RESORT NEWS - FEBRUARY 2015 Copyright 2015 Resort Publishing • Phone 07 5440 5322

TIPS FOR SELLING MR

L I F T - O U T I N F O R M A T I O N F E A T U R E

Would you like to hear what constitutes a “heartbreak scenario” as it applies to the sellers of management rights?

Here it is.

Your management rights business has been on the market for four months; you have � nally obtained a contract - then two weeks later you are told by your solicitor or your agent that (for whatever reason) the contract has crashed and you have to start all over again!

Unfortunately, up to 20 per cent of sellers who have signed off on an offer and acceptance document go through this heartbreak scenario each year.

How do you avoid it?So many of the things that you must do to smooth your sale through to completion are things you must do before you even sign your agent’s appointment to act. When I started selling management rights about 14 years ago, a listing took about 30 minutes to complete. Today, if your agent is doing it properly, it should take a couple of hours.

It is a fact that buyers have changed in the last 14 years. Today’s buyers are better educated about management rights. They have probably attended a couple of introductory seminars and they have spent hours trawling the web, seeking information. They are also more nervous and, like antelope at an African waterhole at dusk, it doesn’t take much to spook them!

10 to 12 years ago, a small shortfall in the veri� cation of your pro� t and loss statement would probably go straight through without a raised eyebrow - today, it will at best mean a renegotiation of the price - or at worst, a crashed contract.

Most agents will tell you that incorrect P & L statements are one of the most common causes of contract failure. The simplest way for a seller to minimise the risk in this area is to have a recognised management rights accountant prepare a pre-sale P & L veri� cation. There are three great reasons for this. First, when your agent is establishing the correct market price for your business, he knows that he is

using the correct data. Secondly, and more importantly, when your buyer knows he is looking at a P & L prepared by an industry expert, he is more likely to trust the � gures than had they been prepared by the seller or the agent. The third positive (for all parties) is that the buyer should also be using an industry expert accountant, and that accountant will be well acquainted with the person who did the pre-sale veri� cation. Should any contentious issues arise, the two industry experts are very likely to resolve the matter without leaving blood on the � oor.

Even if your complex takes a while to � nd a buyer, it is easier to keep your P & L up to date when you are starting from a professionally prepared base.

The secret of achieving a sale within a sensible time line is to be sure you have your offering priced correctly. In spite of what the tooth fairy might have told you, there are no “wood duck” buyers with fat wallets and no brains out there at the moment. And even if there were, that nasty valuer from the bank will soon put them right.

So how do you know what is the correct asking price?

In normal residential real estate an agent must give an owner a comparative market analysis to back up their opinion of the property’s worth. This is simple to do. He goes to RP Data or Price� nder to see what has sold, and for how much. Real estate sales prices are all on the public record. But in management rights, there is no government database that records the prices of recent sales, so how does the agent know what is the current market price for different sized management rights businesses?

This is a considerable problem for some management rights brokers who might only sell between half a dozen and twenty complexes per year and explains why we see so many complexes that are listed for incorrect prices. To know what the market is really doing, you must have access to lots of current sales data and the only agents who have access to that sort of data are agents who sell heaps of management rights businesses.

Don’t fall for the trap of listening to what Fred down at the golf club told you he got for his business! Nobody likes to admit that they sold for substantially

less than the asking price, so like a � sherman describing the length of the one that got away, Fred may be embellishing the truth a little.

Ask the agent who is giving you advice on your price to produce a list of complexes that have sold in the last twelve months, what they sold for, and some other information on veri� ed net pro� t, type of complex, location etc. If they can’t produce this type of actual data to back up their opinion, you should seek another opinion from an agent who can produce the data.

Thirty years ago, I worked for a real estate agency whose motto at the time was The Right Advice. It is actually a great motto. Make sure that when you come to sell what is probably your biggest asset, you also get the right advice. The wrong advice will cost you in tears, time and money.

We can send you a copy of the pre-listing letter we send to intending sellers that contains a checklist of the information we collect from each seller when we list their business.

By Mike ButlerRAAS Rights

Avoiding the heartbreak scenario

Mike ButlerRAAS Rights

Phone 07 5593 0007 www.raas.com.au

MANAGEMENT RIGHTS

We don’t like to boast, but we DO

know it all!Place your management rights business in the hands of an organization which knows the industry not only back-to-front, but from A to Z as well. No slip-ups guaranteed.Give us a call or email ron@raas.com.au

RN002

Copyright 2015 Resort Publishing • Phone 07 5440 5322 RESORT NEWS - FEBRUARY 2015

L I F T - O U T I N F O R M A T I O N F E A T U R E – T I P S F O R S E L L I N G M R

In previous articles for this feature in Resort News, I said “the best advice I can give any potential seller of their management rights is ‘prepare for it well in advance’. Nothing has changed. As I said then, that might sound like something fairly simple but it is advice often overlooked, sometimes at signi� cant cost.

