Selling your home/investment with SIRE

How To Price Your Management Rights?

OVERPRICING

Setting the correct price for your management rights is critical to achieving a successful sale with strong buyer competition. We have found that correctly priced management rights sell on the first day of buyer inspections. On the contrary, we have found that overpriced management rights don’t sell. With most banks tightening credit policies, and some banks unable to lend at all, there is a smaller number of buyers for businesses in wider price ranges. Buyers will not look at your management rights business or property unless it makes financial sense.

THE MULTIPLIER

One of the biggest debate issues about Management Rights is the multiplier pricing. Multipliers have fluctuated around an average figure throughout time and this is natural.

For instance, in the 2010’s there was some interesting activity. The MFS collapsed and the Management Rights responded with a downward trend on multipliers. In the easy to get finance years in 2006-2007 multipliers were reaching 6 and 7.

Financiers change their lending policy and when there is a decrease in lending rates the multipliers reduce. It is difficult to derive the ultimate formula to determine the ultimate multiplier in a dynamically changing environment that is controlled by numerous factors.

For instance, a potential buyer has some money and they can choose to invest their money in a Management Rights or a structured term investment. If the multiplier for the Management Rights is too high, the buyer will choose to invest in the bank and get a better return. If the multiplier for the Management Rights is better than investing in the bank, the buyer will choose to buy the Management Rights for a better return.

Economic downturn in the job market also presents more buyer competition and drives a higher multiplier.

The answer to “what is the current multiplier” question is that we need to assess who is in the marketplace and what they are willing to spend. This is what SIRE Management Rights focuses on to find the optimal multiplier. We do not set the multiplier – the market does.

OVERPRICING – THE REAL ESTATE

When the market was quite active in the past few years, it was quite common to price properties approximately 10 to 15% above the expected selling price on the basis that buyers will negotiate when they make an offer. In today’s economic environment this is not the case.

If the price for the real estate component is excessively overpriced, the buyers return on investment also decreases. The Management Rights industry is very transparent and it is standard practice to have the real estate price determined by a licensed valuer if there are difficulties determining the market price through a Comparative Market Analysis.

The business price and the real estate price are open to verification and are often challenged by prospective buyers. The verification process proves the actual asking value and therefore if any of the business or real estate components are incorrectly overpriced the errors will be discovered during the due diligence process and the errors will be challenged.

In essence, overpricing is self-defeating for two key reasons:

1.       Overpricing will be detected and challenged in due diligence

2.       The prospective buyer will see the advertised asking price and determine the return on investment will be too low and not be interested

If the buyers in the market feel that the Management Rights is overpriced, it is highly unlikely they will enquire and the marketing campaign will be a waste of time and money. Furthermore, even if the price is reduced the buyers will notice this and tend to think that something is wrong with the management rights.

Low offers from purchasers are rare in this industry because of the transparency in setting the initial asking price. As brokers, we fully utilize this transparency when we engage buyers and we prove the asking price with the necessary facts provided by your verifications and valuations. Purchasers are asked to accept this asking price on face value and challenge it only through the due diligence process. If the purchaser’s due diligence report comes in with a variance we agree to re-negotiate and we will come back to you with the not so good news. Just remember to not overprice because this situation happens, and when it happens the purchasers go cold and the sale goes down the drain.

MAKE SURE YOUR MANAGEMENT RIGHTS IS PRICED TO SELL

We estimate that approximately 75% of listings on management rights websites are not sustainable or fundable in today’s market conditions. Do not let your management rights be one of these. If you want to sell then price your management rights to sell and you will have the best chance of achieving your asking price:

·         Get an independent valuation of your real estate

·         Do not base your price on advertised properties, many are overpriced and won’t sell

·         Ask your bank if they would finance your asking price

·         Allocate and inject sufficient funds to get your management rights into the right market

Ask yourself these fundamental questions:

·         Would I buy my own management rights now with these returns?

·         If the returns are not leaving much for the buyers after they pay the bank the principal and interest, then why would they pay what you are asking for a 365 days per year business?

·         Will the bank approve the finance?

·         Would I buy my own real estate?

If the answer is no then it is likely that your management rights is not priced to meet today’s market and it is probably unfundable. In many instances of overpriced management rights and real estate, we see there is not much left for the potential buyer and the amount is less than the minimum wage. Let’s put this into perspective by breaking filling in the following table to see if there is something left for the buyer and ultimately if your management rights has a good chance of selling.

Once you have derived a figure for the total remaining income, you need to consider the following:

·         Income taxation

·         Living expenses

·         Health costs

Then you also need to factor in the financier’s general rule of allowing a maximum of 50% of the Nett income to be used as loan payments and finance costs.

Disclaimer: the above information is approximate only and while accurate at time of writing it may change.

How To Price Your Management Rights?

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