Are you looking to take your business to the next level? Ready to unlock the value of your hard work and prepare your business to sell, but never actually sell it? Learn how to strategically build, manage, and position your business for maximum return on investment in this step-by-step guide to Build To Sell, But Never Sell. Brad Larsen takes the stage at PMMCON 2023 and talks about key strategies to elevate your business to a level that be prepared to sell now or decide later.
Connect with Brad's team at www.rentwerx.com!
This podcast is produced by Two Brothers Creative 2023.
Brad Larsen: Hey everybody. On today's episode you'll be hearing a presentation that I gave at PMMCON called Build to Sell. But never sell.
Announcer: Welcome to the Property Management Mastermind show with your host, Brad Larsen. Brad owns one of the fastest growing property management companies in San Antonio, Texas. This podcast is for property managers Buy property managers. You'll hear from industry leading professionals on best practices, new ideas, success stories and lessons learned. This is your opportunity to learn about the latest industry buzz surrounding property management, as well as tips and strategies to improve your business.
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Brad Larsen: Hey, everyone. We wanted to introduce the RentWerx Summit going on December 7th and eighth, 2023, in San Antonio, Texas. We're only allowing six attendees to this event, two full days of all the inside outside training that RentWerx puts on with biz dev mastermind, our CPA, our maintenance team, our operations, our leasing, all of that two full days in San Antonio. Visit rwmastermind.com .
Brad Larsen: We're going to talk about something that's really interesting. If you look at the title of this presentation, Build to Sell but Never Sell. And it's just kind of an interesting way to spin things around. If you think about it, well, why would I build it to sell but never sell? So I want to go through some of these things because I think it makes a lot of sense. It's going to lead into some really good discussions in the mastermind because everybody is talking about this person sold, this person bought this. This company is buying everybody. It's just a really hot topic right now in the industry. All right. Quickly. That's me. Give you some highlights. Owner and broker RentWerx. We manage 1100 homes. Property Management Mastermind Podcast. We got the Mastermind group. Co-founder of the Biz Dev Mastermind and founder of the PMM Conference. Okay, cool. A couple of things I want to bring up. These are some of the resources I've taken some of this knowledge from. I listen to podcasts and books and read, and I want to throw these things up here because one of my favorites by them build the 40 hour work year and build the sell.
Brad Larsen: Now we've had John Warlow and Scott Fritz speak at the Property Management Mastermind Conference. This is our fourth iteration. Both of those two gentlemen on the right have spoken on our conference. I can't get a hold of the Walker Deibel guy, but his book is fantastic. It almost makes the case of forget about real estate investing, focus on businesses, because that's one thing you can control. You can't control the real estate market. But his whole spiel is buy a business and then build it up and watch it flow. Other resources, Right? We've talked about these the last few days, the US life, the traction. That's what really has set us up to be a very well run company is adopting these methods. Now. You don't have to pay for an implementer 30 grand, 50 grand to come in and and do this all into your business. You can get a lot of this knowledge just by reading some of these books and applying their cadence of meetings, applying their concepts and putting it into your business to help it run well. All right. I'm not an attorney. Okay? So this is I stole this from Mark Cunningham because it's like a disclaimer. Don't blame me. You know, reference everything to attorneys because we're going to be talking about tax implications and things that are going to go on here.
Brad Larsen: So I just want to throw that out there. My intent is to bring up issues on both sides. I really just want to go right down the middle. 5050. Okay. I could talk to you about building it and never selling. I'm going to talk to you about selling and what that looks like. So we're going to hit this both ways. I want to offer clarity to your path. That's kind of the purpose of what this discussion is about, because a lot of us are just kind of waiting. We're trudging through with the management business and we don't really know if we have a clear path going forward. At the end, I want you to have a business that runs better and can be sold now or never. And that's really cool because I wanted to go into it in a little bit more. So I'm also buying, okay, but I only buy in the San Antonio and Austin markets. I'm very limited in my scope of vision and I actually put this together. I offer a referral fee and I'm showing you this because you can rip it off and use it yourself. This is a really cool thing because you go to rentWerx.com PMC. I've got a big long letter that's posted in there. It's a six page letter of what you could use in talking to someone that wants to sell in your market.
