Think about selling from the day you buy
When selling any business, the key outcomes of a successful sale typically include achieving a quick and pain-free sale at the highest possible sale price.
Sounds easy in theory, however can be quite challenging in prac-tice. 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 maximising your sale outcome.
Ideally your planning for a sale should start the day you settle on purchasing your management rights. What were the things that created concerns with your purchase? Are they still an issue after you have settled? One common example is the letting agreements, issues that might have been raised with the agreements during your due diligence are still going to be there when you sell unless you take action to get them resolved. All too often the agreements end up in the bottom draw of the filing cabinet and don’t see the light of day again until your buyer is undertaking their due diligence. At that time it may be too late to rectify the issues or at best will lead to potential long delays in your sale.
Bundling for a better outcome
Another strategic decision you could make early on in your management rights journey that could pay dividends when you go to sell is the bundling of fees and charges to unit owners. Increasing in popularity over the last five years, bundling has led to successful outcomes for many management rights sales by simplifying the revenue streams of the business, improving relationships with unit owners and maximising revenue outcomes. If your management rights has not already bundled charges, talk to your industry accountant and ideally have the new system in place at least 12 months prior to going to market to sell.
Preparing a sale of business statement that will stand up to scrutiny
Against the best advice from industry professionals, management rights owners continue to prepare their own sale of business statement when they go to sell, particularly in long-term letting. Although this do-it-yourself approach is quite admirable and it may lead to savings in professional fees, it is also likely to increase the possibility of a sale contract falling over or a dramatically reduced sale price due to some common errors. The opportunity cost of not maximising your sale price may be many times that of the savings in professional fees.
Preparing your figures, yourself or engaging an inexperienced accountant to advise on your sale purely because they are charging less can lead to the same unhappy result. Generally, the old adage “you get what you pay for” couldn’t be truer.
Although not rocket science, the preparation of a sale of busi-ness statement is not entirely intuitive. Getting a single figure wrong will cast a shadow of doubt in the mind of an experienced accountant preparing the financial verification for a buyer. We see simple errors such as including 13 months-worth of one income item or making inappropriate treatment of GST. These can easily lead to a termi-nated contract or a drastic reduction in sale price.
COVID-19 related considerations
At the time of writing this article the management rights industry is very much still in the grip of the Corona virus pandemic. However, with state and international borders opening the future is a lot more positive. Despite these positive signs there remains the risk of further significant lockdowns and border closures which can have a cata-trophic effect on the industry.
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 because of the pandemic.
Understand that in a sale a buyer and their advisors will not be aware of how your business has been impacted and are likely to assume the worst. As a result, it will pay to be prepared. Have data available to a verifying accountant, what are your current vacancy rates and rental arrears compared to pre-COVID-19 levels. If they have increased prepare a concise explanation for the reason for the change and any reasons why the changes are not COVID-19 related. Consider your average weekly rentals and how they have changed compared to pre-COVID-19 average weekly rentals.
A verifying accountant is likely to have a series of questions for you during the verification designed to determine the impact of COVID-19 on your business. Be prepared to explain how you have responded to COVID-19 in your business, how you have addressed tenants who may have claimed financial hardship and what the outcome was for your 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 actually increase for what is seen to be a very low risk business model.
Short-term letting has been more problematic with many businesses decimated during the lockdown and very few sales 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, again a buyer their advisors, bankers and valuers will all be keenly interested in understanding how your business was affected and how it has managed to recover over the last 12 months. For a lot of short-term letting businesses in South-east the Christmas Holidays will have seen very strong trade more than pre-Covid levels.
There are several ways to present figures of a short-term letting business effected by COVID-19. 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-19 effected months. Importantly you should also make available monthly trading data comparing the key trading indicators, average room rates, occupancy and total room revenue monthly compared to the same month in the previous year.
Ideally these reports will show the recovery the business has experienced since borders opened with the indicators demonstrating the business is on a trajectory toward pre-COVID-19 results, if 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 you will need to be patient, transactions of short-term letting properties are happening and will accelerate 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.
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.
Disclaimer: This article contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.