28 Nov 2013
Words Tim Admin

Get set, get ready, Sell

In recent editions of The Informer, readers will have read a couple of articles concerning important actions that resident managers should take to maintain the value of their management rights. One article, centered largely on short-term management rights businesses, focused on the importance of working with unit owners to upgrade, refurbish and improve their investment units. Another article, applicable to all management rights business, focused on the importance of topping up the caretaking/letting agreements to maintain a healthy length of tenure.If you are a management rights owner and haven’t read these, I highly recommend checking our website (all Informer articles are now archived and available to be read online). These articles were intended to provide advice and help for the ongoing, day-to-day running of your business. The suggestions made would be equally relevant on the day you bought your business to the day you sold your business. In light of this, of thought it was pertinent to highlight a couple of the crucial steps necessary just prior to putting your management rights on the market.

You’ve done all the hard now; in the years that you’ve owned the business you’ve cleaned up the complex, renovated a good proportion of the units, increased the income, and successfully achieved a 5 year top-up (hypothetically speaking, of course!) Now what? What can you do to smooth the marketing and sales process? I’d like to focus on 2 key areas. First of all, you must get an industry specialist accountant to verify your trading figures for the purpose of sale. A professionally prepared, up-to-date P&L is essential for an easy sale process. Time and time again, we come across managers who have prepared their own figures. We are told that ‘they are definitely correct’ or that ‘if they’re wrong, it will come out in due diligence’. Take it from us…you are doing yourself a big disservice. Please don’t take this an insult. It’s not that we don’t trust you. It’s a question of presenting your business to the market it the best possible way you can. Many buyers are instantly dissuaded when they are provided with a vendor prepared P&L. Although some will proceed to an inspection, many will not even bother to look at a business without it. In particular, experienced buyers who have owned management rights before will often not consider businesses that have not taken this critical step. The idea that ‘it will all come out in due diligence’ just doesn’t fly with many buyers. The simple fact of the matter is that once a sale is agreed and contracts are signed, a considerable amount of time and money will be invested. If there is a discrepancy in the figures that cannot be rectified, all this time and money is wasted. Many buyers are not prepared to take this risk. After all, there will be plenty of other businesses with professionally prepared figures that they can look at. Just as importantly, by getting a professionally prepared P&L, you are protecting yourself during the sale and subsequent due diligence period. If the P&L prepared by the buyer’s accountant differs from the one provided by the vendor, the vendor will be in a far better position to argue the toss if their figures have been professionally verified. Moreover, what if the vendor underestimates the level of their net profit. If a buyer’s accountant reports that the business is making more that it was sold on, this will never be passed back to the vendor. Let’s say you sell your business, based on your own figures, is sold on a net profit of $150,000 and a 4.5X multiplier. If, in actual fact, it is making $155,000, you’ve just lost $22,500!

Secondly, it is an incredibly wise idea to get an industry specialist to value your managers unit. Although perhaps not as important as getting a professional to verify your figures, it will generally always pay in the long run. In regards to the marketing period, it will certainly help attract buyers and make them feel comfortable when it comes to the offer stage. Although many buyers are knowledgeable about multipliers applicable to businesses, they will rarely have a clue as to what residential prices should be. Even most of us at Resort Brokers would freely admit that we are not experts when it comes to pricing manager’s units. Getting a professional valuation will give buyers confidence that there are buying at the right price, and that the sale will get past finance approval. As well as providing the buyer with confidence, a professional valuation will also instill a high degree of confidence in the vendor (and the agent). After all, if a professional has indicated that a unit is worth a certain price, it is very difficult to argue against this. As broker, if a unit has a valuation on it, out attitude will always be ‘that’s the price, take it leave or leave it’. There is simply no room for negotiation. I can testify that the vast majority of buyers of accepting this. This enables us to put the unit negotiation to one side and to concentrate on the more difficult job a negotiating the business price. Once a sale is agreed, having the unit valuation in place will greatly reduce the chance of a sale falling over. This is an important point that all vendors should be aware of. Any agreed sale will almost always be subject to finance approval. Depending on the size of the business, banks may or may not opt to value the business (general only large management rights businesses require valuation). However, all banks will value the managers unit during their approval process. It is simply unavoidable. If your unit is overpriced but you manage to find a buyer willing to pay the asking price, it will inevitably come to a head and create a difficult situation during due diligence. If the managers unit does not value up to contract price, the price will need to be renegotiated or the sale will fall over. Bearing in mind that finance approval comes right at the end of the due diligence process, there will be a huge amount of time an energy spent by this time. Why not avoid this stress by getting the valuation done before going to market? It goes without saying that the reason many managers choose not to get their figures verifies and their unit valued is to avoid what they see as an unnecessary expense. The point of this article is to point out that these two important steps actually amount to money well spent. Not only will they help you to get a better price and ultimately save you money in the long run, but they will also greatly reduce the stress involved in the whole sales process. For anyone who has ever sold a business or a residence, a method of reducing stress is certainly worth following!