Brad Larsen: For me, I'm willing to pay more than anybody else for any management company in the San Antonio and Austin region, I will outbid and out pay anybody. Why? Because it means more to me. I can use it as a tuck in. I've got existing operations, you know, it just means more to me. I don't have to recreate the wheel in a new market like other potential purchasers would, and we can go through some of that. Why you should prepare to sell This is a really good one. Who's seen this show. Love it or list it. The concept is they go into a home, they spend a bunch of money, they build it up with the intentions of just making it fantastic. At the end. They have to make a hard decision to live in it or sell it. So if you apply that kind of thought process to your business, it really kind of rings true. They go hand in hand together. Prepare to sell, then decide. That's kind of the mantra of this discussion. Awareness of needed improvements are going to come out of this when you start to build it. All of a sudden you're like, Hey, we got to fix this. I got to fix this. I got to put this into place. Otherwise, no one's going to even look at this business. Recognize your operational challenges. So what you want to do is see what where are the bumps, where are the speed bumps, where are the operational issues? Great One, for example, that we've always had a fight with is new business development.
Brad Larsen: Handing off to the operation team, the property manager. That new bizdev little chasm of trouble always causes us issues and there is no one perfect solution. But recognizing that and trying to fill that gap is going to help you create a very smooth running business. Peace of mind for an unexpected exit. That's a big one to me, because what if you have a health issue? What? What if I mean the what ifs, right? I mean, I can go on and on about what if. What if, what if? But if you feel at night. Hey, if I need to sell my business, I could. It's all prepared. Ready? Everything's ready to go. I don't have to spend a year to do this. And I've heard managers say, well, you know, I want to get it ready for sale and, you know, put it on the market maybe in a year or once I hit a certain door count, you know, then maybe I'll sell it. And then if you were to go into that business, it's probably a dumpster fire, right. Because they're not even close to being ready to sell and they don't have the mindset of being ready to sell. And I'm not pushing you to sell, pushing you to get ready to sell.
Brad Larsen: Right. There's a difference. All right. What does it look like? The operations? Can you remove yourself from the daily tasks? I don't have a job or rentwerx any longer, to be very honest. Melanie does everything. The team does everything. We have great property managers like Christina. I don't do leasing. I don't do business development. I don't have a job there. So I manage my way out of the office so I can do different stuff. I don't even like to call it higher level because that's snooty. I want to go do different stuff. Okay. And this is one of them. I like doing the conference. Do you have your 1 or 2 key people? We have Melanie. We're very blessed to have her. Do clients call you? Do they have your mobile phone? Are they calling you on a Sunday and say, I can't reach anybody at your office because it's Sunday afternoon? Why are you calling me? Right. Do they call you? And identify those key numbers. For example, one of our North Star numbers is maintenance. Our maintenance work order ratio to the homes under management I wanted at 50% so or even less 25. So if you have 1000 homes under management, you should have only 500 active work orders at any point, which is high. I know it's a lot, but you're talking, you know, tracking inspections, etcetera. That's one of our North Star numbers.
Brad Larsen: What does it look like? Ancillary businesses. You have all these other things going on. You have brokers license that are attached to your business. You may have a contractor's license in certain states attached to your business. All those have to go with it. And or you got to figure out a plan to do something to get out of it. Can you include or remove those brokerage licenses if you decide to sell or pass it on to somebody who's going to take the rain? Example, the rentwerx. I'm a broker. I'm not the broker. Melanie is the broker. She's the broker of record. But if I had to step back in, I could. Or we can go out and find a broker to fill her shoes. Okay, Keep that in mind. Can the assets be removed? Now, we don't have a lot of assets. As a property management company, you may have a office space that you own that's typically under a different LLC. Our biggest asset is our vehicles. Right? But are they properly titled? Are they on your balance sheet? Can those be removed or included in a business sale? You understand the asset column is going to reflect on that. Now you also potentially have your own rental homes. Are you going to allow those to be managed? I do know of a San Antonio manager who exited the business and then he left his homes under management of that business for a while, but eventually moved them.
