The Management Rights business is your most valuable asset and if you want to achieve the best price for that business, it pays to make sure all accounting matters are in order as they play a vital role in achieving that price.
Do some ”housekeeping” checks before you list the business for sale and sort out any problems or contentious matters well ahead of any potential buyer inspecting the property.
Some of the main accounting matters to consider include:
Agreements – Body Corporate & Owners
Management Rights businesses achieve high values because of the stable and recurring nature of the income. The right to earn this income is based on two sets of agreements, firstly caretaking and letting agreements with the Body Corporate and secondly individual letting agreements with each lot owner (PAMDA forms). These agreements should be reviewed to ensure that they are up to date, have an adequate term and are in place with all relevant parties.
What Assets Are Being Sold
Identify what assets are being sold with the business and prepare a detailed list of these assets. Consider what these assets are worth, do you have clear title to these assets and proof of ownership. If there are any finance charges over these assets, consider how this is going to be dealt with from a sale perspective – will the purchaser take over the commitments or will you pay out the loans and give clear title.
Accounting Records
The trust account and general account accounting records should be kept up to date so that any prospective buyer can easily trace income through the system and in to the sale figures for the business. Ensure your licence is current and trust account audit reports are up to date.
Unit Owner Charges
Unit 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. A common mistake is for the manager to increase these charges but not have those changes reflected in the PAMDA’s.
Taxation
Make sure you discuss your sale plans with your accountant as the income and capital gains tax rules surrounding sales of businesses are complex and a badly structured sale transaction may result in you paying more tax than necessary.
Sales Figures
All vendors should have a ‘sale basis’ Profit & Loss Statement for the business prepared by an accountant experienced in the Management Rights industry. The sale figures should be no more than 3 months old and for the preceding 12 month period. Purchasers are increasingly requesting to see 2 years of trading figures to see that the profit is consistent.
These sales figures should be refreshed on a regular basis so they remain current.
Wages
Generally the most contentious expense item in the sales figures will be the level of external wages/contractors; whether that be unit cleaners, reception, gardening, maintenance, etc. Because the sale profit 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 issue is for the manager to prepare an analysis of what staff/contractors are engaged at present, their specific duties and hours of work, and whether any of these duties could be performed by the manager. A similar analysis should be undertaken in respect of the managers themselves, and 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 Recurring
Lastly the income contained in the sales figures should be recurring. One of the reasons Management Rights businesses attract the values they do is because of the recurring and dependable nature of the income stream. Accordingly one off income items should not be included and new areas of income that have not been in existence for at least 6 - 12 months are likely to be either eliminated or discounted in the profit analysis. One way to address this issue is to have documented agreements of some form wherever possible 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 qualified accountant.