[10 Steps] How to Value a Property Management Company
Valuing a property management company isn't as easy as putting up a banner on the front yard of a property and receiving calls from interested buyers.
Instead, it is a detailed process in which you'll need all the help you can get to evaluate your business and apply valuation methods successfully.
In this guide, we explore the steps to take to value your property management company as you set your sights on a successful sale down the road.
Let's get to it!
TL;DR - How to Value a Property Management Company
Here’s how to value a property management business:
1. Review the company's financial statements
2. Assess the revenue streams
3. Evaluate the client base
4. Evaluate the market position
5. Assess the company’s assets
6. Determine the net profit
7. Determine the liabilities
8. Apply valuation methods
9. Evaluate growth potential
10. Get professional valuation help.
We’ll discuss the above steps in detail in the coming sections.
Since a property management company's valuation is complex, consider hiring an M&A team to help you. The M&A team will bring unique industry-specific insights, value your firm accurately, and help you sell faster for more money.
At Exitwise, we can help you find, recruit, and manage top M&A experts in the property management industry. All you have to do is contact us, and we’ll streamline your exit strategy and maximize your exit value.
How Much is a Property Management Company Worth?
The worth of a property management company depends on various factors. Each company has its own worth because it's a unique entity with defining characteristics that set it apart in the market.
The worth can range from as low as a few hundred dollars to several millions or billions.
How Do Property Management Companies Make Money?
Management fees are the primary source of income for property management companies. Monthly management fees are the cost of the company managing your property.
In addition, these companies may get extra income from investor-centric ancillary services, such as property maintenance.
How Much Does A Property Management Company Make?
Depending on the location and the services provided, a property management company can charge between 8% and 12% of a property's monthly revenue.
Consider a 100-unit rental property that charges $1,500 per unit. Using the percentages above, the management company will earn between $12,000 and $18,000 in monthly fees.
Are Property Management Companies Profitable?
Property management companies are profitable since they typically operate at 10-15% profit rates.
While this is a general industry standard, you'll want to ensure the company’s profit margin doesn't go below 10%, even if a lower value doesn't mean the company is financially unhealthy.
Are Property Management Companies Worth It?
Given profit margins of 10-15%, property management companies are worth their weight in gold.
You can't go wrong with running such a business, especially if your management team has the right industry experience and influence.
Factors that Influence the Valuation
The valuation of a property management company depends on the following factors:
Strength of the management: If the management team has extensive industry experience and operates the other teams effectively and efficiently, the company's value goes higher.
Customer distribution: Where most of the properties you manage are owned by one real estate owner, the risk is higher, and the company's value drops.
Transferability: A company with document standard procedures that make it easy for a new owner to take over gets a higher valuation.
Portfolio churn: A company's valuation is higher if it maintains longer contracts with property owners, preferably for at least one year.
Specialization: The type of properties the company manages matters. For example, properties with at least 100 units fetch the company a higher valuation.
Company reputation: A company with a strong reputation in its service area has a higher valuation.
Debt-to-income ratio: Too much debt can lower a company's valuation and leave little to manage recurring expenditure or expansion plans.
Valuation Multiples for Property Management Companies
The figures below show the average valuation multiples for property management businesses, as reported by most M&A and business brokerage companies:
Average revenue multiples: 0.51x - 0.93x
Average seller's discretionary earnings multiples: 2.51x - 3.01x
Average EBITDA multiples: 3.76x - 4.17x
While these are just averages, the actual multiples differ based on factors like the company's size and financial status. For example, EBITDA multiples can be as high as 6.0 or 7.0.
How to Value a Property Management Company
You can follow the steps below to determine the value of a property management company.
1. Review the Company's Financial Statements
Financial statements, such as balance sheets, income statements, and statements of cash flows, can tell you if a company is in good financial condition.
2. Assess the Revenue Streams
A company with diverse revenue streams is worth much more. Check if the company relies solely on a single service or client or if it has multiple clients paying for various services.
3. Evaluate the Client Base
You can assess the value of a firm by checking its customer base to see how it can acquire new clients and retain existing ones.
Check also how much a client spends and the frequency with which they pay.
4. Evaluate the Company's Market Position
If the company has a considerable market share, its valuation rises.
You can compare the company against its competitors to see how it's differentiated. For example, it could serve a specialized target market or offer specialized property management services.
5. Assess the Assets
Both intangible and tangible assets count when valuing a property management business. Check the quality and value of assets such as office equipment, cash, technology, and real estate.
Goodwill and brand reputation are vital intangible assets that factor into the valuation.
6. Determine the Company's Net Profit
The net profit is the total revenue minus the total expenses. If a company has a higher net profit, it is worth more.
7. Determine the Liabilities
Assess the company's liabilities to ensure it doesn't have excessive debts and pending payables. Too many liabilities lead to a lower value.
8. Apply Valuation Methods
The four valuation methods that commonly apply to property management company valuations include the market, revenue, SDE, and EBITDA approaches.
Market Approach
Comparing the sale prices of similar businesses can show you how much your company is worth. The comparison will show you the multiples other businesses sell at.