Brad Larsen: You talk about the slap in the face of the acquirer. He didn't. Or like he didn't like the way they were managing the homes. So he took all of his rental homes and moved them either to privately or once that non-compete was up, he managed himself. Is that going to be something you're okay with? Are you going to allow the acquirer to manage your personal homes? More ancillary business stuff. Do you have a maintenance company? Is that included with the sale or is it something separate that you have to negotiate as well? There are some maintenance companies that are completely separate of the management company because the management company, in theory, people are only going to buy the assets. It's kind of like a dealership. A car dealership. You're not buying the dealership. You're buying the cars and the lot. Most management company transactions, buying, selling. You're buying the contracts. You're not buying the actual name of the LLC. You're not buying the marketing. Maybe you're buying the website. But you can see there's going to be some some weirdness in there that you have to negotiate through. Do you have a cleaning company? A landscaping company. A pool company. All these ancillary businesses that have to be considered in prepping a business for sale. Does a PMC generate real estate deals? Deals. That's a big one. A lot of people use their property management company just to bring up more real estate deals and or they treat the real the real estate deals that they want to sell in five years
Brad Larsen: They treat this management company as a holding pen. Like, hey, I know you don't want to sell now let us manage your home for two years, five years, 20 years, and then we can sell your home, especially in a downturn market. Is that going to affect your long term wealth strategies? Think through anything outside of your property management company that I totally forgot. I mean, you've got a couple of things with HOAs. There could be other things with short term rentals, you know, there's different silos of businesses that might be under your umbrella where that management company could be the epicenter of that. So it is something to consider when you're looking at selling, what does it look like personal? Is your name removed from the branding? You guys may have heard this story before I started this company called Larsen Properties. Dumbest thing I ever did, right? It took a bit to rebrand and actually re retrain everybody not to contact me. And it's a funny dichotomy because you go into kitchen table meetings and say, Yes, Mr. Owner, Mrs. Owner, I'm your guy. I'm my name's on the door. You can call me any time. Here's my mobile phone. Call me anytime. You quickly grow out of that, right? And then you're like, okay, don't call me.
Brad Larsen: We have banker's hours, you know, that type of stuff. Call my team. It transitions over time, but you know how it is when you're trying to go from zero. You're begging for the business. I mean, I did. I'm not ashamed to say for it. Salary shock. So your business is probably paying you a salary or could or should. It's just a tax strategy. It all depends on your owner's discretionary earnings. But are you going to go into salary shock? Oh, I was used to getting X salary every month, and I'm going to go into shock when I don't have it because all of a sudden you get a big lump sum of money and what do you do with it? Pay taxes. Can you trust your team to do their job? Getting it all ready for sale? I trust Melanie to make a lot of decisions. I mean, 99.9% of the company decisions. I completely put that trust into her. We have enough oversight with CPAs, with monthly oversight, with them, with our tax implications. I mean, I can trust them to do all the right stuff. And here's the ultimate test. Can you take a four week vacation? People are like, Yes, please sign me up. Where do we want to go? We'll go with you. All right, let's go take a four week vacation. Some of the personal stuff.
Brad Larsen: If you do sell, can you deal with the extra time? Deb, how did it feel when you sold? Can you deal with the extra time? She said, Heck yeah, because I want to go do consulting and I love consulting and she's great at it. So she sold her management company to free up her time to go do consulting, and I really respect that. Can your ego be removed? I'm a big business owner. Look at me. You know, can all of a sudden, can you can you walk away from that ego in your community, in your church, in your sphere of influence and your friends? You know, can you all of a sudden say, well, I'm I'm just I'm a nobody. I don't do anything. I don't own anything. I'm just I'm just here. I'm just here to party, man. Can you tell your clients you can't help them? That's a tough one for a lot of owners. Deb, you might have had that problem. Big clients might be calling you and say, Hey, can I can't get a hold of anybody. I know it's Sunday afternoon. Can you help me? I sold the business six months ago. Remember that letter you received? I sold it. And are you going to have an opportunity to forward that on to a new person? And are you going to feel bad about that? Some people cannot get out of their own way in selling because they don't want to break themselves away from their owners.
Brad Larsen: Would you agree? Right. They just they just can't I can't leave my owners. I love my owners. I can't leave them. I get it. Don't get over it. It's a natural course of business and it's a pretty proud moment. Honestly, if anybody respects you and likes you as a person and a friend, you bump into them at the grocery store and you say, Yeah, I sold the property. I sold the business, you know, six months ago. Congratulations. You know, you did a good job. You built it, you took care of it and you sold it. That's the entrepreneurial life cycle. Anybody with a brain understands that. And they're not going to be upset with you. Do you have other interests Back to Deb? She had a big other interest. She wanted to go do consulting. I might want to go be a professional hunter. I don't know. Or male model. I'm not sure. What would I do? Shut up, he said. Hunter And I don't blame him. All right. Let's go through the accounting piece real quick. Normal accounting standards. You know, I'm a big fan of it. Even if you don't use the GL codes in that chart of accounts, it's fine. But read the other stuff and apply the other stuff as much as you can. That is huge. Honestly, it's the it's the language of numbers in the management industry.
