McAdam Siemon : Accountants and Business Advisors

The Five-Minute Business Coach - March 2011

In this issue: Management Rights - is this a good deal?

Words of advice from Sam Hodgetts CPA, Partner, McAdam Siemon

When it comes to Management Rights, here are the two questions I'm frequently asked by purchasers looking at a complex: "Is this a good deal?" and "Is the multiple correct and am I paying too much?"

Follow these five simple tips and you'll be closer to determining if you're onto a good thing:

1: My view has always been that the market will dictate the multiple. I am not a valuer and as such multiples are not my area of expertise – however, my advice is that you must look at your purchase from a variety of angles in order to determine if it's a great deal or a lemon. Each case is mutually exclusive and should be treated as such.

2: From a financial perspective, even prior to looking at complexes, it's important to ascertain how much money you are willing to spend. In other words, how much cash/equity you currently own/control and how much money you are willing to borrow. (Speak to your MR business banker or broker for details on lending capacities).

I used 'willing to borrow' not 'able to borrow'. These are two distinctly different things and being 'able' to borrow the money doesn't necessarily mean you should. Your business cash flow must be able to support your borrowings as well as your return on equity and wages. If this isn't possible, then you have either borrowed too much money or paid too much for the complex. To minimize the risk of over-borrowing, it's extremely useful to prepare cash flow projections for the first few years based on the Profit and Loss statement provided by the vendors, and any other information they are willing to provide. Your accountant can assist with all of this.

3. From an environmental point of view, look at the complex surrounds and common areas you will be responsible for. Discuss the hours of work required to manage it. Higher prices may be paid for easier to manage properties and vice versa. Make sure you align your efforts closely with a financial perspective so you are being adequately compensated for your time. Also, make sure the body corporate salary is adequate for the tasks required.

4. Investigate the rental pool to ascertain the ownership and potential in the complex. A complex with a greater potential for growth in the rental pool may attract higher prices from astute purchasers, but beware and do your homework. From a business point of view, buying a complex of owner-occupied properties can be difficult to change, even to the most experienced managers.

5. It's not always all about the financials. Purchasers may be willing to pay premiums for prestige, potential or ease of living. It's ultimately up to you to determine what you are willing to pay for. So if you want to know if the multiple you are paying for a complex is aligned with the current market, seek out a qualified MR valuer and they will tell you hands down. This will give you a great starting point.

Please feel free to contact us for more advice on how to make Management Rights work for you.