How to Value a Property Management Firm
Property management firms oversee residential and non-residential real estate for property owners. This can include providing maintenance, rent collection, trash removal, security, and renovation services. In recent years, the property management industry has seen healthy growth, generating over $114 billion dollars in revenue. Moving forward, we can expect revenue rates to increase. However, profit margins may experience a slight decline. In addition, the property management industry is fragmented and competitive. If you’re looking to buy or sell a property management firm, it is vital to understand how to value a property management firm. With this information, you can begin to maximize the value of a property management firm.
There are a variety of factors to consider when learning how to value a property management firm. To start, it is best to obtain a business appraisal. As part of a business appraisal, a valuation expert calculates the value of a property management firm. In addition, they will consider the risks and benefits of your property management firm. This information is vital if you are looking to increase the value of a property management firm you are buying or selling.
Peak Business Valuation is a professional business appraiser. We are passionate about helping businesses find success. At Peak, we work with property management firms on a regular basis. We are happy to provide you with a business appraisal for a property management firm. Peak can also discuss any inquiries about how to value property management firms. Start by scheduling a free consultation with Peak Business Valuation today!
How to Value Property Management Firms
Valuation analysts can use various valuation approaches to value a property management firm. At Peak Business Valuation, our appraisers typically use the market approach and/or the income approach. Each valuation approach serves a different purpose. The business appraiser will determine which valuation method is best for your property management firm. This can include using a combination of valuation methods to value a property management firm.
Valuing a Property Management Firm Using the Market Approach
The market approach is common when valuing a property management firm. This approach is similar to how a real estate appraiser values a property. Real estate appraisers consider similar homes in the area that recently sold. This helps them determine a fair value of the property. When using the market approach, a business appraiser considers similar businesses that recently sold to determine a fair market value of a property management firm. If the firm is private, the appraiser will use private transaction databases to gather information.
Multiples for a Property Management Firm
Valuation multiples are a crucial component of the market approach. Multiples are financial ratios that compare the value of a property management firm to financial metrics such as earnings, cash flow, or sales. To find the valuation multiples for a property management firm, business appraisers use the proper NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a property management firm.
SDE (Seller’s Discretionary Earnings) Multiples for a Property Management Firm
- Valuation analysts use SDE multiples to value a property management firm based on its seller’s discretionary earnings. This is a common valuation multiple when valuing a property management firm.
EBITDA Multiples for a Property Management Firm
- EBITDA multiples help business appraisers determine the return on investment a property management firm can expect.
REVENUE or SALES Multiples for a Property Management Firm
- REVENUE multiples measure the value of a property management firm based on the amount of revenue it generates. Using this multiple involves multiplying a property management firm’s total sales by the revenue multiple.
There are various factors that determine which multiple a business appraiser uses when deciding how to value a property management firm.
Valuing a Property Management Firm Using the Income Approach
The income approach is another popular valuation method for valuing a property management firm. This method measures a property firm’s value by considering its potential to generate cash flow. In addition, the income approach assesses the following risks of buying or selling a property management firm.
- Competition: The property management industry is fragmented and competitive. It is important to differentiate from competitors to earn a portion of the market share.
- Economic Conditions: Economic fluctuations can affect the demand for rental properties and property management services. During an economic downturn, vacancy rates may increase and property value may decrease.
- Property Damage: Properties are subject to unexpected damages. Property maintenance and repair are crucial and can be an expensive undertaking.
- Contractual Obligations: Property management firms enter into contracts with property owners, service providers, and vendors. It is vital to uphold contractual obligations.
Methods to Value a Property Management Business Using the Income Approach
There are several variations of the income approach when valuing a property management firm. The most common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these valuation approaches assess a property management firm’s income potential. We discuss more about how to value a property management firm using these valuation methods below.
Capitalization of Cash Flow Method
- Typically, business appraisers use the capitalization of cash flow method for property management firms with a stable history and predictable cash flows. This method involves projecting the future cash flows a property management firm may generate. Then, the expert determines an appropriate capitalization rate and divides the future cash flows by the cap rate. This calculates the rate of return that an investor can expect from a property management firm. With this information, a business appraiser can determine an accurate value of a property management firm.
Discounted Cash Flow Method
- The discounted cash flow method is best for property management firms with strong financial histories. It involves using 3-5 years of future cash flow projections. The business appraiser discounts the future cash flows using a discount rate rather than a cap rate. This helps determine the present value of a property management firm you are buying or selling. Keep in mind, this method is less common since it uses future cash flow estimates which can be subjective.
Summary
There are various valuation approaches a business appraiser can use when valuing a property management firm. In many cases, business appraisers use the market approach and/or the income approach. These valuation techniques calculate the value of a property management firm based on different metrics. To understand which method is best for your property management firm, receive a business appraisal. As part of a business appraisal, you will also learn about the risks associated with the property management firm. This is crucial whether you are buying, expanding, or selling a property management firm.
Peak Business Valuation, business appraiser, works with many property management firms throughout the country. We are happy to provide you with a business appraisal for a property management firm. Peak can also answer any questions you may have on how to value property management firms. Start now by scheduling a free consultation with Peak Business Valuation below!
See also Valuing a Property Management Firm, Value Drivers for Property Management, and Valuation Multiples for a Property Management Firm.