Brad Larsen: We went to them and said, Hey, we got you. We got to get you guys to implement this accounting standards idea. So we're all speaking the same language, right? Because you're looking at different panels from different people and it's just a gobble goo. If you guys remember Tony Drost, he used the president from ten years ago, guys, at least. Right. And Tony did this drill, I think it was in 2014. He compiled like 50 property management company books. Do you remember this, Melissa? And it was just a goat rope. I mean, it was just they were all over the place. And one of the tidbits that came out that's really changed is people were spending 50% of their revenue on staffing. That's one of the highlights that just shook our world. Now it's way different. We're spending, what, 25 to 30 to 35% remote team members have influenced that. And where does that extra five, ten, 15% go straight to the bottom line, Straight profit. Okay. Accounting standards will help you get there. All accounts monthly reconciled. Seems simple, but this is just part of the accounting stuff. You've got to get current on. You've got to have your state income tax, your federal income tax squared away. No one's going to buy a business when you're four years back in taxes. Right. It's just it's just troublesome. Then have to have good profit and loss statements. You have to have good company books and of course, all your money flowing in, flowing out.
Brad Larsen: Our rent roll right now, I think is like 1.6 million flowing in, flowing out every month. And we've got to be straight on accounting because we're money managers. That's what we are first. More accounting stuff. We have CPA accounting oversight in place, our Badger, the Badger and Badger CPA firm. They do all of our accounting oversight. They do our monthly oversight, and they do our annual tax prep. And that is huge because it makes me feel really good about our team. It's not to, like double check their work. Amy's here, my accounting coordinator. She's our vice president. I can't live without her. Her and Mel and our team here is fantastic, but it's good to have all of the CPA accounting in place monthly because it makes taxes really, really darn easy. You know, you're not scrambling at the end of the year to try and compile everything and turn it into your CPA to file your taxes. Cash reserves. Do you have any of those? It'd be nice to have trusted banking and software. We use Rent Vine. We use Enterprise. They work very, very well together. It's kind of a rinse and repeat formula that I would recommend to anybody. And all of the above. Show me. Okay, here's the punch line. If you're going to get ready to sell what what's it look like? Can you give me 12 to 24 months of a profit and loss statement? Does that make you just like, Oh, crap.
Brad Larsen: Does that, like, make your heart drop when I say that to you? Like, oh, I don't know if my books are good. Well, if you say right off the bat, Oh, man, I'm embarrassed to do that. I don't want to do that. You need to better prepare. Would you not say, Scott, wake up, please. Thank you. I'm watching you. Your next test, your current balance sheet. I'm not a huge fan of it, but every bank, every acquirer is going to ask you for a balance sheet. And really all we got on it is some cash reserves and a couple vehicles. So it's not going to impress the heck out of you. The PNL will last six months of bank statements. Does that make your heart drop last two years of tax returns for your business? Does that make you go, Oh, crap. Oh, okay. Well. And then, of course, your Google reviews. Believe it or not, I think your business is worth less if you don't have decent Google reviews because it's very, very cumbersome to get away from that. Google will find the business that acquired your business and stick all of your Google reviews onto them. I know you can argue with me that no Google will let you change and do. Will they write? Will they let you start over from scratch? I don't think so.
Brad Larsen: I think they just they just stick it on the new business. All right. Succession plan. Heartfelt story here, gang. Everybody know. Kevin Knight, Liberty Management, San Antonio. Kevin's been around for 25 years and a great gentleman passed away last year, had a diving accident. And it was just very unfortunate. He passed away. I spoke at his funeral. He's a fantastic guy. He was one of my mentors as soon as I got into the management business. Join Northam. Kevin called me and said, Hey, I want to take you to lunch. I'm like, Wow, that's my competitor. I came out of the real estate sales field and that's dog eat dog world. Like, I'm not helping you with anything. You're a competitor. You're another realtor. Kevin reached out and took me to lunch, took me under his wing. That's one of the things I love about this industry is we all share that mastermind sharing concept. Kevin passed away. Who took over that business. I don't know if his succession plan was good enough. I don't know necessarily. It was a very muddy situation when he passed because you have a person in charge, you have kids. Did he have a clear will? Did he have good insurance? All of that came into play. Who had access to company funds. Who has the right to sell that company? Do you have somebody that can do probate in a succession plan like that if you were suddenly to be gone? Kevin, you had three kids.
Brad Larsen: You had a really good CEO, Mary, who's doing everything now. But did you just create a whole crap storm for Mary, who's running the business because you didn't properly prepare? So think of that. And I don't even know if our succession plan is perfect. I probably need to go take a look at it again because I just want to bring it up because that really kind of shook my world. When Kevin passed away, all of a sudden you start thinking, did he have enough plans in place where it was just it went smooth to, one, protect his owners who are relying on him to make sure the staff has a good plan in place and of course, his family, number one. Okay. If you're already there. Do you realize what you have? Long term cash flow, salary and distributions should be in a pretty good place. You have really good tax implications, meaning that because you have a business, you get all these opportunities to write stuff off. I'm still yet to perfect how to write hunting trips off, but I'm going to figure it out. If someone's going to hire me as an outfitter and I'm going to do it. Can the cash flow fund other ventures? One thing we just did, and this is a I would never recommend it. If you really hate somebody, tell them to go do an SBA purchase.
