Resort News - Tips Series - Tips for Selling Management Rights

TIPS FOR SELLING MANAGEMENT RIGHTS

Think about selling from the day you buy

When selling any business, the key outcomes of a successful sale typically include achieving a quick and pain-free sale at the highest possible sale price. Sounds easy in theory, however can be quite challenging in practice.

As with most things though, by careful planning and getting the small things right and trusting in the industry professionals to guide you through the process, you will certainly improve your chances of maximising your sale outcome.

Ideally your planning for a sale should start the day you settle on purchasing your management rights.

What were the things that created concerns with your purchase?

Are they still an issue after you have settled?

Bundling for a better outcome

Tony Rossiter, Holmans One common example is the letting agreements, issues that might have been raised with the agreements during your due diligence are still going to be there when you sell unless you take action to get them resolved.

All too often the agreements end up in the bottom drawer of the filing cabinet and don’t see the light of day again until your buyer is undertaking their due diligence. At that time it may be too late to rectify the issues or at best will lead to potential long delays in your sale.

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Another strategic decision you could make early on in your management rights journey that could pay dividends when you go to sell is the bundling of fees and charges to unit owners.

Increasing in popularity over the last five years, bundling has led to successful outcomes for many management rights sales by simplifying the revenue streams of the business, improving relationships with unit owners and maximising revenue outcomes. If your management rights has not already bundled charges, talk to your industry accountant and ideally have the new system in place at least 12 months prior to going to market to sell.

Preparing a sale of business statement that will stand up to scrutiny Against the best advice from industry professionals, management rights owners

continue to prepare their own sale of business statement when they go to sell, particularly in long-term letting. Although this do-it-yourself approach is quite admirable and it may lead to savings in professional fees, it is also likely to increase the possibility of a sale contract falling over or a dramatically reduced sale price due to some common errors. The opportunity cost of not maximising your sale price may be many times that of the savings in professional fees.

Preparing your figures yourself or engaging an inexperienced accountant to advise on your sale purely because they are charging less can lead to the same unhappy result. Generally, the old adage “you get what you pay for” couldn’t be truer.

Although not rocket science, the preparation of a sale of business statement is not entirely intuitive.

Getting a single figure wrong will cast a shadow of doubt in the mind of an experienced accountant preparing the financial verification for a buyer.

RESORT NEWS - JANUARY 2022

TIPS FOR SELLING MANAGEMENT RIGHTS We see simple errors such as including 13 months-worth of one income item or making inappropriate treatment of GST. These can easily lead to a terminated contract or a drastic reduction in sale price.

COVID-19 related considerations At the time of writing this article the management rights industry is very much still in the grip of the coronavirus pandemic. However, with state and international borders opening the future is a lot more positive. Despite these positive signs there remains the risk of further significant lockdowns and border closures which can have a catastrophic effect on the industry.

Fortunately for the long-term letting industry the impact has not been too significant for most operators.

Apart from inner city apartment complexes and properties relying heavily on international student tenants most longterm letting operators are reporting a negligible impact on their business revenue because of the pandemic.

Understand that in a sale a buyer and their advisors will not be aware of how your business has been impacted and are likely to assume the worst.

As a result, it will pay to be prepared. Have data available to a verifying accountant, what are your current vacancy rates and rental arrears compared to pre-COVID-19 levels. If they have increased prepare a concise explanation for the reason for

Despite these positive signs there remains the risk of further significant lockdowns and border closures which can have a catastrophic effect on the industry.

the change and any reasons why the changes are not COVID-19 related. Consider your average weekly rentals and how they have changed compared to preCOVID-19 average weekly rentals.

A verifying accountant is likely to have a series of questions for you during the verification designed to determine the impact of COVID-19 on your business. Be prepared to explain how you have responded to COVID-19 in your business, how you have addressed tenants who may have claimed financial hardship and what the outcome was for your business profitability.

Fortunately, the industry is resilient and sales of long-term letting management rights have continued through the pandemic and in fact in some areas demand has actually increased for what is seen to be a very low risk business model.

Short-term letting has been

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more problematic with many businesses decimated during the lockdown and very few sales occurring during the height of the pandemic. As we come out the other side optimism and indeed the level of interest from buyers is growing.

However, again a buyer and their advisors, bankers and valuers will all be keenly interested in understanding how your business was affected and how it has managed to recover over the last 12 months. For a lot of short-term letting businesses in the Southeast Queensland the Christmas Holidays will have seen very strong trade more than pre-Covid levels.

There are several ways to present figures of a short-term letting

business effected by COVID-19. A common approach is to present at least two years figures, one set of figures showing the preCOVID profitability up to say, February or March 2020 and a second profit and loss statement showing the most recent trading result including the COVID-19 effected months. Importantly you should also make available monthly trading data comparing the key trading indicators, average room rates, occupancy and total room revenue monthly compared to the same month in the previous year.

Ideally these reports will show the recovery the business has experienced since borders opened with the indicators demonstrating the business is on a trajectory toward pre-COVID-19 results, if the busines has not already reached that point.

Forward booking data will also be important to demonstrate the return to normal trading conditions and provide a buyer and their advisors with confidence.

