Selling a business is a monumental decision. Not only are you taking a leap into the unknown, you also need to safeguard your interests. Selling part of a business, such as all or part of a rent roll, needs no less consideration. It can be overwhelming, which is why we have done the homework for you.
Here are seven key things to consider when or before selling a property management business:
1. Is selling the right decision?
The first hurdle you must jump is making the decision to sell. Ask yourself some important questions:
- Why are you selling?
- Are you selling for the right reasons?
- If selling the entire business, do you have employment options after the sale? The sale contract will likely restrain you from working in the industry or immediate geographical area once the sale has been completed.
To help answer some of these questions, it’s consulting a specialist business advisor in the property management space.
2. Know the value of your business
If you are going to sell, you need to put a price on the business. To set the right price, we recommend enlisting the help of your accountant or a consultant in the property management field. Your accountant or consultant can:
- Determine the best valuation method to use, noting that the value of a rent roll varies depending on profit, size, geographic spread, the location and condition of the properties in the rent roll. Once these are determined, a multiplier of the yearly management fee (the rent roll multiplier, or RRM) will generally be applied to the rent roll, and
- Consider the apportionment of plant and equipment, goodwill and any other items for sale if the business is to be sold as a ‘going concern’.
It is crucial you address these issues at the early stages of your sale to guarantee you have effective tax planning in place.
3. Maximise your chances
To maximise your sale prospects, consider appointing a business broker specialising in the sale of rent rolls to market the business for you and advise on sale strategies. Also consider preparing a ‘buyer’s kit’, which is a type of prospectus and provides a summary of the business including an audit of the rent roll, the financials, the products and services offered (including photographs where applicable), details of any employees and scope for growth in the business.
A buyer’s kit and impeccable business records are invaluable in assisting a potential purchaser to conduct their due diligence and determine whether your business is an attractive prospect to purchase. For example, if a seller cannot provide details of the breakdown of each of the properties the rent roll (such as the length of a fixed lease, the rent and other expenses and the type of property), the buyer may get cold feet and pull out of the sale.
4. What is included in the sale?
On the face of things you may assume the business is being sold as one entity. However, it is important to deconstruct a number of elements to determine what is going to be sold with the business, and what you will retain. For example:
- Are you selling all or only part of the rent roll?
- Is a sales business included?
- Will office equipment be transferred?
- Is a premises lease to be transferred?
- Is the business name to be transferred?
- Will you transfer the phone number and internet domain name?
- Will any intellectual property or trademarks be sold with the business?
The scope of the sale will dictate how you conduct it and the taxation impact, such as GST.
5. Seek Advice from the Experts
It is advisable to obtain professional advice and assistance throughout the entire sale process.
Ideally, assistance should be sought from a combination of a business broker, your accountant and lawyer. While it may seem like an expense at the outset, getting the right professional advice can save you money and time in the long run. Here’s how:
- An accountant and/ or external property consultant can best advise the value of your business or rent roll, the way to apportion plant and equipment with goodwill (if appropriate), and help your tax structuring with employee entitlements and sale proceeds.
- A business broker or external property consultant can guide you on the best way to value the business and negotiate the purchase price, and provide a go-between with the buyer.
- A lawyer can prepare the Sale of Business contract and deal with the contractual considerations, ensuring your interests are protected.
6. Contractual considerations
The most important document relating to your business sale is the contract. It is important that the contract does five things:
- Correctly identifies the parties
- Lists the items to be transferred
- Sets out the sale details
- Includes schedules of assets and depreciation schedules, and
- Covers issues such as the retention sum to be kept pending the transfer of the properties in the rent roll to the buyer, warranties and restraints of trade, which may impede your ability to earn an income after the sale’s completion.
7. Transfer of lease
If you lease the premises from which the business is conducted, you will also need to transfer the lease to the buyer. This is generally done by obtaining the landlord’s consent and entering into a Deed of Consent to Assignment of Lease to assign your liability as lessee under the lease.
In this regard, it is vitally important to ensure that you walk away liability free from further obligations under the lease and are released from any continuing obligations as lessee and guarantor.