Tips for Purchasing Management Rights
Acquiring a management rights business involves a number of steps and the involvement of third parties including vendors, professional advisors, agents and financiers. These parties will guide you along the way, but you are ultimately responsible for making decisions.
By familiarising yourself with the steps involved in the purchase process you will be better prepared and able to communicate your requirements. This will make a big difference to your journey and outcome.
Assessing which business to purchase
The cash and capital you bring to the deal will determine the price range you can afford, so it is best to start there – there’s no use wasting time inspecting other properties. Financiers and accountants who specialise in management rights will be able to assist you determine your budget, which will also provide for professional fees, transfer duty and working capital requirements.
Ask agents to provide listings in your price range. You should review available properties and rule out those that do not offer the required level of profit, size of managers unit, location etc.
Remember that although this is a business decision, lifestyle considerations (such as location, allowance for pets, room for kids, etc) are paramount to your comfort and will impact your whole attitude to this enterprise, so these must be treated with high priority.
Another major decision is what type of complex best suits your skills and energy – short term or permanently let.
Holiday let complexes generally require longer hours and guest interaction but provide higher returns. Short term corporate letting businesses are usually in central locations with less grounds maintenance but more room servicing –similar to a hotel.
Permanently let complexes generally have fewer office hours with less tenant interaction, but such interaction can sometimes be confronting if you are in dispute over rowdiness or rental arrears.
It is advisable to pursue businesses that have room for growth. Depending on the situation, growth may be achieved by better marketing or operations; winning units from outside agents, taking on management of adjacent properties or even simply increasing cleaning charges that have not changed for a decade!
Contract
When you are ready to commit you will make an offer through the agent and negotiations may ensue. Prior to forming the contracts you should seek advice from an accountant experienced in management rights regarding structuring – what entity will purchase the management rights business and managers unit? Your accountant will explain your options and set up a structure which best suits your circumstances.
Generally the agent makes the contracts – one for the real estate and one for the business. The business contract is signed subject to financial and legal due diligence; finance and body corporate approval.
Financial due diligence
Your financier will not provide funding without a due diligence verification report prepared by an accountant experienced with management rights.
The accountant will visit the business premises; inspect records and obtain enough information to conclude if the adjusted net profit of the business satisfies the contract condition. You will be provided with a detailed report explaining any variances, adjustments and other commercial information regarding the business operation.
If the accountant concludes that the profit is lower than stated, then you have a right to negotiate the price or exit the contract.
Legal due diligence
Your solicitor will check all contractual documentation including the purchase contracts, the body corporate agreements and the letting appointments to ensure they are effective. Any risks to you will be identified and rectification will be required.
Finance
Your financier assesses the transaction based on the due diligence reports, together with your financial position. The financier will sometimes require a full valuation report prepared by a specialist and may also request a cashflow projection and/or business plan. Such requirements can add significant costs.
Body corporate approval
You must present yourselves to a committee who will assess your character, financial standing and capability of managing the complex. They may also request a business plan.
The timing from signing the contracts to settlement generally takes 90 days with other deadlines inside this for due diligence and finance approval. This timeframe can sometimes stretch out longer, so purchasers need to ensure they can maintain themselves through this period and not eat into the funds they have pledged for settlement.
Alongside this process the purchaser is required to complete the prescribed training modules and apply for a license from the Office of Fair Trading.
Settlement
Be warned – the first weeks in business are never perfect! Even experienced managers have a great deal to learn when they walk into a new property, because no two businesses are the same.
Usually the business contract makes provision for a training period prior and subsequent to settlement – use it well and take lots of notes.
Prioritising tasks is paramount at this time. Focus on the infrastructure requirements and managing the trust accounting software – don’t worry about your general accounts or marketing plan just yet – smiling at the guests is more important!
By Miriam Eagle, Eagle Accounting
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