How to Sell a Property Management Company

What a buyer is paying for

The base unit is the door, meaning a rental unit under management. Buyers will ask how many doors the company manages, what type each one is, what fee it pays, and how long the owner has been a client. A book of single family homes behaves differently from a book of apartment buildings, and both differ from community associations or commercial space. Single family owners tend to be numerous, small and quick to sell their property. Apartment owners are fewer, stay longer and pay less per door. Associations sign multi-year contracts and sit on a board that changes over time.

The income has several parts. Monthly management fees are the steadiest. Leasing fees, renewal fees, inspection charges, maintenance coordination fees and markup on repairs vary with turnover and with the owner's willingness to spend. A buyer will separate recurring fees from transaction fees and will place more value on the recurring part. They will also ask how the company handles vacancy, because a fee tied to collected rent moves with occupancy.

Buyers are buying the owner relationships. When a property changes hands, the management agreement usually ends or gets renegotiated, and a short notice period gives the owner an easy exit. That is why a buyer will study how long the typical owner has stayed and why owners have left.

The management agreements

Every agreement will be read. Buyers look at the term, the notice needed to end it, the fee schedule, the authority to spend money on repairs, the handling of deposits, and whether the agreement can be assigned to a new company. Many are written so that the owner can leave with a short notice, and some require the owner's consent before they transfer. A company with agreements that renew automatically and carry a termination fee is more attractive than one where owners can leave next month.

Concentration matters as much as it does anywhere. If a few owners account for a large share of the doors, the buyer will want to meet them or at least know them well, and may structure part of the price around whether they stay. Our post on customer concentration explains how buyers think about it, and the post on recurring revenue covers why contract terms count.

A company that sells owners on its service rather than on the lowest fee tends to keep them. Buyers will look at online reviews from both owners and tenants, the response time on maintenance requests and the percentage of tenants who renew.

Trust accounts and the licensing question

The trust account is where a buyer will look hardest. A property manager holds tenant security deposits and collected rent that belongs to owners, and holds them in separate accounts. A buyer, and often the buyer's attorney and lender, will want to see that each account reconciles to the penny, that owner balances match the ledger, and that the deposits held match what tenants are owed. Problems here, even small ones from years back, can stop a deal.

Plan for the transfer of those funds. On closing, the deposits and owner balances move to the buyer's trust accounts, and each owner and tenant may need to be notified. Rules on how this works vary by state and your attorney confirms what applies.

Licensing also varies. Many states require a real estate license, or a license held by a supervising individual, to manage property for others. The buyer needs to hold the right credential, or to have someone on the team who does, by the time they take over. Ask your attorney early which buyers qualify, since it narrows who can purchase the company. Our post on who buys small businesses describes the usual buyer groups, and many property management buyers are other management companies or real estate offices adding a division.

Staff, systems and the owner's role

Property management runs on a few people doing many small things. Property managers handle owners and tenants, leasing agents fill vacancies, maintenance coordinators or in-house technicians handle repairs, and bookkeepers keep trust accounting clean. A buyer will ask who holds each relationship, how long each person has been there, and what each is paid. If the owner personally calls every owner on the phone, a buyer will see a company that depends on one person, and our guide to owner dependency describes the fix.

The software holds the company's history. Property management platforms keep the ledgers, work orders, leases, owner statements and tenant records, and a buyer will want reports from it that tie to the books. They will ask how data can be exported and whether the company owns its accounts. A buyer who plans to move to a different platform will budget for the conversion, so a tidy database makes that easier.

Vendors count too. The plumbers, electricians, cleaners and contractors the company uses affect the quality of service. Buyers will ask whether the relationships are written down or held by one person's memory, and whether the company earns anything from vendor arrangements, which should be disclosed and documented.

Records a buyer will ask for

Expect a request for tax returns, monthly profit and loss statements, a balance sheet, a door list with owner, property type, fee, start date and agreement terms, income by fee type, trust account reconciliations, owner statements, delinquency and eviction reports, payroll and staff roster, insurance policies including errors and omissions coverage, and any complaints or claims from owners, tenants or regulators. Buyers will also ask for the lease on the office and the list of software and vendor contracts.

Because owner and tenant information is personal, the first materials describe the book in totals, and names come after a nondisclosure agreement. Our confidential marketing post explains the steps.

What tends to sink a sale

The most common cause is trust account trouble found in diligence. After that comes an owner base that began leaving when word of the sale spread, agreements that cannot be assigned, a buyer who cannot hold the right license, and a key property manager who accepts another offer in the middle of the deal. The financial side sometimes fails as well. Fee income recorded in ways that differ from the tax return, or maintenance markups that owners were never told about, can sour a buyer quickly.

A related point is the timing of the announcement. Owners and tenants should hear about the change at a planned moment, from you, with the buyer in the room if possible. Our post on when to tell employees covers the staff side of the same decision.

How to prepare

Reconcile every trust account now, and keep doing it monthly. Move agreements onto current forms with clear terms on assignment and notice. Spread the owner relationships across your managers. Document your fee schedule, and be ready to explain every line owners are charged. Clean the database so that a report from your software matches the books.

At Business Advisors of America we start with a valuation based on your door count, fees and owner retention, and then prepare the package a buyer and lender will ask for. If you want to see how buyers approach selling a property management company, that page is where we would begin, and a short call with us is the natural next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.