Above all you will need to be patient, transactions of short-term letting properties are happening and will accelerate moving forward however the time required to complete a due diligence and for a buyer to secure finance is taking considerably longer than in the past.

The information, opinions or conclusions provided above are generic in nature and do not express individual advice or recommendations.

You should always consult a suitably qualified professional before taking any course of action outlined above. Holmans welcome any queries you may have in relation to the above matters.

RESORT NEWS - JANUARY 2022

TIPS FOR SELLING MANAGEMENT RIGHTS

Selling? Be prepared well in advance…

In the Tips for Selling Guide, I authored last for Resort News I began with comments about how the quality of a prospective buyer had become an important factor in any management rights sale.

That has become even more so the case since that guide was written.

Before you list the business for sale, there is so much that can and should be done to make the sale as smooth as possible. The selection of the buyer is critical...

Qualified buyer Because of some bodies corporate failing to properly investigate an incoming manager’s qualifications and experience, they were accepting anyone and then finding they have a poorly performing manager, but now they (bodies corporate) quite rightly demand that proposed new managers are properly qualified and experienced. Or if not, that they have undergone appropriate training, both theoretical and practical.

There used to be a misconception that a body

new entrants should, for their own benefit, source and undergo training in regulatory compliance.

If not, there is a very real possibility of experiencing problems with the assignment process, huge legal fees from the body corporate’s lawyer and the real likelihood of the assignment being rejected.

John Mahoney, Mahoneys corporate could not refuse to consent to an assignment unless the proposed new manager was a criminal or a bankrupt. That is far from the case. A body corporate is entitled to be satisfied that a proposed new manager has the qualifications, experience and financial capacity to perform all of the duties under the management rights agreements.

Therefore, you should properly vet any proposed buyer to make sure they will be acceptable to the committee. If the buyer is a new entrant to management rights, there are various training and educational opportunities available that you should insist the prospective buyer undertakes. The ARAMA induction course is, in my view, a must for such buyers. In addition,

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Letting appointments First, check your letting appointments. POA forms 6 are automatically assignable but not all PAMD forms 20a.

Ideally, you would have had all forms 20a replaced with new forms 6 but if not and you are relying on these, then (depending on the version used) to be assignable, they will need to have the assignment section ticked and initialled or you will have to obtain the consent of all owners to an assignment to the buyer.

Almost without exception, buyers are insisting that at settlement the purchase price be reduced for non-compliant appointments.

We have seen purchase prices heavily discounted and some contracts terminated because the sellers did not want to, or were not able to, produce compliant appointments.

Management rights agreements Next, check your body corporate agreements.

Locate copies of all 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 firm has acted for you, you would have all these documents in the indexed binder or on a USB stick we provide to 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 is in order - for example, that options have been properly exercised.

Second, if the buyer’s solicitor or financier raises questions about the agreements during the course of the transaction, your solicitor will be able to deal with the matter quickly and efficiently.

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TIPS FOR SELLING MANAGEMENT RIGHTS Term of agreements The term remaining on your agreements is critical. Unless you have long-term agreements with your body corporate, you should be thinking about how the term of your agreements will impact on a future 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 many buyers and their financiers want even longer, depending of course on the amount being borrowed.

The transfer fee rules will not penalise you just because you sell within two years of getting a new agreement or adding a new option. It is only if you sell within one or two years of becoming manager that the transfer fee

applies - three percent of the business sale price in year one, or two percent in year two.

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 many occasions to remedy ineffective additional options.

Termination clause in agreements Much has been written about the Gallery Vie QCAT decision and the changes that financiers want made to the termination provisions in management rights agreements to deal with

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The selection of the buyer is becoming absolutely critical. the problem created by that decision. If you have not already done so, you should have your lawyer check your agreements to make sure they are Gallery Vie compliant. If they are not, you really should take steps to amend the agreements to deal with the issue. The changes can be done in a simple and straightforward way but do require an AGM or an EGM as it is increasingly rare that a financier or a body corporate committee will accept this being done as part of the assignment. Most managers are dealing with the matter at the same time as they are topping up their agreements.

Financial figures You will need up-to-date financial figures. Take the time and spend the money to get up-to-date figures for sale purposes from an accountant with management rights expertise. So many sellers rely upon outdated financial figures or on figures that are not really prepared for sale purposes.

I have seen a number of sellers grossly underestimate their net profit and find that the buyer’s accountant has verified a net profit well in excess of that shown in the contract. With multipliers of around five and above, a difference of only $5,000 will cost you more than $25,000, that’s enough to cover a fair component of the agent’s commission.

Make sure you get the most up-to-date figures you can. The buyer’s bank will want figures no older than a month or two.

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 help Above all, use the experts.

You might think that you don’t need a specialist accountant

to put together your net profit figures. As any honest accountant will tell you, it is a very specialised area. As a general rule, figures prepared according to normal accounting standards will show a net profit lower than the way in which it is calculated for sale contract purposes. Only a specialist accountant will be able to produce accurate ‘for sale’ figures.

You might also 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 this 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. 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 should also pre-qualify a buyer to ensure that your time is not wasted by unqualified buyers or buyers who will not get finance approval.

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

RESORT NEWS - JANUARY 2022