Brad Larsen: So we purchased a office. Melanie and I are finishing it out right now, built it from scratch, did an SBA loan. Man, it was like pulling teeth the last few weeks. It was like, you're on, you're off, you're on, you're off, You know, Oh, we can't do it because you drank a bottle of water this morning. You know, we can't fund your loan. And three minutes later. Oh, we got that waived. You're good because you it was it was clear water. You can you can. We can fund your loan. I swear to God, I was like that. I'm like, it was a nightmare. But we got it done. Can you create other opportunities? One was that office came out of the cash flow of the business. Do you understand this? The asset cash flow of my business is funding a commercial purchase, a long term asset. That is a very good opportunity to build long term wealth. Yeah, it takes a lot of effort. Yeah, I'm giving away all this up, but it's an investment funded by the business. You feel me? All right. You're feeling good. Show me the money. All right. Here's an opportunity to kind of do some monkey math with me. All right? If you have 200,000 of owner's discretionary earnings, we talked about this yesterday and you decide to sell and the owner's discretionary earnings, that's kind of your net profit add back in your salary.
Brad Larsen: It's pretty much everything that you can tinker with Once you have your revenue and minus your expenses, that profit EBITDA owed, that's left over, that's the money you can tinker with. Call it 200,000, just easy math. You decide to sell your company for 600,000. Okay. Now, are you going to pay taxes on it? And you essentially earn two and a half times an annual cash flow in a one lump sum. We talked about this when the mastermind group yesterday. It's kind of like, okay, why would you sell if you just only got that much? Again. I'm trying to be 5050 here. I'm not convincing you one way or the other because we've had people that sold and we've had people that bought in here. We had people that have no intention to sell. We have people that intentions to sell next week. So I'm just going right down the middle on this. But I want you to realize that what you're gaining out of that sale, it is not Michael Jackson F-you money. I'm going to go buy an island and move away. You understand? This is this is good money. You can go do other stuff with it, but it's not you didn't sell Microsoft and you got to be in front of that check. You know, it's not a billion. It's going to be. A business. Are you ready to sell? All right.
Brad Larsen: I love this book, The Art of Selling your Business, because you're ready. I've gone through all of this information about the great benefits of owning a really operating well operating business. But I got to go scratch another itch. I got to go do something else. I want to go be a consultant. I want to go be a male model, whatever it's going to be. This is a really good book podcast guy to listen to. John Warlow. I love this guy as far as what he's created. He's got 3 or 4 books that are out there. Highly recommend it because again, the mindset is if you prepare your business to sell following his guidelines and you never sell, are you better off? 1,000%, Yes. What does it look like to actually decide to sell? Great point. Have all the deciding parties well decided? I remember the story as part of a consultancy call. I took a call with a lady who was wanting to sell. And, you know, we are a Texas licensed business brokerage because we have a broker's license. And she wanted to sell and, you know, talk to me for an hour. She was like, okay, I'm ready to sell. I want you to help me. Let's talk tomorrow. And so we get on the phone the next day. One minute into it, I talk to my husband and we're not going to sell. I talk to her for an hour.
Brad Larsen: I gave her everything she needed to know about selling a business as much as I could, and she was fired up and she was ready to go and she's going to sell. And her husband said, Nope. So that's always been my in my memory. If you're going to sell your business, make sure that everybody that has to make that decision has decided, well, I want to sell my business, but my business partner says no. So I don't know what we're going to do. You've got to get everybody on the same page. Do you keep the decision secret, Squirrel. This is always a fun one. Do you tell your team that you're selling? Because if you tell your team, are they going to jump ship? It's always that discussion point of when is the right time to tell your team? Should you tell your team? Do you bring in a key leader and sit that person down with a non-disclosure agreement and talk to them? Key person about selling or not selling? It's a very tough time frame. There is your accounting current? I just spent, what, 20 minutes talking about accounting? Are you current? Can you show somebody? Are you thin skinned? That's a good point here, because what happens if all of a sudden? You said, I'm ready to sell and here's your offer and you get totally offended. Are you going to be that way and get offended by an offer to purchase? I mean, it's something to consider.
Brad Larsen: If you can't handle that or feel you're going to upset your team or upset your owners or upset your community. What's it worth? The art and the science of pricing. 1 to 1 and a half X revenue. That's a general guideline. I can be yelled at because maybe it's worth more. Maybe it's worth less. It is worth what it's worth to the purchaser. The buyer and the seller establish the market. Nobody's going to come in and appraise it if you're not doing an SBA loan. If you're doing anything outside of that, an appraisal may not even matter. And the appraisals are crap anyway. They're worthless. As mentioned, I said I would pay more than anybody else in my market because it's worth more to me. So the purchaser defines the actual opportunity to purchase that and what it's going to be worth. Another one to follow your owner's discretionary earnings, your profit, your EBITDA, your SD three X to five x. Okay. This is nothing new, gang. You've all heard this. I'm just kind of going through some stuff. You've already heard your owner's salary incentives got to be added back in. And what does it cost to replace you? Because that salary you're paying yourself. If you're paying yourself a $20,000 salary a year, that's not enough to replace you. If you're paying a $400,000 salary a year, you're just. Paying taxes in a different way. Right. That's all you're doing. You're not you're not getting around that requirement.
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Brad Larsen: What next? Do you go FSBO? For sale by owner. Do you use a business broker? Do you do a legacy sale? Selling it to one of your kiddos or a family member? That's called a legacy sale. Do you do an employee sale? By all these considerations, what's next? I want to sell. What do I do? You'll open market. There's a pro to that. No marketing, no waiting, no explaining. That's a good point. Open market for sale by owner. You can reach more people because you can network within your your entire industry. Khan Do you know what it's worth? If you go open market for sale by owner doing it yourself, do you really know what it's worth? Maybe, maybe not. Do you know how a sail works? And we're going to talk through this. How do you actually sell a company some of the pitfalls and things you want to watch out for? This has been one of the most amazing things in our industry. You can sell your business with a Facebook post. You don't believe me? Throw up on the mastermind group Page 11,000 members. I own a management company and XYZ market I want to sell. Dm me and then sit down with a nice glass of wine and be prepared to answer 10,000 questions. Right. So that's how hot our market is. That should make you feel good. That should make you realize that, hey, if I ever needed to exit, I can do so really quickly.
Brad Larsen: It's I wouldn't call it liquid, but if you are squared away and what you do, you can sell very quickly with minimal advertising. I'm okay with a business broker. You know, they do some third party negotiator stuff. They offer some pricing logic. They can they can do some nationwide advertising and network. But if you hone in on what I just talked about with the the mastermind group, do you really need a business broker, maybe just a good attorney, maybe just a title company? They charge a commission. That's a con. Okay. And one of my one of my things I hate is business brokers. You have to teach them how to walk and talk and speak. Property management. They don't know anything about anything. I did acquire a business through a business broker, and it's kind of like I had to coach the guy on what management companies do. Let me get this straight. You guys collect third party rent and then you send it to the owner. Yes. And do you guys conduct maintenance or how does that work? Oh, my God. Get me out of this conversation. I mean, I don't like to do that with business brokers. I'm not saying they're all like that. But again, if you go back to potentially self-representing using an attorney for guidance, I don't feel you need a business broker because you have a very easy business to sell.
Brad Larsen: All right. Let's talk through this. There's the roll up phenomena going on, right? We have companies that are taking they're doing aggregate. They're taking management companies from XYZ Market. They're grabbing five, ten, 50, 101,000 management companies, and they're rolling it up onto one umbrella name. These are professional acquirers. They've got lots of attorneys. Good, bad or other. Just understand what game you're walking into, the playing field you are entering. They have creative hold back. An earn out clauses. The holdbacks will go through in a minute. The earnouts could be anything. Now you have to be prepared to give a little to get a little in those holdbacks and those clauses. And be aware that they're there and they're not designed to help you. They're designed to protect the acquirer. Just keep that in mind. The giant payday gamble. I'm going to say it. I'm going to get hate, but I'm going to say it. The Roll-Ups, they give you X for your business. Here's your hold back. Now go away. Reinvest in the company. Take some of the money that we give you. Take some of your personal money. Put it into the company. And in one year, five years, 100 years, all your hopes and dreams will come true. We're going to have a 20 x return. A 50 x return. We don't know that for sure. This is not meant to be. I'm not disparaging that. You just don't know.
