Property Management Companies: How Are They Valued?

4 min read

Like any other business, property management companies that operate affordable apartment developments can be bought and sold. So how are they valued, and who does it?

Such companies are typically valued by business appraisers (such as those with the MAI designation from the Appraisal Institute) or certified business valuation analysts. There are five different credentials for certified business valuation analysts: American Senior Appraiser (ASA), offered by the American Society of Appraisers (ASA); Accredited in Business Valuation (ABV), from the American Institute of Certified Public Accountants (AICPA); Certified Valuation Analyst (CVA) and Accredited Valuation Analyst (AVA), from the National Association of Valuation Analysts (NACVA); and Certified Business Appraiser (CBA), from the Institute of Business Appraisers (IBA).

According to Michael Shekel, CPA/ABV, MBA, Senior Manager at CohnReznick LLP in Bethesda, Md., these organizations have distinct but similar standards, spelling out the various approaches when determining a valuation for a business.

In deciding on the particular approach to take to value a property management company that operates affordable housing, the first step is considering the purpose of the valuation, says Shekel. This could be for an outright sale of the entire company, the purchase or sale of a minority interest in the firm, succession planning, or gift and estate tax planning reasons.

For an outright sale, such as in the case of one management company planning to acquire another, the two common valuation methods are the income and market approaches. Under each there are two subsets.

Under the market approach, the analyst estimates the dollar value of the subject management company by analyzing current stock prices of comparable publicly-traded companies and/or the total consideration paid for similar companies in recent merger or acquisition transactions (typically relative to sales and EBITDA, or earnings before interest, taxes, depreciation, and amortization). The analyst then applies the indicated valuation revenue and EBITDA multiples (derived from the market trading prices and actual considerations paid for other companies, and typically adjusted for the subject company’s size, growth, and profitability levels) to the subject company’s own revenue and EBITDA.

Under the income approach, and assuming the subject company has stabilized operations and low uncertainty regarding the future renewal of its key and most significant property management contracts, the analyst derives the applicable valuation multiples by assuming applicable discount and growth rates as well as a profitability level. The analyst then applies these to the subject company’s expected revenues and EBITDA for the next year to arrive at the estimated dollar value for the firm.

The precise value, however, will be affected by various factors, such as the diversity of the company’s portfolio of management contracts (e.g., renewal terms and the location and types of the underlying properties such as market-rate or LIHTC/affordable). The more variables and drivers of value involved the greater the need for a multi-year discounted cash flow analysis under the income approach.

For example, it is fairly common for the general partner in a LIHTC deal to hold the rights to the management contract. These rights are typically assigned to a related party. According to Shekel, such a contract would be viewed by a prospective neutral buyer of the management company as a “captive” contract that is highly risky with little or no value, since the contract at renewal would be expected to remain within the general partner’s family of related entities. By contrast, a contract to manage a property of a third-party owner would be viewed as less risky and having value.

Shekel said the purchase price for a property management company typically ranges from 1.0 to 2.5 times annual gross revenues or 3 to 5 times EBITDA. Companies with a significant share of highly uncertain captive contacts fall at the lower end of the range. Firms with higher quality contracts (non-captive, long-term), potential expansion prospects, and/or the opportunity to optimize operations are at the upper end.

According to Shekel, valuation of property management companies requires a high-degree of understanding of the nuances of the underlying management contracts as well as identifying who truly holds the rights to the economic benefits.

“It’s a combination of art and science,” he says.