What have I bought?

I was recently asked to speak at a function where the attendees were predominantly resident managers who had purchased their businesses in the past one to three years.

We at Mahoneys know from the amount of dispute resolution matters we are handling for such managers that many of them are struggling in their businesses. Prior to this speaking engagement, I had witnessed first-hand from a number of new entrants into the industry a lack of appreciation for what they had purchased. Many of them had been led to believe by others that they were buying an effective risk-free passive investment with a return of around 20 percent.

As I explained to those at the function, small-to-medium sized management rights businesses are anything but a passive investment and no management rights business is risk-free. If owners of such businesses think that this is what they have bought, as many seem to do, then if they are not already having problems with their body corporate, they soon will be.

A management rights business is more properly described as a very active asset requiring sometimes significant work on the part of the business owner to properly maintain the value of the asset. Some, of course, require more work than others and it can sometimes be difficult to assess just how much work is involved.

A good guide as to how much work might be required in the caretaking part of the business is the remuneration paid by the body corporate. As a rule of thumb, for every $50,000 per year of remuneration, a manager might reasonably expect to have to work around 25 hours on caretaking duties per week. Then you must look at the time taken to carry out the letting activities at the complex.

It is critical to the success of any management rights business that the manager understands and meets the reasonable expectations of the owners. Rather than focussing just on the return on investment and asking how you might improve that return, a better question for a manager would be: “How can I make sure my owners are happy with my performance?”

Managers might be surprised that asking and responding to this question in a positive way will actually lead to an improvement in their investment in lots of ways.

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