Brad Larsen: What you don't know is my point. I want you to be careful with that. I think those acquirers are fantastic. I really do. I love the people. I think they're doing a good job. They treat the management companies with respect and do a good job in bringing them into their main rollup design. I think all of them are good. Okay, I just want you to be aware of that, that they are telling you or even making that part of their marketing that the next big payday is going to be X, You fill in the blank return. Long pause for effect. Non-disclosure agreements. Are you using theirs or yours? This is kind of a sticking point right there. Non-disclosure agreements, meaning any professional acquirer, any amateur acquirer like me who's non-disclosure agreement are you using? Some of those have some pretty sticky stipulations in there because they are attorney drafted. These attorneys, they're not on your side. They're drafting a legal agreement that a purchaser is sticking in your face and saying, sign this because we're going to disclose to you all of the fancy stuff that we do inside of our company as we bring you into our fold. So just sign it. Shut up and sign it. Prep for the information download. Meaning we talked about this earlier. Here's the test. Give me your 12 to 24 months PNL. Give me your balance sheet. Give me all the stuff that you do.
Brad Larsen: That's what you have to be prepped for because that's the next thing. After a non-disclosure agreement is the information dump. Like, send them all the information you can. Then you're going to get the offer. Non-binding letter of intent. That's how it's typically going to roll. You're going to send somebody or receive a non-binding letter with all the kind of the rough terms and the timeframes and the price that they're going to offer you. Some of the hold back discussions should be less than two pages. Typically just a non however. Does it have any sort of. Uh, exclusivity clause in that non-binding letter of intent. You're going to go through a due diligence period 30 days, 60 days, whatever. Then you're going to do a binding purchase agreement with earnest money. Now you have to get into the realm of attorneys and title companies or not. Title companies are an option, right? They do hold funds or an attorney can do the same thing, but you've got to get some attorney representation. I would highly recommend it. The types of offers all cash, Cash and owner financing. Cash and bank financing. Cash and SBA financing. I would watch out for the last one. The SBA financing. Right. If you want to stick in the eye, yeah, go do it. But as a seller and or purchaser, SBA is a really last ditch effort. If you can do owner financing, that's the number one thing you want to do.
Brad Larsen: There's a lot of benefits to an owner financing. Get a good CPA to talk about what you're going to do with the money. Consider taking multiple offers. Again, that exclusivity agreement in any sort of letter of intent and or binding purchase agreement is something to consider. Make sure there's no exclusivity clause in that LOI. That's key. You get a letter of intent from a purchaser with some sort of exclusivity agreement that says you can't talk to anybody for 30 days or 60 days. I would have a hard time signing that unless you really show me a big, big, giant cash payday. Right. I would have a very difficult time signing that because what if you want to shop? What if they want a 90 day exclusivity agreement to take your company off the market? But you've got to sell right away. You understand they basically put the brakes on any of your marketing efforts or any of your efforts to take on a home. No one will do that in a contract such as a purchase agreement for a home. You're not going to have some sort of exclusivity agreement on a non binding letter of intent. So be very weary of doing that here. Always the hold back. What's the hold back? The claw back. What's that going to look like? You have earnouts clawbacks, hold backs. Typically, you're going to see around 10 to 20% of the purchase price that's going to be held back to make sure that your biggest owners don't run to a management company.
Brad Larsen: You don't abandon ship and don't help the transition. I mean, there's hold backs. And where is that cash going to be held? Who is going to have it? Are your owner clients going to leave? If you decide to sell. Lots to consider in that hold back because that's really where. It can get a little contentious, not only in the agreement up front, but later on down the road, six months, 60 days, whatever that holdback is designed. That's where it can get a little rough if the acquirer doesn't doesn't meet the holdback concerns. Because remember, you're giving up control of the company. They're talking to those owners that you've been working with for years and years and decades. And are they shoving a management agreement in their face? As soon as you close saying, sign here, sign here. And the owner is like, bye, I'm out, I'm leaving. And then who's that affect more? That's going to affect you and your hold back. So consider that transition as a very important piece. Add in a provision for more units. This is pretty good. All right. So every unit that you might lose could equate to a dollar amount. What if you go below that basement? Okay. If that 20% hold back equates to ten units for fun.
Brad Larsen: What if you lose 15 units? Does each unit loss past ten equate to a dollar amount? Who holds the money. Also consider that. What if you gain more units? We did an acquisition in Austin and negotiated with the seller and the seller said, Well, what if I can bring you ten more units that instead of what I sold you, great. I'll pay you X per unit for every unit above what we purchased right now. If you can bring them. No, No ceiling. Go. Bring me all the units you can. I'll pay you X per unit. We equated it to a dollar amount. Same thing going the other direction. You could equate it to a dollar amount in a holdback. Every unit you lose equals X up to a certain amount. You could create a basement. You can create a ceiling. Who holds the money is a key point because. If you don't if you do a hold back. But there's no money being held in escrow, How do you get that? Hold back. Money back. Ask for it. Good luck with that. You're going to have to lawyer up and sue them. And it's just painful. But if the title company holds that money in escrow, you can legally get that pretty quick, right? So I would say be wary of where that hold back is and who holds it. If the acquirer holds it in their pocket, that might be difficult to get back.
