How do you value a property management company to sell it?

One of the hottest topics in the investment scene is how single-family and small multifamily property management companies have all of a sudden become valuable on an institutional level.

What used to be seen as a traditional "Mom and Pop" type, self-employed, business has suddenly been institutionalized by some pretty big players, who are backed by some serious money.

There is really one first question everyone wants to know . . . I bet you can guess what it is. . .

How do they value a property management company?  OR
How much do they pay for a property management company?

While the answer should seem simple.  The real answer is, "it depends".

"Depends on what?" you ask.  

A number of factors, but I'm going to hit the biggest.

Who is buying.  Hard to believe this, but the who the buyer is plays the biggest single role in determining how much they think your company is worth.  Different buyers have different measures of value.  Some buyers may value one thing, while another buyer may value a completely different thing.  Needless to say, to get the most money for your company, sell to a buyer who sees value in what you've built.

Risk.  Risk is a real factor that your buyer is constantly thinking about with regard to your business throughout the process.  Riskier setups like high customer concentration, makes your management company lose value in the buyer's mind.  I would say a high customer concentration is having any one owner who is over 10% of your portfolio.  

Another important factor in assessing risk is, who is going to take on the burden of possible attrition?  Owners WILL leave during a transition, the question is how many and who is responsible for them. 

Frequently, companies will attempt to pursue a clawback or earnout against a seller based on the number of properties that leave the portfolio.  Which has risk for you as a seller, because you no longer have control after the close of the transaction.  

However, if a buyer takes on more risk upfront, you should expect a smaller possible sales price.

Financial buyer versus a strategic buyer.  Knowing what the intentions are of the company who purchases you is very important.  

If the company is a financial buyer - meaning they are almost strictly looking at it as a stand-alone business with a predictable return - they will typically pay less than a strategic buyer - who thinks Company A (Buyer) + Company B (Seller) = 3x better than they are separate.

Strategic buyers is that 3x solution and will pay more for business because they are focusing on the synergies of the combined companies and you get to participate in some of that synergy.  

Most, if not all, of the buyers in the property management industry, are strategic buyers right now because the mergers and acquisitions activity is so new and we are so early in the game.

Selling your property management company is a fairly complicated process.  Dumbing the value of it down to one simple formula is not very easy.

One thing I've noticed in the transactions I've been involved in is the Seller feels like he/she is getting less than what the company is worth and the Buyer always feel like they are paying too much!