First published in Resort News, September 2024
Whether you’re buying or selling, investing in a management rights business requires a tailored approach.
The strata industry is a complex maze of laws, regulations and personalities.
Even experienced operators can stumble when it comes to buying and selling those businesses, leaving money on the table for a seller or over-paying for a buyer.
Drawing on our decades of deep experience in the strata industry, here are our Top 10 Tips for a more seamless (and hopefully less stressful) transaction.
Buyers don’t like surprises. A seller needs to make sure they have secured all the authorities they require to be able to sell the operation at a fair and agreed valuation. Failure to obtain written letting authority from all the relevant lot owners can delay or even kill a sale.
There is little point assessing a deal on figures that are out of date. If you want to maximise the sale price, make sure the revenue figures are up to date.
There is nothing worse than making progress on a sale only for it to get the wobbles because the body corporate has an issue with the buyer. We have seen more refusals to consent to assignments in the last few years than we saw in the prior two decades. Make sure you help the buyer to present themselves in the best light possible.
You may need to top up your agreements as part of the sale to make the term attractive to a buyer. Make sure you have exercised your options and documented those with the body corporate. Be warned: setting false expectations for a buyer on term can be fatal to a transaction.
The starting point for any potential management rights buyer is to determine a comfortable purchase price in terms of what you can, or want, to borrow. The ability to service a loan in a volatile interest rate environment needs to be faced with a cold-hearted realism that may require walking away from a potential deal.
Structuring your prospective purchasing entities is best worked through with your lawyer and accountant before you find the strata complex that suits you. That way, when you do find the right management rights business, you are ready to sign contracts straight away.
Understand the sale multiples that apply to the type of business you’re buying. Find out how many owners are in the letting pool. Ask about owners who are not in the letting pool. Understand the remaining time left on the management rights agreements. Review the remuneration paid to the manager by the body corporate. Is the manager’s office included in the title to the unit or is it part of the common property?
Buying an existing business provides certainty. Buying off the plan means you are buying the management rights business from a developer as part of the development itself, meaning less visibility on what the business will look like when it is created. This requires more thorough due diligence from a buyer’s perspective, but that is usually compensated by a lower purchase price.
Brokers, accountants, lawyers, bankers, valuers, body corporate managers – there seems to be an endless stream of people involved in a sale or purchase. It’s important to understand what role they all play and when they will join the process.
Many advisors call themselves experts. Don’t be afraid to ask for testimonials from other management rights clients. Ask them how many management rights transactions they are currently working on, or how many management rights clients they have advised over the last few months. Ask the other industry professionals you are working with how often they have dealt with your advisors.
Hynes Legal has produced guides for sellers and buyers of management rights businesses, with practical advice no matter what side of the transaction you’re on. Get your free guides here: