cleaner and easier, but there may be an advantage to buying the complete business because of its brand value.
would make buying a complete entity more enticing.
if you have the cash to pay in full, you want to structure it so you pay over time. You also want to make sure that you will have assistance from the old management during the transition period. It is important to work together as a team. WHATARE SOME STEPS YOU TAKE TOMAKEASMOOTH TRANSITION FORYOUR CLIENTSANDYOUR TEAM? The first thing you want to do as an owner of the company buying the contracts is to personally contact every client. This is a huge asset for them, and they want to be sure they are working with the right person. So, reach out to every client. Give them a call and introduce yourself. Letters and information will be sent to them, but the personal touch is important. So, call them and tell them who you are and how you han- dle things. This will also give you an idea if any of the contracts are going to sour quickly, which will give you leverage on your clawback option. If you are interested in buying or selling, a good resource would be the National Association of Residen- tial Property Managers, or NARPM. There is always ‘someone who knows someone’ that you can con- tact and start a dialogue with. • Article provided by the National Association of Residential Property Managers (NARPM) and written by Richard Hart, EA, CAA, the owner of Hart & Associates Tax Consulting and Preparation Services and a NARPM® Affiliate Member. He specializes in tax accounting and has earned the credentials of Enrolled Agent and Certified Acceptance Agent with the Internal Revenue Service. NARPM® receive information like this article every month through its news magazine, Residential Resource. To join or learn more, visit NARPM.org/join.
HOWTO STRUCTURE THE SALE After you agree on a purchase price, put together a letter of intent that highlights the main points of the contract that you will complete. After the letter of intent is accepted and signed, that is when you begin draw- ing up the contract in detail. This is where it can get complicated. Try to not make the contract so wordy. Everyone should be able to read it and clearly understand it. If you need a doctorate in rocket science to understand the contract, you need to rip it up and start over. Remember too that every company is different in how it sets up property management contracts. Some have month-to-month contracts; some have leasing fees; some are long- term contracts. You need to look at all those when you’re structuring your purchase contract. There must be a clawback clause, meaning if any properties are lost over time, that loss comes off the top. That’s sometimes over a 6- to 12-month period. Remember that when you are buying contracts, that individual owner did not choose you. They chose the other company and you are buying them. You need to make sure you can do everything to keep them under your management and prove how you are the right manager to keep in place. There will also be a contingency phase so you can do your due dili- gence. Bring in an auditor to look at the company’s books and software. Really dive into their accounting. Set a deposit on the company and find a company that can escrow it. A title company is usually a good company to use. Then, set up a pay structure where you can pay over time. Even
WHATABOUTTHE BRANDVALUE? If the target company is
well-branded, with great relation- ships in the industry, that is going to mean something. When the name alone is going to bring you value, that could be a great source of future revenue. You can check the repu - tation online, look at how long they have been in business, where the properties they manage are locat- ed and what the condition of those properties are. This will not be easy because if you are buying 100+ units, it will be difficult to go and inspect them all. So, take a sample. Perhaps randomly inspect 10 or 20 per- cent of the properties. If they are in good shape, there is a good chance the balance of the portfolio is fine. Likewise, if the samples prove to be clunkers, run for the hills. (This is also a good idea if you are just buying contracts). Dive into their books too, which is part of your due diligence. However, if you are buying the entire business, that means you are also buying any skeletons in the closet. Make sure to have an exceptional- ly good attorney and accountant on your side every step of the way. You are responsible for the problems, legal issues, and debts you will inherit with an entire entity pur- chase. Another alternative is rather than buying the entity, perhaps you can purchase the name along with the contracts but not the business itself. Everything can be negotiated. I find that Realtors are interested in buying complete entities whereas if you already own a PM business, you just want to buy the contracts. Also, some property managers want to branch into different states, which
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