But how then should you prepare for a sale?

Letting appointmentsFirst, check your letting appointments. POA forms 6 are automatically assignable but not PAMD forms 20a. If you are relying on these, to be assignable they will need to have the assignment section ticked or you will have to obtain the consent of all owners to an assignment to the buyer. It is also an offence for you, in the case of a letting appointment without an assignment clause, to assign that appointment without the owner’s consent.

Almost without exception, buyers are insisting that all appointments be properly assignable and assigned at settlement or the purchase price be reduced for non-compliant appointments. We have seen I saw a purchase prices reduced by $70,000 or so and in some cases contracts have been terminated because the sellers did not want to, or were not able to, assign appointments.

If your appointments are not assignable, you should consider new appointments (particularly if the existing ones are a few years old as there have been many changes that should be incorporated) under POA.

Management rights agreementsNext, check your body corporate agreements.

Locate copies of all of the relevant agreements with the body corporate – copies of the caretaking and letting agreements, deeds of assignment, deeds of variation and the like. If my � rm has acted for you, you would have all of these documents in the indexed binder we give our clients after settlement of their purchase.

Get the real estate agent you have selected to scan electronically and/or take photocopies of these to give to prospective buyers. You should also give your solicitor copies of these documents for two reasons.

First, your solicitor can check that everything if in order - for example, that options have been properly exercised.

Secondly, if the buyer’s solicitor or � nancier raises questions about the agreements during the course of the transaction, your solicitor will be able to deal with the matter quickly and ef� ciently.

Term of agreementsThen you need to consider the term of your agreements. Unless you have a long-term agreement with your body corporate, you should be thinking about your sale as early as the time you buy.

You must also consider that most (if not all) buyers looking at a complex in the standard module will these days want close to the full 10 years to run on agreements when they purchase. With complexes in the accommodation module most buyers will be looking for at least 15 years but some buyers and their � nanciers want even longer, depending of course on the amount being borrowed.

If you buy with 10 years or so to run on your agreements, you will invariably will have to secure add another option before you sell.

The transfer fee rules will not penalise you just because you sell within three years of getting a new agreement or adding a new option. It is only if you sell within one to two years of becoming manager that the transfer fee applies and the body corporate must impose a transfer fee of 3 per cent or 2 per cent of the business sale

price. Adding a new option to an existing agreement is technically prescriptive. Apart from getting a new agreement, this is the only way that the term can safely be extended. Because of these technical requirements, many lawyers and body corporate managers have failed in their attempts to extend the term.

Because of our involvement in the legislative changes (in fact we designed the prescribed statutory form that must accompany the motion to add the new option), we have been called upon on a number of occasions to remedy ineffective additional options ruled invalid by the body corporate commissioner’s of� ce.

Financial � guresYou will need up-to-date � nancial � gures. Take the time and spend the money to get up-to-date � gures for sale purposes from your accountant. So many sellers rely upon outdated � nancial � gures or on � gures that are not really prepared for sale purposes.

I have seen a number of sellers grossly underestimate their net pro� t and � nd that the buyer’s accountant has veri� ed a net pro� t well in excess of that shown in the contract.

With multipliers of around � ve and above, a difference of only $5000 will cost you more than $25,000 – enough to cover a fair component of the agent’s commission.

Make sure you get the most up-to-date � gure you can. You would expect these to show a higher � gure than � gures a month or two older but if they don’t, you can at least decide what it is you are going to rely upon and include them in the contract.

Make sure your body corporate salary has been updated to take into account the latest CPI increases or any market review that might be permitted under your agreement.

Get expert helpAbove all, use the experts.

You might think that you don’t need an accountant or a specialist accountant to put together your net pro� t � gures. As any honest accountant will tell you, it is a very specialised area.

As a general rule, � gures prepared according to normal accounting standards will show

a net pro� t lower than the way in which it is calculated for sale contract purposes.

Only a specialist accountant will be able to produce accurate � gures.

You might be tempted to use a local or suburban lawyer because they offer a cheaper rate. Although as a general rule there are fewer legal issues when you are selling than when you are buying, I have seen so many sellers get themselves into trouble because they have tried to save money by using a lawyer who does not specialise in the area.

