Valuing property management firms has been a great interest of mine since my days at Deloitte. While at Deloitte, I worked with multi-billion-dollar property management firms. As I transitioned into business valuations, I began working with small multi-million-dollar property management firms. Regardless of the size, operations are very similar.
Property management firms are becoming more popular as an increasing number of commercial and residential associations are looking to outsource their management needs. The property management industry has been a key focus over the past five years due to the fact that the economy has been primarily focused on expansion in residential and commercial properties. Over the past five years, revenue has increased at an annualized rate of 4.0% to $80.7 billion in 2018. This exceptional growth rate is not expected to continue as many in the industry have pointed to a rebound in homeownership, reducing the need for residential property management. Regardless, the nonresidential market will continue to provide the industry with growth markets as businesses expand and new operators enter the market, though office vacancy rates are expected to increase slowly over the next five years.
Although it may seem counterintuitive, the best time to sell a business is during a healthy economy. If you currently own a property management firm, consider the possibility of selling when cash flow is trending upward. Current industry trends point towards further growth, which provides a great opportunity to sell now. The first step to selling your business is obtaining a business valuation. Whether you are looking to sell or hold on to your company, understanding the market value of your business is important. A valuation specialist will show you a range of values for your business and consult with you on how to increase the value of your business.
Over the past five years, I have provided business valuations for several property management firms for various valuation purposes. To give you an idea of each of those engagements, I will list out some of the key factors used in valuing a property management firm. Keep in mind that the factors listed below are only a guide.
Market Multiples for a Property Management Firm
- Annual Revenue: 1.0x – 1.25x
- Typically, the multiple is around 1.0x due to the fact that a book of business is being valued
- Sellers Discretionary Earnings: 3.0x – 5.0x
With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your property management firm prior to a potential sell. I will touch on several ways in which you can increase the value of your business. There are many factors to take into consideration, but this will provide you with the basis of what your company is worth and a few ideas to increase your company’s value. If you are searching for a more extensive valuation, reach out to a valuation professional like myself.
1. Key Success Factors
There are several success factors that help distinguish a property management firm:
- Contracts within Key Markets
- It is important for companies to establish contacts within the real estate sector because the majority of property management clientele are gained through personal contacts and business relationships.
- Well-Defined Strategy/Goal
- The property management industry is highly fragmented, so it is important to have a strategic plan to differentiate property management businesses from competitors
- Proximity to Key Markets
- Property managers must be in markets where there is ample demand for real estate services. Densely populated areas or places with strong population growth tend to be key markets for industry participants.
- Business Expertise of Operators
- Businesses and individuals often seek the advice of industry participants during real estate transactions because of their expertise in the local real estate market, including zoning, financing and tax structures.
2. Expansion through M&A
Mergers & Acquisitions are a large proponent of growth for businesses within the property management industry. One of the primary benefits of operating a property management company is that you do not need to physically be in the city of your properties. As such, Mergers & Acquisitions can take place across the US.
Incorporating this type of expansion approach will grow your company quicker. When compared against the traditional approach of starting a new business in a different city, you can purchase an existing business and expand your territory. Securing clients and revenue through this type of activity will increase the value of your business over the long-run.
Understanding the value of your property management firm is important, regardless of any near future transactions. Even if you have not thought about selling your business, consider the future of your business; it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with. We can also help to identify ways to increase the value of your business.