Why buy an existing business?

If you buy an existing business, you can analyse the profit and loss statements and balance sheet of the Company you are buying. This is an advantage because you see firsthand what you are getting in, particular the income streams of the business and the individual expenses of the business.

In addition to this you have a going concern producing revenue, with staff, brand, systems and an infrastructure in place. In essence you are making money from the day you settle.

When you start a business from scratch, you must secure and fit out a premise, build the systems, web site, arrange plant & equipment, hire and train staff- all of this before you begin to earn an income.

Statically most start up businesses struggle to make a profit and in some cases fail within 3 years from commencing. Experience would say that starting up a business require an enormous and of persistence & resilience but above all a bullet proof business plan.

What items to be included in the sale of a rent roll?

The followings items that possibly could be included in the Contract of Sale to purchase a rent roll;

 1.            Telephone numbers and Facsimile numbers- In some cases the franchisor may   reserve/own these numbers and this is reflected in the franchise agreement.

2.            The agency’s web site URL.

3.            The agency’s Trading Name.

4.            Any mobile phone numbers of staff where the business pays for or provides a mobile phone as part of the employees work agreement.

Rent Roll Market Wrap -2013

Victoria

We have seen an increase in buyer enquiry from agents wanting to purchase rent roll over the last quarter. The reason for this is that agents are experiencing a decrease in sales income and are willing to purchase a rent roll that ensures bankable and regular monthly income.

A number of sale of smaller sized rent rolls, or parts of existing rent rolls have occurred in the last quarter. The reason for this is agents have sold rent rolls in order to inject capital into their businesses. Some residential agents have sold their commercial portfolio’s, to concentrate on core activity, reduce debt.

 There haven’t been a lot of transactions where agencies have sold on a walk in walk out basis. The business confidence and the state of the Real Estate market haven’t encouraged this.

We predict that there will be more mergers of agencies over the next 12 months; so agencies with like businesses can take advantages of the economies of scale and maintain income whilst reducing duplicated costs.

The multipliers are remaining constant at $3.00- $3.20 in Metropolitan Melbourne, $3.20-3.35 for quality Inner City rent rolls that have been managed for a length of time.

The outer suburbs particularly the Western Suburbs f Melbourne the multipliers have dropped slightly to figures of $2.00-$2.40.

 The multipliers in regional Victoria have maintained their values in the $2.00- $2.50 region.

NSW     

We have experienced a huge increase in buyer activity in the last quarter. The appertite from agents looking to increase and scale up the size of their rent rolls has been huge. As a generalisation the size of rent rolls NSW have been smaller than some other States. Buyers now see the value in a large well run rent roll that provides consistent property management income and sales leads.

The amount of buyer activity in the Eastern Suburbs, North Shore and Hills District has resulted in a seller’s market.

The multipliers achieved for good sized well run rent roll is $3.20-$3.70 in Metropolitan Sydney. Rent rolls have sold in outer suburbs in the $3.00- $3.20 region. The multipliers achieved in regional areas such as the Central and northern Coast is in the vicinity of $2.50- $3.00, whereas rent rolls in the Regional Country areas have sold around $2.40-$2.70.

Tips on Buying a Rent Roll

We are seeing a growing number of business owners who for a variety are choosing to sell their rent roll. With targeted marketing of a rent roll we are experiencing good competition from buyers wishing to purchase and integrate a new rent roll into their existing one. This generates income into the business immediately.

A Buyer usually can leverage their existing infrastructure without adding huge expenses to their business. The income generated from buying a rent roll of 150 properties far exceeds the extra associated costs. These could be;

• Small upgrade to the computer system or trust accounting package
• Additional fixed office costs including desks, electricity, office space, rent etc.
• No additional staff or perhaps employing an administration person to assist the Property Manager.
• Additional sales income generated from the “new rent roll”.
• No additional procedural systems.

However, not all rent rolls may be a great investment. Care must be taken that the purchase will not cause deterioration of the existing rent roll due to poor management of the rent roll purchased.

Taking on rent roll of any size is going to require more work, however if you need to spend 80% of the staff’s time on 20% of the rent roll to “bed it down” then it is a recipe for disaster.

A structured due diligence process can reduce the potential for loss of property and allow for the program of changes and improvements to be implemented by the team at settlement.

