This article is part one of a new series by TOPS founder Jeff Hardy on valuating a community association management company, for the purposes of buying or selling.
Eventually, every business owner (even management company owners) will consider selling their business. Or perhaps you are looking to buy another management company for the instant growth that may give your company.
Buying or selling, it all comes down to the value of the company. Unfortunately, it can be difficult to determine exactly how much a management company is worth...
It’s easy to confuse the sweat equity and effort it takes to run a management company with the value it is worth when you go to sell it.
Determining the fair market value of a management company will certainly be an area of dispute when negotiating a sale. Particularly if you are thinking of selling, you may expect the product of your blood sweat and years to be worth a lot more than the buyer is willing to pay. Let's consider some general factors that negatively affect value so you have a more realistic starting point.
Product > Service for Value
First, understand that a service business, like a management company, is inherently worth LESS than a company with a product to sell.
Why? Because with a service business you have to justify your existence to your customers every day to continue the revenue stream. You do not have a tangible product you are selling; you are selling a service. A service by its nature is nebulous because it can’t be seen or touched and the need for it established and appreciated.
Low Profit Margins
Second, community management is a low profit margin business. Of the 4 areas of property management (rental, commercial, unit rental and Condo/HOA) it is the lowest revenue generator per door. Yet it can be the most demanding.
The community management business has a low barrier of entry. Between limited federal or state licensing requirements and the low cost of entry, competition is high.
In most states, anyone can start a management company working out of their home with little overhead, then under-bid you on management fees. Add to that the mentality of Boards of Directors, where they want to pay as little as possible for management services, and don’t recognize that management companies need to make a profit to stay in business, all of which serves to depress management fees.
CAM Management is a labor intensive service business. You need high staffing levels to provide good service to your customers. This adds to the expense levels in the business, which further depresses profitability.
So the effect of the 3 negatives factors listed above is that a management company is not worth as much as the owners would like to think. It’s easy to confuse the sweat equity and effort it takes to run a management company with the value it is worth when you go to sell it.
But don't get discouraged! Next we'll talk about the factors that can effect your company's value, the formula to calculate how much your company is worth, and how to raise that value.