Vendor Finance is now becoming more popular

With the banks continuing to be cautious lending money to cash flow business (such as rent rolls), we are seeing more sales where the owner leaves in some money for the purchaser. This makes good sense for both parties- the buyer benefits from the seller’s continuing interest and support in the success of the business and the seller gets a higher interest rate and less risk by investing in a business they know and understands.

Analysis of the commission rates of a rent roll

Most trust management systems will provide a potential purchaser of a rent roll with a management statistics report.

Generally this will show the statistical information of the portfolio or the rent roll, such an average rent, gross fees, letting fees, number of properties managed, number of landlord, arrears etc. It is important for a potential purchaser however, to obtain the actual commission rate charged for each property managed to review whether there is a variation in the rent commission charged across the rent roll.

The value of the rent roll is in part based on the commission charged. That said there should be a price variation or lesser multiplier paid on a rent roll where there are a number of fees charged at 4 or 5%. It is too hard to increase the commission rate to 6-8% as owners will resist this increase. Therefore as a conclusion, the higher the commission charged, the higher the multiplier a buyer will pay.

If you own a rent roll, start the process to increase your commission rate over time and to do this in conjunction with increasing your rent. It will be hard for the landlord to resist pay a higher commission if at the same time they are getting a rent increase.

Top 10 Exit Planning Mistakes

We have compiled a list of the common mistakes business owners make when they exit their businesses.

1. Bad timing – judging the best time to sell is important to maximise the price received.

2. Not being proactive – waiting for the perfect deal is like waiting to win the Lottery– it is highly unlikely.

3. Not considering all your options – Discuss with your broker the potential target market and the sale options.

4. Being distracted – do what you do best – run the company. Let the professionals market your
business and negotiate the best deal.

5. Not knowing your value – what is your business worth now?

6. Where to next? – An important part of exit planning is answering that question. As soon as you start to think about selling, act on it as you are likely to be distracted and take your eye of the ball and stop running the business with all your energy.

7. Tax implications? – Your accountant should be part of your team implementing your exit plan.

8. It takes time – selling a business is much more complex than selling a house so allow plenty of time. Information has to be assembled, multi-pronged marketing strategies need to be implemented, legislative and tax implications need to be understood, and almost certainly there will be unexpectedroadblocks and challenges before settlement.

9. Hard work ahead- do not get overwhelmed with the task ahead. If you have an experienced team handling the process they will smooth the way and sort the problems.

 10. Ensure your listed price is correct- Agents spend a life time educating their clients about value- when you are selling head your own advice.

Does the length of time of properties managed on a rent roll influence value?

Over the past few months we have had a number of real estate agents looking to sell their rent rolls. Their primary question is- how much do you think the rent roll is worth?

One needs to consider a number of factors in valuing rent rolls; not the least the length of time each property has been managed by the agency.  A rent roll that has only been operational for a few years isn’t considered a mature rent roll, not having built good loyalty with the clients of the rent roll.

Generally speaking, these property owners are first time or new investors who invariably have geared their investment and are influenced by the economic conditions, vacancies and level of commission & fees charged. If the property is vacant for a few weeks the agent could find the listing is vulnerable and those property owners leaving to go to another agency.

That said, rent rolls with this profile and dynamic are worth less than a rent roll where property owners have been with the agency and built a relationship with the agency over time.  The value of rent rolls that have a mature client base is more valuable than those without.

Preparing your rent roll for sale

Make sure that you know your business- what are the state of the rent roll files?

If you are selling a rent roll then do a self audit of the files to ensure

·         all the authorities are updated and have the correct entities name on the authority

·         ensure that leases to all the properties are signed

·         the condition reports are up to date

·         the bond lodgement registers up to date

Above all ensure that what’s in the file matches the computer records.

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What restrictions should the vendor offer when selling a rent roll?

A purchaser expects that the vendor selling a rent roll should offer and entered into the contract of sale with a restrictive covenant clause. This clause should preclude the vendor from having any interaction with the landlords of the rent roll sold for;

a.        A period of up to 3 years.

b.      An area of up to 10 kilometres from the vendor’s office.

c.       In the capacity of director, shareholder, branch manager or consultant.

The vendor should be further restricted from soliciting or assisting others to solicit the landlords and should be restricted from providing any material to enable someone to solicit the landlords.

How long should the retention period be when selling a rent roll?

Naturally the vendor will want shortest time and the lowest amount and the purchaser will want the

longest time and the highest amount.  So therefore what is reasonable?

I am suggesting that an amount of 10-15% of the purchaser price to be held in Trust as the retention sum for a period of up to and no more than 6 months. In most of the transaction that have been negotiated, the retention period has been 4 months.

The interest on the retained amount shall be divided between vendor and purchaser.