As a going concern business, the purchase of management rights is the purchase of an income stream. Essentially, the price is calculated as; Net Profit For Sale (income) by Years Earning Factor (Multiplier) equals Value/Price.
Example: Net profit For Sale $150,000 x Multiplier 4.75 = $712,500 Selling price.
The banks and their valuers have a significant input into these multipliers for lending purposes.
As a guide for tourism / residential management rights related businesses, the following multipliers would be applicable.
– $50,000 to $100,000 nett – 2.5 to 3 times
– $100,000 to $150,000 nett – 3 to 4.2 times
– $150,000 to $250,000 nett – 4 to 5 times
– $250,000 to $500,000 plus nett – 4.75 to 5.5 times
Please note that the above multipliers are indicative only, as with any business or property opportunity placed in a competitive situation, someone may pay above the market for a desired business.
Variations in multipliers can be affected by a number of factors including, location, age, size, livability, and desirability.
Generally speaking an additional 5-6% can be factored into the purchase price to cover professional fees (legal, accounting, valuation) and government stamp duty.
Important Factors To Consider Influencing Value:
Business type – permanent/holiday/student/short stay corporate
Location – CBD/suburban/tourist destination
Income – both overall income and the income being generated for each lot in the letting pool. Businesses at both ends of the income scale (low and high profit) will have a smaller pool of willing buyers, so they may achieve a lower multiplier than a complex with a mid range income
Number of lots in the complex and in the manager’s letting pool
Body corporate salary – the salary amount and the way in which the salary is reviewed or adjusted
HOW MUCH CAN I BORROW?
Management Rights don’t carry the same operational and cash flow risks associated with the majority of other types of going concern businesses. In fact you could be forgiven for thinking the Banks love Management Rights. It is essential you consult an experienced management rights and accommodation finance specialists when considering your next purchase. For more information on borrowing against a management rights business check out one of our preferred finance suppliers who offers some great information relating to management rights finance.
WHAT INGOING COSTS DO I HAVE TO BUDGET FOR?
The greatest acquisition expense comes in the form of Government Stamp duty. This fee is calculated on a sliding scale with a top rate of 3.75% of the business purchase price. If a residential manager’s lot is purchased in an individual’s name and is their principal place of residence for 6 months or more, the purchaser will not pay capital gains tax on the residence.
Other expenses include;
In a typical purchasing scenario these fees will equate to an additional 5-6% on top of the purchase price.
HOW DOES A MANAGER EARN INCOME?
Managers can earn an income from two primary sources.
BODY CORPORATE OR CARETAKING SALARY
Managers receive a fixed salary from the body corporate as a part of the annual fees and levies paid by property owners within the complex. This salary varies according to the range of duties required for the caretaking of common property outlined in the agreements. The Body Corporate also pays for some of the day-to-day expenses of looking after common property including things such as fuel and equipment maintenance used by the property manager.
The Body Corporate or Caretaking Salary is usually indexed to the CPI to allow for annual increases in the manager’s costs.
A typical management rights agreement includes an agreement with the body corporate that allows you to conduct a letting business within your community titles scheme. This allows the manager to act as the on-site letting agent for investor owners wishing to rent their units to tenants. Managers are expected to supervise the standard of tenants and maintain an office and reception area. The hours required for the manager to operate these areas are outline in the agreements. In a tourism related business income will also be derived from the provision of services such as unit cleaning, supply of linen, internet supply and tour commissions.
The body corporate or Owners Corporation (Vic) is made up of all the individual unit owners in a complex acting as one committee. These members act in a manner similar to any company and utilise committee meetings to voice any concerns and discuss matters relating to the management of the complex.
CAN THE MANAGER BE ON THE BODY CORPORATE?
Resident managers are under the BCCM Act. They are “ex-officio” members of the Body Corporate Committee. Whilst they cannot vote at meetings they can attend and voice their opinion on all matters. It is essential that a manager maintain a strong and functional relationship with the Body Corporate.
WHAT IS A BODY CORPORATE MANAGER
A body corporate manager is a member of the committee elected to provide legal, financial and secretarial services and advice to the Body Corporate in order to ensure that all statutory requirements of the committee are met. Initially a manager is appointed by the developer when the complex is first built and under the B.C.C.M Act all managers have a maximum tenure of 3 years. It is the role of the Body Corporate Manager to set out and oversee the spending of all administrative funds from fees collected from owners within the complex.
TIPS FOR BUYING OFF THE PLAN
There are a number of reasons why people want to buy management rights off-the-plan. It is often perceived as an opportunity as there is an expectation that:
– The multiplier will be lower when buying from the developer; and
– The profit could ultimately be a lot higher than that projected by the developer
It is also important that there is no stamp duty on the initial grant of the management rights, although there is still duty on the unit.
Although there is GST on an off-the-plan management rights acquisition that is eventually remitted back to the buyer as an input tax credit. While the legal fees and general delays can be much greater than a normal purchase, the duty saving more than makes up for that as the duty can be over 5% of the price!
