CASHFLOW RULES! – OR DOES IT?

16 March 15

Management Rights are unique businesses. They generate good steady cashflow and mostly retain their capital value.


Bankers are good judges. They love them – and why wouldn’t they, when you are talking about a business that carries no stock-in-trade, has no stock write-offs, has no debtors and they contract with a company that cannot go broke!


Banks consistently lend 60%-70% against the goodwill of these businesses. Try getting that sort of margin on most other business! Management Rights rarely fail and when they do, there is inevitably a peculiar reason why – such as over-borrowing by amalgamators or major personality conflicts.


Multipliers


Management Rights are purchased on “multiples” of net income. These multipliers currently range between 3.5 and 6 times net income. A multiplier of 5 is equivalent to a 20% return on the business investment.


These high multipliers are unique to the Management Rights industry. The businesses are regarded as safe long-term investments, where recurrent income is transferrable. Contrast this with my legal profession, where multipliers run at 1 or 1.5 x net income – if you are lucky enough to find someone silly enough to pay you for goodwill. I say this because unlike Management Rights, the income of most law firms is built around a one-on-one service and is not (to quote my friend, Michael Teys) “sticky money”.


Income


Permanent let complexes generate steady income with only odd units coming in and out of the rental pool. Holiday or serviced apartment income can fluctuate somewhat but there are a number of other areas where income is generated. Returns on investment vary between 15% and 25% but, overall, they generate a good return on investment.

 

The Key – Retaining Capital Value!


A good return on investment is great – as long as you retain the capital value of your business. Capital value is directly tied to tenure, and this is where things can get a little bit tricky.


Caretaking and Letting Agreements have start dates and end dates. They are contracts that expire unless renewed. Ultimately, retaining capital value is directly related to being able to “top-up” the term of your agreements. This renewal process can become highly emotional and needs to be carefully managed.


When buying Management Rights, the type of complex is important. Is it one that would not function properly without having an onsite manager? If so, (in my view) term should be irrelevant to the Body Corporate. All parties should be more concerned about the manager’s performance, rather than the term of the agreement. I would love to see Perpetuity Agreements for these types of buildings so that there is no ill-will generated by the “top-up” process. Unfortunately, Perpetuity Agreements are not going to happen in my lifetime!


Most Bodies Corporate are happy with the performance of their managers and the granting of top ups is a non-issue. However, Bodies Corporate can be left soured when the manager sells soon after receiving a top-up if this has not been flagged previously.


I believe that when asking for “top ups”, the starting point for managers has to be looking at the process from the point of view of the owners. In other words, what is in it for them? If you start there and you don’t become unreasonably sensitive and suspicious about the process, you will most likely get that all important “top-up” without any real issues. However, suspicion can be contagious, so think about what you do and say.
 

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