Revenue-Based Valuation
While it's the least common valuation method for property management firms, it's still reliable if a firm is growing rapidly.
For a property management company, you'll want to consider the total revenue from management services. You can exclude brokerage, maintenance, and other minor revenues, as they may be few and far between for a firm mainly offering management services.
Revenue multiple = Enterprise value/Annual revenue, where the enterprise value is the total equity plus total debt minus total cash.
For example, for a company with an enterprise value of $1,395,000 and $1,500,000 in gross annual revenue, the revenue multiple = 1395000/1500000 = 0.93.
Here's a sample valuation:
Assuming a total revenue of $745,000 from management services only and a revenue multiple of 0.93x,
Company value = $745,000 x 0.93 = $692,850
Seller's Discretionary Earnings Valuation
In a seller's discretionary earnings (SDE) valuation, we consider how much the business owner pays themselves.
The SDE-based approach determines how each employee efficiently generates revenue and indicates the company's earning capacity.
Applying the SDE multiple method is best if your company makes below $5M in annual recurring revenue.
Company value = SDE x Multiple
Using this approach and assuming an SDE multiple of 3.01x, a property management company making $250,000 in annual seller's discretionary earnings would be worth $752,500.
EBITDA-Based Valuation
An EBITDA-based valuation considers the general financial health of a company.
The method is usually used for larger companies making $5M or more. The EBITDA method usually applies to firms managing over 500 units in the property management industry.
The number of times the EBITDA of a property management company is worth averages between 3.76 and 4.17.
Company value = EBITDA x Multiple
Based on a 4.17 EBITDA multiple and an EBITDA of $6M, a property management business would be worth $25,020,000.
Determining the accurate value of a property management firm can be tricky. Our online valuation calculator can help you arrive at a real-time value.
9. Evaluate Growth Potential
You can determine the growth potential of a property management firm using various aspects:
Does the company adapt well to industry trends and technologies? Are these technologies improving the firm's operational efficiency?
Check how the company acquires new clients. Are there extra ways to sign up and retain new clients?
Does the company invest in high-quality employees? A firm that hires and retains top-notch employees has a high growth potential.
10. Get Professional Valuation Help
To maximize the value of your business, find the right financial experts for a professional valuation.
At Exitwise, we help you find the best tax accountants, M&A lawyers, and investment bankers to help you with business valuations and sales. You can speak to an M&A expert today.
Common Valuation Mistakes to Avoid
Since property management company valuations are complex, you’ll want to avoid mistakes such as:
Comparing companies that aren't accurately similar to yours in the type of services, the clientele you serve, or size when using the market approach
Omitting intangible assets like goodwill, client loyalty, or brand reputation when using the asset-based approach.
Selling Strategies for a Property Management Company
Your selling strategies include decisions, goals, and actions that inform how you'll position your company to recruit the right buyer.
The strategy you use will depend on several factors, including the size of your company.
Try the following approaches:
Start preparing the perfect business exit at least one year before initiating the sale. You can organize your finances, add revenue streams, or reduce debt.
For a small company earning $250k - $2M annually, market your company to individuals already in the sector or those looking to join.
Sell your business to competitors, real estate investors, or house maintenance companies since they are also in the real estate sector.
Opt for a stock sale structure if you are a large public company.
While these methods can yield results, you would be better off working with established M&A experts to smoothen the valuation and sale.
Exitwise exists to help you recruit and manage the best M&A professionals. You can talk to us today for more information on our process.
Frequently Asked Questions (FAQs)
Below are answers to common questions about property management company valuations.
How Is Revenue Considered in the Valuation of a Property Management Company?
A revenue multiple is applied to the total annual revenue from management fees your property management company accrues.
The company's value will be the annual total revenue times the multiple.
What Role Do Client Contracts Play in Valuing a Property Management Company?
Client contracts can raise or lower the value of a property management firm. Transferable long-term contracts with automatic renewals fetch a higher value because they translate into a predictable revenue stream.
How Do Market Conditions Affect the Valuation of a Property Management Company?
The general state of the economy and real estate sector can cause high or low company valuations. If the industry is in bloom, it can be an excellent time to sell as the valuation will be higher.
At Exitwise, we leverage a global network of industry-specific M&A experts who can evaluate the prevailing market conditions and let you know if it’s the right time to sell your company.
How Does Client Retention Rate Impact the Value of a Property Management Company?
A good client retention rate indicates efficient operations, excellent customer service, and customer satisfaction, which can raise your company's value.
How Can Technology and Software Investments Influence the Valuation of a Property Management Company?
You can invest in property management technology and software such as Yardi and Appfolio (for example) to increase your company’s value.
Such technologies can help streamline operations, leading to efficiency and better financial performance.
Conclusion
Now that you know how to value a property management company, you can make a successful sale once you market it to the right buyers.
Valuing your company can be overwhelming. Contact us today to help you recruit and manage the best M&A team in the industry. Besides valuing your company accurately, we’ll also help manage your team for the best results.
