How to Position your Property Management Company for a Successful Exit

The topic of preparing your property management company for a successful exit is a big one, and our guest today is one of the brightest minds in property management. Andrew (Andy) Propst has experience in taking his company, Park Place Property Management, from 200 properties to 4,000 properties in eight years and in just the last year, he has added 700 doors organically, and another 400 through a local portfolio purchase.  Andy is also a NARPM past president, and he is now the CEO of HomeRiver Group, a nationwide company that acquires property management companies and their portfolios.  Andy will share with us his insights for any owner who is looking to position their property management company for a successful exit. What Size Do You Need to Be to Meet Your Financial Goals upon Exit? It’s an important question that 80 percent of property managers don’t ask themselves. People see property management as a source of income, which it is. But everyone who owns a business should eventually prepare to sell it and the sooner you start to prepare, the better. Let’s say you want to exit with $5 million, and the average rent you collect is $1,800. On the open market, you would need 2,000 to 2,500 doors to get out of the business with $5 million. Some people have a lot of doors but don’t earn as much on those doors and that’s going to alter your number. 5 Things to Avoid When You’re Planning an Exit There are some things we see that trip up the acquisition process. Try to avoid these to make a smoother transition. Accounting struggles. Your property management company must reconcile accounts on a monthly basis. Get good reports from your system. Have a trust account balanced and a historical units report available. You need clean financials. Unclear data. You need to know how many units you managed six months ago or two years ago. Have transparent, accessible data. Inconsistent Formatting. Sometimes, formatting gets in the way. Something as simple as not being consistent with St. versus Street can throw off a whole system. Lack of strategic planning. It is rare to see a strategic plan or a budget. These things are important as buyers want to see your future. Too many receivables. When owners and tenants owe you money and you’re not collecting, you could have hundreds of thousands of dollars outstanding. That’s a problem when you’re trying to sell your business. What’s More Important to Buyers – Top Line Vs. Bottom Line Revenue? When you’re building a business to exit eventually, you need to focus on both top line revenue (gross sales) and bottom line revenue (net income). People base the success of their companies by the number of doors, but who cares how many doors you have if you aren’t making money on them? If you want to sell your company, you need to have a healthy bottom line. A company like HomeRiver Group buys or evaluates on EBTDA – which stands for Earnings Before Taxes, Depreciation, and Amortization. You get a dollar amount based on your profitability margin. The higher the profitability means a higher payout for your company. The bottom line really matters. The door count doesn’t matter as much as the overall performance of the company. In Andy’s experience as an acquirer, there is the potential that HomeRiver Group can take a company that’s underperforming and add some efficiencies to make it more profitable. If they can change the performance, they will pay for a brighter future and not focus on profits. There are other companies that do buy per door or based on gross revenue. However, the typical model is to look at the bottom line, add a multiple,