11 Nov 2024
Words Jeff Keast Informer

Broker Insight: Management Rights

Set yourself up for a successful sale by having your P&Ls prepared by an industry specialist accountant, writes Brisbane management rights broker Jeff Keast.

Readers of a certain vintage may remember the TV gameshow The Price is Right.

Contestants were drawn from a studio audience to guess the price of merchandise. If they guessed right, they won the merch. When a contestant’s name was called to come on stage, the announcer bellowed “Come on down!” which became the show’s catchcry.

Buyers of management rights assets don’t need to guess the price. Unless it’s an expressions of interest campaign, the sale price is listed. No guesswork is required. The buyer knows what the seller expects for their asset.

Savvy buyers also know what they’re prepared to pay for it. If the seller’s price is overpriced, especially in this current market, the seller will almost certainly need to “Come on down! — on price. Inevitably, a price drop is required if they want to sell.

Some sellers may hold out for their ‘dream price,’ which invokes another popular catchcry, “Tell him he’s dreamin.’” The seller fails to shift their asset. It becomes a stale listing and like most stale things develops a bad odour. Then no one wants to touch it.

Having seen this happen on more than a few occasions, my recommendation to sellers is to avoid it from the get-go. Set yourself up for a successful sale at the start.

HOW TO SET YOURSELF UP FOR A SUCCESSFUL MANAGEMENT RIGHTS SALE

Many elements make for a successful sale. First among them is preparing your profit and loss (P&L) statement for sale. That’s because your sale price will be based on your P&L. That’s why I always recommend sellers have their P&Ls prepared by an industry specialist accountant. For example, we might see that the client’s repairs and maintenance is much higher than previous years and ask them to explain.

ResortBrokers’ point of difference is we spend time with our clients to go through their business and each line of their P&L. This may take us longer to get properties listed but we’d rather take time to understand your business than rush to market unprepared. It helps us foresee any problems in the P&L that could arise with potential buyers. (We apply the same scrutiny to buyers as well by qualifying them; that is, ensure they have the financial means to buy your asset.)

Management rights is a specialism and like any other specialist industry you need experienced, expert practitioners who know what they’re doing. Accountant’s fees will vary depending on who you engage and the size of your business, but typically it’s a small outlay that will save you potentially tens of thousands of dollars when it comes to your sale price.

Rest assured that buyers interested in your management rights business will have their own accountants verify your P&L. If they find it’s out of whack, the buyer will expect a price reduction. A variation of as little as a few thousand dollars or more means you’re looking at a price drop.

Avoid this at all costs.

As a broker, I certainly do. I won’t take on a listing unless the seller has had their P&L prepared for sale by an industry specialist accountant.

Some sellers say they don’t want to spend money on a P&L. I’ll then ask them, “If you were looking to buy a business whose figures weren’t prepared by a specialist accountant, how much trust would you have in what you’re buying?”

Most sellers get it at this point. Once they’ve placed themselves in the buyer’s shoes, they understand how crucial an industry accountant-prepared P&L is. Nevertheless, some sellers still want to do it themselves. And that’s OK if you know what you’re doing.

But if you don’t, you may overlook crucial items. You may leave GST in your figures. Or not properly account for wages. This is particularly the case in short-term letting schemes where wages are always a bone of contention. When your P&L undergoes scrutiny by an industry specialist accountant, these mistakes may prove very costly to you.

How costly?

Potentially, tens of thousands of dollars off your sale price, if not more. I heard of one sale (not one of ours) where the seller missed out on $100,000 of the sale price because they’d messed up their P&L by doing it themselves

There’s another reason I insist upon an industry accountant-prepared P&L.

It means I can stand behind the figures with authority. I can confidently defend your price. I know the figures are clean and can get behind them to sell it for you.

It also gives buyers’ confidence to submit an attractive offer. If buyers think the figures are rubbery, they’re never going to put their best foot forward.

Due diligence in management rights sales is hard enough. Don’t make it harder for yourself. Your aim should be to come to market with P&L figures that the buyer will have the least amount of objection to once they have been verified by their accountant.

I learned this the hard way. When I was very green in this industry, one of my first listings was a management rights business netting over $300,000. My client was very experienced and insisted they didn’t want an industry accountant-prepared P&L. Because I was new to the industry and a little daunted by my client’s experience I didn’t push for an industry accountant-prepared P&L.

During verification the buyer’s accountant discovered my client’s figures were out by about $20,000. Once the multiplier was applied the difference in the sale price was about $120,000. It was a huge gap to try to negotiate. I got it sold but not before my client agreed to a significant price drop. 

Don’t let this be you. A small amount to pay upfront to get your P&L properly prepared will save you tens of thousands of dollars in the long run. You can confidently stand behind your sale price and won’t have to “Come on down!” END