05 Nov 2013
Words Tim Admin

Its great out there - but you gotta take care

In all my many years of practice in the area of management rights, I have never seen an election have so much impact on the volume of management rights business transactions. From a fair volume before Julia Gillard announced the election, reducing to a trickle for a couple of months after the announcement, a slight increase for a couple of months, then almost nothing at all from when Kevin Rudd became leader, it was as though the floodgates opened about a week before the election was held when most of us realised that there was definitely going to be a change of government. The dramatic change in confidence was remarkable and shows no sign of abating. It seems as though so many potential buyers were sitting on their hands waiting for the change and as soon as they knew it was happening, they moved swiftly and decisively into the market. Whilst we have seen heightened activity across all sectors of the market, it is in the upper end that we have seen the biggest improvement in terms of volume and multipliers. This end of the market has no doubt been helped by other factors including a rising property market, a lower Australian dollar, record low interest rates and improving occupancies in the leisure and corporate markets. However buyers should be careful not to let the hype lead them to the corner cutting that can often occur in a buoyant market. It can be easy to ignore the importance of making sure the business you are buying stands up to proper scrutiny from a legal and accounting perspective. Some agents will gladly refer you to a lawyer or accountant who will not look too closely at the business for fear of upsetting the sale and the potential for more referrals from the agent. Some buyers are happy to shop around and go with the cheapest lawyer or accountant they can find. Invariably though they will rue the day when they did so. In recent months I have seen so many cases where accountants or lawyers – and in many cases supposed professionals holding themselves out as industry experts - have made an absolute mess of income verifications or the legal aspects of the business. Examples include: • An accountant verifying leaseback income as the much more valuable management rights income, resulting in a rude financial shock for the buyer when he went to sell a couple of years later; • Failure to appreciate that a pre 1997 management rights agreement was subject to the 10 year standard module term limitation even after the complex subsequently converted to the accommodation module; • Improperly adding options to agreements; and • Invalid market review provisions which have the effect of invalidating the agreements altogether. All of these problems could have been avoided if the buyers had not cut corners but had used a genuine expert accountant and lawyer. They may have saved a few dollars by taking the cheaper alternative in the first place but in each example that has come at a subsequent huge cost to them. So a word of warning in these times when the market is running pretty hot. Don’t be fooled into thinking that all lawyers and accountants are the same, that those that claim to be industry experts really are or that you will get the same quality of advice from those that charge a lower fee. Seek out the real experts and avoid the trap that many others have fallen into in not doing so.