How to Value a Property Management Company: A Quick Guide to Valuing Property Management Companies

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What Classifies as a Property Management Company?

A property management company is a business that specializes in the management and maintenance of rental properties. They are responsible for the day-to-day operations of the property, including taking care of tenants, collecting rent, and handling any maintenance or repairs. Property management companies may also specialize in certain types of properties, such as single-family homes, condos, or large office buildings.

Property management companies often use Proptech software like Appfolio, Yardi or Buildium to help with the day-to-day operations of the property, such as tracking rent payments, managing maintenance requests, and scheduling repairs. In addition, they must possess an understanding of the local rental market, rental laws, and landlord-tenant relationships in order to succeed.

The value of a property management company comes from their ability to provide a great tenant experience (consistency), manage contractors and the operations budget (profitability), and help create a sustainable and profitable rental income (churn).

What Is Included In a Business Valuation?

A business valuation typically takes into account a company's assets, such as its buildings and equipment, liabilities (e.g., an SBA loan or lines of credit), profitability, transferability (e.g., how easy is it for a new owner to take over?) and growth prospects. This helps to provide a clear and accurate picture of the business’s worth.

As a business brokerage that specializes in “main street” businesses, we work with dozens of property management company owners each quarter to craft valuations from the ground up. These valuations can be used to think about exit planning or to set the asking price when selling a property management company.

In this post, we’ll break down the basic process for valuing a property management business based on seller's discretionary earnings. That being said, if you want to get a detailed valuation of your own business, please reach out.

How Do I Value a Property Management Company?

To calculate the value of a property management company, start by analyzing the past three years of your tax returns. Once you’ve pulled these financial documents from your records or your CPA, the next step is to calculate Seller’s Discretionary Earnings for each year. Seller’s discretionary earnings (SDE) is a proxy for how much future earnings an owner-operator would receive from owning the business. 

To get to SDE, we add up the following:

We then need to adjust the initial SDE number for common “edge” cases in a small business:

Now that we have a number for SDE and we’ve adjusted it for a new buyer, we need to come up with an average that represents future earnings. For instance, if you specialize in commercial properties and lost management contracts during COVID, you probably saw recovery in 2021 as people came back into the office.

There are a number of ways to calculate a fair average of SDE across the years. At Beacon, we use a somewhat complicated formula. If you’re doing a valuation at home, we recommend that you weight the most recent year 50%, the second most recent year 37.5% and the third most recent year 12.5%.

For instance, if you had SDE of $420K, $390K, and $325K in 2022, 2021, and 2020, you would do the following: $420K x 50% ($210K) + $390K x 37.5% ($146.25K) + $325K x 12.5% ($40.6K). Adding those up would yield $356.2K. This would be your weighted average SDE.

Once you’ve calculated your weighted average SDE, you’ll need to apply a multiple to your earnings to determine the value of your business when ignoring cash on the balance sheet.

What Affects The Valuation of My Property Management Company?

There are a number of factors that can impact that value of your property management company:

These factors will impact the multiple applied to your SDE. As a general rule of thumb, we recommend using your revenue to guide your multiple. That being said, it is pretty imprecise. Some management companies may have high revenue but very low profitability with high churn. For a more exact valuation, please reach out to a member of our team.

For those performing a quick valuation at home, we recommend the following approach:

Using our example from previously, if the property management company earning $356K in SDE was grossing around $2M in revenue, then their valuation would be between $979K and $1.246M.

FAQ

How do market rent, rental income and rental property value affect the value of a property management company?

The value of a property management company is definitely affected by market rent, rental income, and rental property value. When rent prices in the market are high, rental income for the company will increase, which can lead to increased value for any property management companies in the area. Conversely, when rent prices and rental property values are low -- as is starting to happen in the country as of the writing of this post, the value of the company will decrease as the company’s profits decline.

What other methods are used to value a property management company?

In addition to the SDE approach, some buyers prefer to use a per-unit method of valuing a property management company. This involves setting the asking price or bid price of the company based on how many units are under management contracts. For example, some buyers may bid at $1,050 per unit. A property manager with 375 units under contract would be valued at $393,750.

What does it take to be a successful owner of a property management business?

First and foremost, a new owner needs savvy marketing and technology skills, ability to multitask, prioritize and be organized. Property management is the art of multitasking, as any company could have well over 100 units under contract.

Aside from the organization skills, customer centricity is important as well. Property managers are often the first call when something goes wrong. Being able to disarm and work with difficult tenants is crucial to maintaining contracts for the long run.

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Katie Lamar
Katie Lamar
Business Development

If you're interested in acquiring a Main Street business, Katie is your go-to person. Katie hails from Kansas City originally and majored in Art History at the University of Kansas. In her free time, she enjoys climbing, paddleboarding, and cooking.


Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.