Tips for Buying Management Rights in a Covid-era

Pain-free purchases a challenging prospect?

When buying any business, the key outcomes of a successful acquisition typically include achieving a quick and pain-free purchase at an appropriate price.

‘Tips for Buying Management Rights in a Covid-era’

You can download this document as a printable PDF for future reference. Click here to access the PDF document.

Sounds easy in theory but can be quite challenging in practice. As with most things though, by careful planning and getting the small things right and trusting in the industry professionals to guide you through the process, you will certainly improve your chances of achieving the right outcome.

Fortunately, the management rights industry has evolved over many years to achieve a robust purchase process largely designed to protect the interests of a purchaser. A purchaser could enter a transaction with the comfort of knowing that their interests were being well looked after by industry professionals following a program of financial verification, legal due diligence, and independent valuation. From a financial verification standpoint, the process is spelled out in the management rights contract and is agreed and well understood between industry accountants. Generally, the process works smoothly and then along came COVID-19, nothing like a 1-in-100-year pandemic to turn the industry on its head.

COVID-related considerations

At the time of writing this article, the management rights industry is approaching 12 months since the pandemic first took hold of the industry. With the vaccine currently being rolled out and outbreaks largely being controlled, the future is looking a lot more positive. Despite these positive signs, there remains the risk of further significant lockdowns and border closures which can have a catastrophic effect on the industry. So where to from here?

Long term letting

Fortunately for the long term letting industry, the impact has not been too significant for most operators. Apart from inner city apartment complexes and properties relying heavily on international student tenants, most long term letting operators are reporting a negligible impact on their business revenue as a result of the pandemic.

It is important to understand, however, that the impact on long term letting management rights will vary from property to property and a buyer and their advisors should assume the worst and carry out investigations accordingly.

As a result, it will pay for a vendor to be prepared. A verifying accountant will want to understand what the current vacancy rates and rental arrears are compared to pre-COVID levels. If they have increased the accountant will look to understand the reason for the change and determine the extent to which the change has been caused by the influence of COVID or from other factors. Consideration will also be given to average weekly rentals and how they have changed compared to pre-COVID average weekly rentals.

A verifying accountant is likely to have a series of questions for the vendor during the verification, designed to determine the impact of COVID on the business. The accountant will be looking for an explanation for how the vendor has responded to COVID, how they have addressed tenants who may have claimed financial hardship and what the outcome was on the business profitability.

Fortunately, the industry is resilient and sales of long term letting management rights have continued through the pandemic and in fact, in some areas demand has increased for what is seen to be a very low risk business model.

Moreover, some long term letting management rights have experienced a reduction in rental arrears and have been able to increase weekly rents largely of the back of Government subsidies increasing the disposable income of their tenants.

Short term letting

Short term letting has been far more problematic than long term letting with most businesses being decimated during the lockdown and very few bookings occurring during the height of the pandemic. As we come out the other side, optimism and indeed the level of interest from buyers is growing. However, a buyer and their advisors (accountants, lawyers and valuers) will all be keenly interested in understanding how a property was affected and how it has managed to recover in recent months. For a lot of short term letting businesses, it is increasingly looking like a ‘V’ shaped recovery with bookings increasing month on month and forward bookings showing positive signs.

There are several ways to present the figures of a short term letting business effected by COVID. A common approach is to present at least two years figures, one set of figures showing the pre-COVID profitability up to say, February or March 2020 and a second profit and loss statement showing the most recent trading result including the COVID effected months. The COVID effected profit and loss statement can then be ‘normalised’ to provide a third profit and loss statement. The process of normalising involves identifying the most severely COVID effected months (typically March, April, and May 2020) and replacing the actual trading with ‘normal’ trading months based on prior years. The outcome is a profit and loss statement which seeks to identify what the likely outcome of the business would have been had it not been impacted by COVID.

A vendor will then have three sets so figures, pre-COVID, COVID effected and normalised which will ideally tell the story of how the business has fared during COVID. Careful consideration then needs to be given to how to value the business. In our opinion, it is not necessarily a matter of simply applying an appropriate multiple to the normalised net profit.

A verifying accountant should also obtain from a vendor monthly trading data comparing the key trading indicators, average room rates, occupancy, and total room revenue to the same month in the previous year. Ideally these reports should be obtained for a minimum of 36 months. Once graphed the year-on-year comparison will show the recovery the business has experienced since borders opened and demonstrate whether the business is on a trajectory toward achieving pre-COVID results. Assuming the business has not already reached that point.

Forward booking data will also be important to demonstrate the return to normal trading conditions and provide a buyer and their advisors with confidence.

Above all, a buyer will need to be patient, transactions of short term letting properties are happening and will continue to increase moving forward however, the time required to complete a due diligence and for a buyer to secure finance is taking considerably longer than in the past.

‘Tips for Buying Management Rights in a Covid-era’

You can download this document as a printable PDF for future reference. Click here to access the PDF document.

The information, opinions or conclusions provided above are generic in nature and do not express individual advice or recommendations. You should always consult a suitably qualified professional before taking any course of action outlined above. Holmans welcome any queries you may have in relation to the above matters.