Why buy a management rights business in NSW?

As a practicing accountant with years of experience, specialising in this industry, I would like to take this opportunity to highlight for you some of the reasons why I consider a management rights business (provided it is managed effectively) to be a sound commercial investment.

Liquidity

• You do not hold trading stock which may have an expiry date or become obsolete;
• Minimal working capital requirements;
–    Body corporate remuneration paid monthly;
–    Trust account income paid monthly (that the manager controls).

By Jonathon Hanaghan, Jonathan Grant Accountants

Risk

•    When purchasing a management rights business it is a normal condition of contract that the income be verified by an independent management rights specialist accountant. This can usually be done with a very high degree of accuracy (not always the case with other businesses).
•    The industry is subject to vigorous government legislation (not usually the case with other industries).
•    Returns in excess of 20 per cent (before financing, depreciation and taxation costs) are common.

Process

Pre-contract
•    Speak to as many operators as possible to find out what it’s really like. Nothing like first hand advice! They will tell you what a seminar wont.
•    Evaluate your purchasing capacity. Know how much you can borrow.  Perhaps gain pre approval from a lending institution specialising in the management rights industry.
•    Meet with an experienced management rights broker. A good broker will further evaluate your suitability for the industry and in particular a complex that will suit your lifestyle and commercial aspirations.
•    Find the right complex.  This may take time but you need to visit the complex a number of times to ensure it is appropriate for you and your family.
•    Seek specialist management rights accounting advice:

You need to give consideration to using the most appropriate business structure.

Goodwill is a major asset for any business, especially one within the accommodation industry.  For this reason it is extremely important that the purchaser of a business involved in the accommodation industry should seek professional taxation and legal advice as to the best way in which the business should be acquired. This will usually require the establishment of a discretionary/family trust, a partnership, incorporating a company or a combination of these entities. The appropriate business structure adopted is very much dependent upon the purchaser’s own circumstances.  Each of these business structures has its own advantages and disadvantages.

Before deciding which structure is most appropriate, the taxation and risk consequences of both running the business and the capital gains tax implications when the business is sold, have to be considered.
To structure a business incorrectly can be an infinitely more expensive exercise than structuring it correctly. For this reason purchasers should obtain professional advice prior to signing the initial contract.

•    Select an experienced New South Wales management rights solicitor. They will perform a thorough review of the purchase contract, body corporate management agreement and body corporate history.  Once satisfied then sign contract.

Post-contract

•    Verification of net operating profit: The contract you sign will contain two clauses (amongst others) that set out the body corporate remuneration and the stated net operating profit of the business. If you are borrowing, an independent management rights accountant needs to produce an income verification report for a recent twelve-month period. It is important that you confirm with your financier that they will accept a report from your accountant. This report is for the benefit of yourself, your solicitor and financier.

It is also important that you understand how the net operating profit is calculated, what is included or excluded in regard to income and expense items.  These matters can be discussed at the same time as you discuss the business structure that most suits your commercial and private needs.  It would also be appropriate at this time to discuss other areas covered by the income verification process.
If for some reason the represented net profit is not verified in its entirety your contract becomes null and void and proceeds no further.  At this point you can either accept the reduced net operating profit and proceed with the contract, walk away, or renegotiate a reduced price (based on the verified net operating profit) with the vendor.

•    Legal due diligence and finance conditions: Your solicitor and financier will perform their checks and balances and hopefully settlement is just around the corner.
•    Obtain your license with New South Wales Fair Trading.  
•    The contract will go unconditional once finance and legal due diligence (including body corporate approval) is obtained.
•    Check with your accountant that all statutory registrations (for example TFN, ABN, GST, PAYG) are in order and make sure you have a solid record keeping plan in place for your trust and general accounts.  Seeking specialist software advice is a must at this developed stage.
•    Always only work with industry professionals. By doing this the purchase of your new business will run as smoothly as possible.

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Richard McGill