Tips for selling Management Rights in 2024
Preparing your management rights business for sale can be a daunting prospect. Being prepared and having the right professionals to guide you through the process can make all the difference.
Planning for sale should start before you’ve even settled on the purchase and any issues encountered during your purchase, unless resolved, will still be issues when you come to sell. Fixing inherited issues will not only assist with a smooth sale process but may improve your business operations and potentially net profit for the duration – why wait to improve your asset until you’re ready to sell when you could reap the rewards throughout?
“Don’t put off ‘til tomorrow what can be done today.” Purchasing a management rights business can be costly, spend time reviewing the detailed financial and legal due diligence information you commissioned and seek advice from experts on areas you can focus on improving and make the most of the information you’ve paid for from day one.
Form 6 letting appointments are transferable and provided the owners were notified that the agreements have been assigned and appropriate evidence of that notification is kept on file, there is no requirement to have all letting appointments updated in your entity’s name.
Similarly, you may have inherited some of the old PAMDA 20a Agreements and provided no changes have been made to the terms of those agreements (including any changes to fees charged) then these may still be legally appropriate to support the income generated from those units without change.
But why not take the opportunity to ensure you have consistent letting appointments, addendums and schedule of fees and charges prepared in line with current legislation and in your name? In part, you will be selling your relationship with the unit owners and knowing the owners have engaged you directly, as the vendor when presenting for sale, can instil confidence in a buyer about the relationships they are acquiring.
Similarly, the better the state in which you keep your records the more attractive the package you are selling will be. Digging through musty filing cabinets and dog-eared paper files to review letting appointments with years of updates and notices of increased fees and charges is a lot less appealing to a new business owner and their advisors, than being presented with organised records.
First impressions matter and one of the first impressions of the business you are selling is the presentation of records to a prospective buyer’s accountant and solicitor during the due diligence process. Having organised and preferably soft copies of your business records not only improves the quality of the package for sale but should make your life easier whilst running the business. If you don’t already, consider filing all of your agreements, addendums and variations to an online storage system – if you use a Cloud-based Property Management System you can generally upload documents so all in one place. Make things easier whilst running the business for yourself, your accountants and auditors as well as being prepared for when it comes time to sell.
Taking the time to review and update filing of your letting appointments prior to sale provides you with the opportunity to rectify any issues and ensure you have everything ready to present during due diligence, making for a smooth sale transaction.
Fees and charges
Regularly reviewing charges levied can not only improve your revenue and ultimately net profit but also promotes confidence in your owner relations and strength in the letting pool.
Most agreements authorise an annual CPI or other increase for fixed charges like cleaning/linen. Actioning appropriate increases allows businesses to maintain profit margins despite increasing labour and other costs.
In the aftermath of the COVID pandemic, operators may have been anxious to increase charges for fear of losing units from the pool but with inflation rising you can’t afford not to pass on increases without risking significant reduction in the value of your business when it comes time to sell.
Adjusted net profit for sale
I’m the first to proclaim that managing costs is crucial in maximising profits, no matter how much income is generated if costs are not well managed returns suffer.
That being said, selling your management rights is a significant transaction and the cost of having accurate figures prepared for sale pales in comparison to potential reductions to your sale price resulting from DIY figures not appropriately adjusted in line with industry practices.
An adjusted net profit report prepared for sale by an industry professional is invaluable in the presentation of your business for sale. Whilst adjustments are not necessarily complex, the industry is ever evolving and accepted adjustments when you purchased may no longer be accepted when you’re ready to sell. Particularly with regard to labour, for instance you may have bought on figures prepared on the basis the business be run by a two-person full time team with the only labour costs being for cleaning. If you’ve increased the rates, occupancy and revenues of the letting business, and you do engage additional staff for admin/front of house services – you shouldn’t expect to have your net profit for sale prepared excluding additional labour costs that you’ve demonstrated are required to generate higher returns. The net profit on which you sell should, notwithstanding some standard cost allowances/adjustments, essentially be what a purchase could reasonably expect to achieve in a 12-month period.
If you engage workers for duties that one of the two-person management team would otherwise be responsible for, then an appropriate adjustment may be made to the net profit for sale.
Any adjustments made, especially labour adjustments, must be verifiable by the purchaser’s accountant to minimise the impact on contracted sale price. It is not uncommon for sales to fall over during the financial verification process as a result of lost confidence in the net profit and any savings from not having professionally prepared figures will be long forgotten as the sales process progresses.
The easier it is for the purchaser’s accountant to verify the figures, the smoother the sales process will flow.
The purchaser’s accountant will generally seek to verify the net profit for a recently completed 12-month period, which may differ to the net profit on which the contract is based where time has passed between your accountant preparing figures for sale and a contract being signed. Making the verifying accountant’s job easier, can only yield positive results.
Having well-kept books, consistently up to date is another way you can avoid issues during the financial verification process.
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.