You need someone who understands management rights to be able to deal with any issues raised by the buyer or the buyer’s solicitors – so often we are able to salvage a sale transaction because of our expertise and ability to convince other solicitors of our view of the legal position.

Perceived savings on commission might encourage you to market your business yourself rather than use an agent and sometimes you might succeed. But there are downsides.

A good agent will help guide a buyer through the purchase process and often keep together a sale that might otherwise fall apart. I have seen that happen on more than one occasion.

A good agent will also pre-qualify a buyer to ensure that your time is not wasted by people who will not get � nance approval.

On the other hand if you are able to � nd a buyer yourself, an experienced lawyer will be able to handle contract preparation and negotiation.

By John MahoneyMahoneys

Above all, use the experts

John MahoneyMahoneys

info@mahoneys.com.au

RESORT NEWS - FEBRUARY 2015 Copyright 2015 Resort Publishing • Phone 07 5440 5322

L I F T - O U T I N F O R M A T I O N F E A T U R E – T I P S F O R S E L L I N G M R

Management rights are generally a very saleable business, however you need to get the business “ready for sale”.

Here are a few tips:

Unique building and business featuresEach management rights business is different due to its location, number and con� guration of units, facilities on offer, etc. Just as your building will have varying levels of appeal to guests, the same applies to buyers of your business. Identify and then promote the particular characteristics of your building or the management rights business itself that set it apart from others, any unique features or facilities it may have. It may be that the location or style of units attracts a particular category of visitor that other buildings in the area cannot match.

AgreementsManagement rights businesses achieve high values due in part to the stable and recurring nature of the income. The right to earn this income is based on two sets of agreements, � rstly caretaking and letting agreements with the body corporate and secondly individual letting agreements with each lot owner (PAMDA forms). It is vital these sets of agreements are in existence, up to date, properly executed and reviewed on a regular basis. The term of these agreements is also important as generally, the longer

the term remaining the more valuable they are which will have a positive impact on the value of the business.

Assets being soldThis may sound simple but it pays to clearly identify what assets are being sold with the business, prepare a detailed list of these and check what proof have you that you actually own them. If any of these assets have � nance charges over them, consider how these are going to be dealt with from a sale perspective – will the purchaser take over the commitments or will you pay out the loans?

Accounting recordsThe trust account records will be vitally important to a buyer in con� rming the income of the business. It is essential these records are up to date and you have full copies of all month end trust reports, owners’ statements, etc for the trading period upon which the business is being sold – usually the most recent 12 months. It also pays to have your general account records similarly available, these become increasingly important as the size and income of the building increases.

Unit owner chargesUnit owner charges should be reviewed on a regular basis, generally yearly, to ensure they are up to date, are competitive in the market place, and in line with the PAMD agreements and what is being charged through the

trust account system. It is not uncommon for the charges to be increased in the trust account system, but the manager has not advised the owners of these changes or had them otherwise authorised in PAMDA’s.

Sales � gures

All vendors should have a ‘sale basis’ pro� t & loss statement for the business prepared by an accountant experienced in the management rights industry. The sale � gures should be no more than three months old and be for the preceding 12 month period. Purchasers are increasingly requesting to see two years of trading � gures as further assurance that the pro� t is consistent and maintainable. These sales � gures should be refreshed on a regular basis so they remain current.

Staff wages

Generally the most contentious expense item in the sales � gures will be the level of payments to external staff/contractors; whether that be unit cleaners, reception, gardening, maintenance, etc. Because the sale pro� t is calculated on the basis of including all wages “other than those of the working proprietors (two only) and any work that those two people could reasonably do themselves” it becomes a subjective analysis as to how many “other staff” are required to effectively run the business.

In our view the best way to

address this is for the manager to prepare an analysis of what staff/contractors are engaged at present, their speci� c duties and hours of work, and whether any of these duties could be performed by the manager. That is assuming, of course, that the two managers are not already working full time in the business. If the managers are not working full time, detail what other duties they could do and which staff wages would be reduced as a consequence.

Income should be recurringLastly the income contained in the sales � gures should be recurring and any one off income items should not be included in the sales � gures. Similarly if there are any new areas of income that have not been in existence for at least 6 - 12 months, it is likely these will either be eliminated or discounted in the pro� t analysis. Wherever possible try to have documented agreements of some form to support the sustainability of the income.

These are general guidelines only and recommend any manager considering selling their business get professional advice on the accounting issues from an appropriated quali� ed accountant.

By David JacksonHospitality & Strata

Making sure you are ready for sale

David JacksonHospitality & Strata

07 5574 0922info@hostrata.com.au

www.hostrata.com.au

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