to me and said: "I'll pay you $10,000 in a one time fee if you let me manage your 36 units and all you have to do is keep paying the 10% property management fee you do already and I'll honor your existing contract!" I'd jump at that and I think others would as well. So that hypothetical could spend $10,000 for your book of business or semi-bribe me (maybe call it a "rebate") with $10,000 to get my book of 36 units.
When you start talking about scaling and it's hundreds of units/accounts it's just not longer easy to pick up that many rapidly. So there's arguably more value in that established customer base. Again, my two cents. And I hope someone tells me that I'm wrong, can manage my own properties for a year, and then have a sellable portfolio.
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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
So then I would just call my "business" a "practice" at this point. Either way, I feel there is a valuation on it. It's a revenue stream and maybe if I tighten up my contracts with the owners it will make it more sellable in the future if I choose to do that. I just want to be able to put a conservative valuation on it, that's all.
[email protected]732-289-3823
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Cole Vogel
Lake Wales, FL · Member since 2017 · 1 post · 0 votes
9y
I currently have a portfolio of about 70 properties in the central Florida area. I have Been considering selling. I have great books and very high owner retention rates. If I were willing to stay on and help with the transition for a couple of months. Would it be possible to get closer to 2x on my yearly gross?
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Tom Kaider
Investor · Palatine, IL · Member since 2015 · 69 posts · 31 votes
9y
I love this thread. I would buy 10 units from someone, no problem. I'd rather just have the contracts than their "company".
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How much should I value the purchase of a property management company?

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