Of course there are also risks of buying off the plan. But, if the items in this article are considered and acted upon, the risks can be substantially minimised.
Tip Number 1. Deal with competent and respected people and get good advice early.
Importantly, the first person you need to check out is yourself!
Do you have the skills to bring this kind of business together? Permanent complexes are fairly straightforward. Many of my existing clients hear about a holiday building years before it is completed. Warning bells should ring if you have no experience and come across a major holiday or short term building six weeks before it is to be finished!
Never sign an off-the-plan management rights contract without expert legal and accounting advice. These contracts are never standard.
Tip Number 2. Trust but verify.
The agent and the developer can be an excellent source of information. But, it is critical to distinguish between information and ‘blue sky’. Information can be verified, blue sky cannot be. Blue sky includes, for example, unsupported estimates about likely rental or occupancy rates.
It is important to identify, check, and verify any important assumptions about the business. Get good advice form an accountant with expertise in management rights to help with the verification.
Your accountant will assist to establish price calculation and related assumptions. What is the breakdown between body corporate remuneration and letting income? What expenses have been allowed for? What is the expected occupancy? What are the other income sources (electricity supply, internet services, parking fees)? Is it appropriate that those Income sources be included in the projections for sale purposes?
Remember that projected profit does not equal cash flow! Depending on the size of the complex, nett cash flow (before interest) could be 10% or more below projected nett profit. Consider preparing separate cash flow forecasts. Again get your accountant to assist in this regard.
Tip Number 3. Get good advice from an experienced lawyer on how to structure the clawback arrangements and deal with these issues up front so that agreement in principal can be reached with the developer.
A critical question that is often ignored is, “How many units do I need in the letting pool to settle?” You can have the best clawback clause but if there are not enough sales to investors, the business might not stack up even with a major price reduction. In a holiday complex, consider if you require a minimum number of units to be fully furnished.
One of the things that you need to determine is how much each unit is worth in the letting pool. For example, if the projected letting income from a unit is (say) $6000 and the multiplier on your purchase is 4.5, then that unit alone is worth $27,000 to your letting pool.
Examples of the features of clawback clauses include: not paying for units retained by the developer or its associates, only paying on receipt of a signed Form 6 Letting Appointment from an owner who has completed the unit purchase, and only paying for completed, furnished units (if applicable).
These are just a few examples and we have a comprehensive checklist that we use for working out a clawback/claw-forward arrangement. Working these out at the beginning of the matter as part of reaching in principal agreement with the developer can save time, money and angst.
Tip Number 4. The developer and its selling agents – ideally, the developer will have a good track record – find out about the developer’s other complexes. Speak to the managers of those buildings.
What support will the developer offer you? This could include marketing support for websites and advertising, and assistance with identifying and rectifying building defects. Managers often need to spend significant time and money setting up the business and fitting out the office in the months leading up to settlement.
Who are the agents selling units in the complex? What have they promised the buyers? Obtain copies of marketing material.
Tip Number 5. Make sure that you are using a lawyer with extensive experience in off the plan management rights transactions.
There will be items of critical importance that need to be resolved before and after the contract can be signed. Your lawyer should identify any immediately obvious issues in the agreements but also conduct a thorough review of the agreements and the by-laws in the due diligence period.
Developer’s solicitors frequently use ‘off the shelf’ caretaking and letting agreements. Often, we see permanent townhouse complexes with agreements that seem drafted for a high-rise holiday building and vice versa. High risk items that might need to be considered include, for example, strict office hours, or being required to carry out duties that are way beyond the expertise of a manager and more properly the responsibility of a specialist contractor.
These are but a few of the issues that an experienced lawyer will be able to identify and address.
THINKING OF SELLING YOUR MANAGEMENT RIGHTS?
Selling your Management Rights can be a complicated process without the right advice. If you want professional service, marketing and a team who can get your management rights sale across the line, then RCA Business Brokers is your agency.
The team at RCA Business Brokers have over 50 years experience in the Management Rights and Accommodation industries across Australia. RCA Business Brokers have a team who know the industry and have the networks and listings to help you on your way to a successful Management Rights transaction. Our agents spend time with each of their clients to make sure they understand your business and can find the right buyer for you!
In order to get your Management Rights business sold, RCA Business Brokers will utilise our extensive database of managers, purchasers, investors, operators, accountants and lawyers by emailing details of the opportunity for consideration by themselves or their clients.
Our Management Rights database currently stands at over 13,500 recipients. We offer at no cost to the vendor the following marketing services for all exclusive listings:
– RCABB Online: Our monthly newsletter featuring the hottest properties as well as Management Rights industry articles
– RCABB Hot Listings: Our latest feature listings sent out monthly
– RCABB Corporate Advertising: Block media in relevant industry section
– Weekly feature listings and mail outs
– On top of our own in house advertising, all listings are uploaded to relevant industry websites
– Should you feel it necessary to market the property to a greater audience by way of a more expansive media campaign, we will prepare a campaign and budget for your consideration and approval.
Please do not hesitate to contact our office for any enquiry you might have regarding listing your business for sale.