1. A Presentation to NARPM April 11, 2016 BUYING OR SELLING A PROPERTY MANAGEMENT OR BROKERAGE BUSINESS

2. Buying or Selling a Business Why buy or sell a property management or brokerage business Valuation models Price and terms Deal Structure Things to watch out for

3. Deal Terms Almost always a Non-Compete, Non-solicitation agreement will be required by the purchaser They can be enforceable depending on jurisdiction as far as non- compete goes but non-solicitation is almost always enforceable

4. Deal Terms What is being purchased? Contracts for management (Property management) Furniture fixtures and equipment Listing and pending contracts (brokerage) Trade names and electronic addresses Non-compete agreement May also assume certain liabilities such as office and equipment leases

5. Why buy or sell Growing your business Eliminating competition Entering new markets Exiting the business

6. Valuation models The Income Approach Look at last twelve months of Net Operating Income (NOI) Examine the last three years of NOI Adjust for Owners compensation and non-recurring items Apply a multiple Multiples vary based on size, location, concentration of business, encumbrances, consistency of NOI, breadth and depth of buyer pool, etc.

7. Valuation models The Gross Margin Approach For brokerage a percent of Gross Margin or Company Revenue For Property Management a multiple of Gross Margin Percentages vary based on same terms as does the Income Approach

8. Valuation models It is important to note that one of the factors that impacts the valuation multiples whether Income Approach or Gross Margin Approach is the terms of the transaction Simply stated the higher the price sought by the seller the more generous the terms will normally be – and the inverse is equally true in that the more attractive the price then for the buyer then the more attractive the terms are for the seller

9. Price and Terms Example is a high multiple of NOI or percentage of Gross Margin sough may need to offer terms that include less cash down and more years to pay for the deal Alternatively we have seen sellers want more cash, accept lower price and shorter terms for payment of the balance owing

10. Deal Structure Asset acquisition Preferred by buyers and all purchasers should focus on this form Exception can be when seller is a “C” type corporation Some tax advantage to purchaser and limitations on liability Stock acquisition Most tax advantages accrue to the seller Retention of liability by purchaser a real issue Indemnification provisions will generally be onerous

11. Deal Structure What can be used for acquisition? Cash Notes Earn out Stock in purchasers Phantom stock Employment compensation

12. Deal Structure Acquisitions are the most common form of the combination of two firms Mergers are far more rare Key to mergers is asking two questions: Would you chose to be in business with your prospective partners anyway The toughest part is defining roles, authority and compensation of the partners

13. Things to watch out for Always determine why someone wants to sell? What is their real reason What are their goals for themselves after a deal is done When they are unwilling to take any risk in a deal through future contingent payments they may be signaling something important What are family or other personal considerations Is the brand name important? How can you maintain or protect it?

14. Things to watch out for Can they produce clear and concise records for their business Are their policies for agents or employees consistent with yours Are your cultures in sync or at odds with each other What will be the role of the seller after a deal is done The longer a deal is under discussion the more risk of leaks or growing disagreement between the parties