Brad Larsen: Closing and handover timing of the announcement is a key point. When do you tell your team? You frame the sale as a merger? Not a bad idea to look at it. Maybe you want to just frame it in a different light, but saying, Hey, we're partnering up with this management company, they're coming in and and we're working together and we're going to continue to manage your home at a high level. Framing it as a merger is not a bad way to do it. Ensure that your employees have a safe role, especially during the announcement. That's when people freak out because am I going to lose my job? Am I going to be able to pay my rent next month? You know what? All these questions that your team is going to have, you have to ensure them and the acquirer has to ensure you that they're going to have a safe role for a certain amount of time, six months, a year or six days, whatever you feel comfortable with. And you may tell the acquirer, get rid of this person day one or keep this person for as long as you can, forever chain them to the desk. Communicate, communicate, communicate with your owners, your tenants, and then overcommunicate again. We've seen acquisitions where owners say, we didn't even know you sold. We see tennis to say we don't even know where to pay rent now because rent has changed processes because you have a new software, we don't know what to do.
Brad Larsen: Well, that's your fault. You've got to overcommunicate this acquisition and or sale to your clients. Owners, vendors, tenants. Taxes. Big one. Your capital gains, I think is 20%. I said 15 to 20% because that's that's what I found on the Google machine. Your selling price minus your original cost, the state income tax. Welcome to California. The state of Texas does not have an income tax on business, but there are think about 20 or 25 states that might have a state income tax on business. The professional acquirers in here probably know this better than me. I didn't research every state, but I want you to take these two numbers in your mind 20% and another 10% for fun. And that's going to help us do some math. Also, you may have an estate tax. 13 states impose an estate tax on the sale of that business. Sales price 500 K got 100 K in capital gains. You got state income tax another 10% for rounding math. Easy. You got 50 grand there. You got attorney's fees for 25. Turns out 500 K into about 350 to 325. Is that a fair assessment? Rough math? Okay. I mean, just doing the capital gains and all this other stuff. Yes, there is ways to avoid it. You can do No. 1031 exchange. No such an animal. Okay. In a business, sad to say, I had to research it just to double check my thoughts because you're thinking I'm going to sell this home.
Brad Larsen: I'm going to 1031 it right. I'm going to sell this business in 1031. Nope, can't do it. Owner financing. Good idea to break up those payments and the owner financing side instead of getting one lump sum now maybe one lump sum now another lump sum through owner financing and then maybe even a escalation clause and or a lump sum payment at the end of that. Okay. A little, little trinket of nugget there. Should you close 31st December or 1st January? It's just a tax avoidance strategy. Your CPA is going to tell you what to do there. Big one, gang. Opportunity zones. That's a really neat way to avoid paying taxes. Quickly, I'm going to explain it two stories. One of my golf buddies sold a giant tech business, and I think he got handed 10 or 15 million. Right. And we were golfing. I'm like, oh, did you ever hear of opportunity zones? He's like, What? I'm like, Wait, you've never heard of Opportunity Zones? You have a CPA, don't you? Like, yeah, that CPA never mentioned anything. What's an opportunity zone? I'm like, Oh my God, I had to sit down because I'm just thinking, you are getting screwed by your CPA and you need to go Google it because that is a huge opportunity to avoid paying all taxes.
Brad Larsen: If you invest and build or buy in an opportunity zone after ten years, you are fully vested. Everything you put in is now tax free. Google it. Okay. You're welcome. Top five reasons to Never sell. You have annual income. You have ancillary businesses that you want to concern yourself with. You have real estate sales. You can build capital value. You have a legacy. Handoff to concern yourself with. Top five Reasons to Never sell. Now your top five reasons to sell. You realize the exit you've worked for? You have a cash out and reinvest like Deb. Stop being the one in charge because you're just burnt out. You have no succession plan, no kids, nobody wants to take over the business. So it's a pretty good reason to build it up. Use it for as long as you want and then sell it and run. Health reasons. That's a big one. You know, you're given six months to live. Do you want to spend it in a management office talking to tenants and owners? You may not. So that might be a really good reason to cut to pop smoke and get out. Final thoughts. Prepare now. Decide later. I want you to read that in your mind. A couple or three times. Prepare now. Decide later if you have everything built and ready to sell at a moment's notice. That decision could be made in a snap of a finger. And let's go either way.
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