Management Rights Purchase Assessment
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About Purchase Assessments
A Purchase Assessment is a general overview of the proposed purchase and is completed to establish a fair value range for purchase price negotiations.
Three key areas are examined to establish a fair market range:
- Value of Managers Unit.
- Value of Management Rights Business.
- End cash flow results after allowances for debt servicing, other expenses not included in the FOR SALE Profit & Loss and what is your gross return on investment.
It must be remembered the vendor will be looking to maximise their sale price and the selling agent is working for the vendor to achieve this result.
Vendors will be listing their properties at a premium price to allow for some negotiations.
The trick is to establish a fair market price range that will satisfy all parties concerned.
1. Value of Managers Unit
Managers units usually attract a premium as they are directly linked to the management rights business and offer the protection of exclusive rights to conduct the letting business from the complex. They also may have various exclusive use entitlements for extra storage, car parks etc.
The key consideration in assessing the value is to confirm what exclusive use arrangements are in place and if the office is attached to the unit title or is it only an exclusive use arrangement with the Body Corporate.
If the office is attached it is a general industry guideline that the managers unit will attract a premium of 10-15%.
2. Value of Management Rights
The value of the Management Rights business is calculated by multiplying the net operational profit of the business by a factor of between 3.5 to 5.5 times or even higher.
Net Operational Profit
For the purposes of sale, Net Operating Profit is generally defined in Clause 12.1(a) of the REIQ. Standard Conditions of Sale as follows:
"For the purpose of this clause net operating profit shall be calculated by deducting from the gross income of the business for the relevant period the actual expenses of operating the business for that period (in particular excluding depreciation, borrowing expenses, interest on borrowings and any payment for labor related to work which would normally be performed by a two person resident management team.)"
This is the key industry standard for the valuation of the management rights and is usually directly associated with the size of the Net Operational Profit.
The higher the net profit, the higher the multiplier.
A Net Profit of say $80,000 may fall in the range of 3.5 to 4.5 times, whereas a Net Profit of $350,000 and above may fall in the range of 5.0 to 5.5. (supply and demand will also play a key role)
The problem with this general rule is that each complex is different and all facets of the business must be considered to establish an upper value range.
These factors include:-
- What are the agreement terms? If the complex only has a standard module and is limited to an agreement term of 10 years, it would have lessor value than a complex that is under the Accommodation module with 25 years.
- Is the Office on Title or not on title? The security of having the office on title provides a higher level of comfort to the financiers as well as you as the operator.
- Duties required by the body corporate. Is body corporate salary adequate to meet the terms of your agreement and what extra wage costs will be involved?
- General overview of the vendors Profit & Loss statement. Whilst your accountant will complete a verification report on these figures there is no sense negotiating a price if there are clear errors and/or misrepresentations in the figures provided.
The key area which is open to interpretation is the clause which relates to deletion of expenses that are "any payment for labor related to work which would normally be performed by a two person resident management team.)"
Example: A vendor may pay for full cleaning of the units as well as engage a gardener to complete some of the body corporate work, however they use this clause by saying that they could complete this work themselves however chose not to. As such these costs are deleted from the FOR SALE figures.
3. Cash Flow/Debt Servicing
Catalina Finance & Consulting can provide a financial and income analysis to suit your own personal financial position against any complex you are considering.
The majority of prospective purchasers look at and consider the net profit that is being advertised on a complex that is for sale.
This amount at times seems most attractive however the MOST important consideration that is overlooked is what your financial position will look like after taking the following into consideration.
- How much will loan repayments be? either interest only or principal and interest.
- Are there costs not included in For Sale figures? - Example body corporate and rates associated with the managers unit.
- What will the tax liability be on net taxable profit?
These are only a few of the possible adjustments that will need to be made to the FOR SALE figures to fully analyse your end profitability and surplus cash flow available to meet your personal needs and/or other investment strategies.
"We were fortunate to be introduced to Mr Barry Maller and it was with his help and guidance along with his experience of the industry coupled with his extensive background in the banking industry that enabled us to move forward."
Lloyd & Jackie Collingwood - Kirra Surf Apartments