Whether you’re just starting your property management company or you’re a veteran of the trade, knowing how to financially value your company in the case that you may one day sell it is incredibly valuable knowledge.
Steve Murray, the president and co-founder of REAL Trends, the nation’s leading trends and research organization, recently held a session at the 2020 Pulling Back the Curtain property management conference diving into the details of how Property Management companies are valued and how you can be actively driving up value for your company, even if you aren’t looking to sell anytime soon.
3 Factors That Drive Value:
- Profitability – what is your pre-tax cash flow?
- Consistency – consistency of financial growth, personnel, and company records.
- Portfolio Churn – how long are your contracts?
To measure profitability, the acronym to get to know is EBITDA – Earnings Before Interest, Taxes, Depreciation, & Amortization.
Driving profitability comes of course from growing your unit count, but also continuously to be finding ways to increase operational efficiencies and revenue per unit as the market and industry changes. For more on this you can read our in depth article on Business Health For Property Managers: Margins, KPIs, and SMART Goals
You can also book a discovery call with us to see how you can be increasing your revenue per unit by $4/unit/month by partnering with Latchel to streamline your maintenance operations.
Your company’s valuation will also increase if you have consistency in your growth. Your growth shouldn’t look like rollercoaster of ups and downs, but a stable, steady increase. Typically, your past 12 months are evaluated so it’s suggested to start prepping to sell at least a year before you actually do.
The consistency of your personnel will also be evaluated to ensure there is stability within those turning the wheels of the company, so investing into a solid team will matter. Consistency in how you keep company records will also be important to your valuation – nobody likes to inherit a mess.
Your average length of contracts is also something that will be looked at. So it will be important to narrow down the traits of your ideal customer, and be picky about who you choose to work with. If you find what works best for you and with you, you can increase those types of clients and show less portfolio churn.
How Your Value is Calculated:
To determine the hard number of your company’s value, you multiply your EBITDA by a number between 2 – 5 (your multiplier).
There are many factors that go into determining whether a company’s multiplier is on the lower end, or on the higher end. The above factors of profitability, consistency, and portfolio churn are big determining factors. A few others to keep in mind are:
- Non-recurring incomes & expenses: these are one time events that would be added or deducted from your cash flow statement like:like lawsuits, settlements, and expensive property damages. You want to have as little one-time events that deduct from your cash flow statement as possible. This is why it’s so important to have a solid emergency maintenance plan. You can download our comprehensive guide on that here.
- The size of your firm in relation to the size of the market you’re operating in: This helps determine the potential for your company’s future growth in the market you’re operating in.
- Strength of your management teams: Your multiplier will also be higher if your management teams are strong. Do they have tenure with the company? Do they have industry influence? Do they operate their teams efficiently and effectively? etc.
As noted previously, you’ll want to be prepping documents for at least one year before you intend to sell your property management company.