 In short you can use the settlement period to be proactive about reviewing the files regarding the following items to ensure they are in order;

• Current lease status
• Rent increases
• Bond lodgements register
• Keys
• General or routine inspections
• Outstanding maintenance
• Property & client familiarisation
• Arrears or part payments
• Financial reporting to owners

Taking a proactive approach through thorough research and due diligence can protect the income stream of the rent roll you purchased. Needless to say it also builds goodwill with your new clients.

Due Diligence

Buyers of businesses are naturally concerned that they have made a “good” buy and that any representations made to them have been true and correct.

To provide this assurance there will often be a condition in the agreement for sale and purchase for the buyers (or their professional advisors) to check the business further. For the smaller business this may be as basic as approving the lease and the financial statements.

For the larger business the process may be far more complex and take longer to complete. The focus will be on three main areas: legal, financial and operational. Experts may be required to evaluate the different areas.

Business owners planning to place their company on the market need to anticipate the probability of some form of due diligence requirement. To ensure a win – win deal they need to be aware of what the buyer will want to see, have the information ready for inspection and be certain that no unexpected surprises will emerge. And the seller needs to see the process from the buyer’s perspective.

Missing documents, lack of co-operation or a lack of understanding of the process can lead to uncertainty, delays, suspicion and, often, cancellation of the contract,

The experienced business broker should educate both the buyer and seller on the due diligence process so that both have reasonable knowledge and realistic expectations. However, it is not the broker’s job to conduct due diligence for the buyer. The broker can facilitate the flow of information, anticipate obstacles and check that those responsible for various tasks are carrying them out in a timely fashion.

Below is a list of information that may be required under due diligence for a mid size business. This is not meant to be complete or appropriate for any specific business.

• business structure – company, partnership, sole trader
• historic summary
• financial statements and GST returns
• lease details
• assets schedule and identity of any plant, , leased, hired, or not passing in the sale
• organisation structure, employment contracts and staff schedule
• pricing, structures, discounts, terms of trade
• marketing and advertising strategies and commitments
• any trademarks or patents
• contractual arrangements e.g. franchises licenses, supply contracts etc
• computer software and other IT information
• any legal issues

Factors that influence the value of a rent roll

There are a number of factors that influence the value or worth of a rent roll. We have listed below a checklist for your reference;

1.       Number of properties under management

2.       Number of landlords

a.       Number of multiple landlords

b.      Number of owner related properties

3.       The % of commission obtained each property

a.       Trust system report only give averages of entire rent roll

4.       Geographic spread of properties

5.       The $ of management fees per property per annum

6.       Management fees - $per annum

7.       Letting fees for last 12 months

8.       Sundry fees for last 12 months

9.       Type of properties under management

10.   Length of time each property managed

How to buy a rent roll

To buy a rent roll you need to be a licensed Estate Agent.  When you buy a rent roll the price you pay is a multiplier of the management fees. Items that effect values have described in other articles on this Blog, however these are some factors that influence value;

1.            The number of properties under management- if the rent roll being sold is too small then buyers will find it hard to secure finance from a Bank. If the rent roll is small then due to finance restraints the price will be affected negatively.

2.            Banks generally like to lend on a rent roll of 150 or more properties.

3.            The ratio of landlords to properties will influence value. Ideally a 1:1 ratio is perfect.

 

4.            The geographic spread of properties.

5.            The mix of properties under management .

Any offer to purchase a rent roll will encompass the price offered, settlement terms, is it subject to finance or not, the restrictive covenant offered by the vendor and the retention period and amount.

The broker will draft up the heads of agreement and then once all parties agree on the sale price then the vendor will instruct its solicitor to prepare contract of sale. The contracts are exchanged, a deposit paid and then the buyer has the right to conduct due diligence investigations. No due diligence occurs prior to any agreement reached between parties.

At the conclusion of DD, the parties agree on the wording for the assignment letters to be sent to the landlords (VIC ) or new authorities will be sent to all landlords in the name of the new agent.

 The final settlement price is determined once all authorities have been returned or notification of assignments has occurred. Generally the settlement of a rent roll occurs at the end of the month thus allowing the vendor to account to all stakeholders. All tenant and landlord information is required to be transferred onto the purchasers trust system at settlement allowing for an easier transfer. Naturally there will be a period of involvement from all the parties to ensure that the transfer occurs as smoothly as possible.

 The retention sum and period operates for the purpose that if any property drops off for no apparent reason post settlement then a financial adjustment can be made on those properties that drop off at the conclusion of the retention period. An amount of money from the settlement sum is held in Trust to satisfy this clause.