How One Savvy Owner Sold His Property Management Company
Excellent Interview With a PM Pro Who’s Happy With His Decision To Sell
In January 2020 the founder of the Value Builder System, John Warrillow, posted a terrific podcast interview with Scott Raymond, who sold his property management company to Mynd Property Management in Northern California. I highly encourage any property management professional who’s considering selling their business to take a listen. We’ve excerpted the highlights here and provided a link to the full podcast below.
Scott Raymond never intended to get into property management. In the 1990’s he struggled finding third party management companies who did a good job with his buildings. So he started his own.
He eventually built a PM company with 25 employees and $2 million in annual revenue when an acquirer approached him. MYND Property Management is a venture-backed company in the Bay Area that was impressed with what Raymond had built. Their initial offer was too low, he felt, but he kept working with MYND. He helped them understand why they should pay more for his company.
A year after the sale, Raymond was thrilled with his decision because the sale allowed him to focus on his passion, which is real estate investing.
Scott Raymond: We focused primarily on residential real estate, including single family homes, duplexes, triplexes, fourplexes, 10-unit buildings, 20-unit apartment buildings. Our largest was a 100-unit apartment community. We had a few commercial office buildings, but it was mostly residential rentals. At the time we sold, we had about 1500 units under management throughout three or four regions in Northern California. We probably had 250 clients. So we got 1500 units, 250 clients, the average client owned four units or five units, whatever the math is. Some just owned one, some owned 10 buildings and units.
John Warrillow: So what prompted you to think about selling?
Scott Raymond: Well, my real passion is on the real estate investment side, frankly. I build a management company really out of necessity initially, and then it just kind of took a life of its own. I did get a lot of satisfaction growing a business. The satisfaction of servicing clients well and being appreciated. The satisfaction of building a real recognizable brand in the Sacramento region. The satisfaction of watching margins go up. The satisfaction of changing employees lives through offering healthcare and career advancement, and all that stuff was very satisfying. But at the end, it didn’t really satisfy my core. My core is just really in the investment side of things.
John Warrillow: And so you were approached by potential acquirers. Under what sort of conditions were you approached? Was it under the guise of let’s have a peer-to-peer conversation? Did they use the word strategic? Did they come right out and say, “We want to buy you.” How did they sort of couch the conversation in the beginning?
Scott Raymond: No. So the memory’s a little bit vague on the initial conversations, but it was something like a phone call. “Hey, we’re in the market to acquire a management company. Would you consider selling?” I mean, it was a pretty basic right between the eyes kind of pitch, which I like. I’m not one to mince words. That was followed up by a lunch and then some more discussions and then an LOI and then off to the races.
John Warrillow: What made you decide these guys were legit? Because a lot of our listeners would get those calls all the time, right? And sometimes they’re real, other times they’re a bit shaky. There’s some investor who thinks he can cobble together some money. How did you know these guys were serious?
Scott Raymond: That’s an easy one. Unfortunately, it probably won’t translate to a lot of your listeners’ “real-world” experience. The company that came to us was founded by two pretty well-known entrepreneurs and had already built a company and took it public. Now this was their next mountain to climb. So very recognizable guys in the business world, in the real estate world. Furthermore, they were backed by some pretty substantial venture capitalists. So obviously we went and met with them a number of times. We talked to other companies that had been bought by them, and we talked to their VC guys as well.
John Warrillow: And this company you’re referring to is called Mynd, is that correct?
Scott Raymond: Yeah.
John Warrillow: So Mynd approaches you, these kind of all-star entrepreneurs at the end of it. So you figure they’re legit. Did you have any sense of what you thought the management company was worth?
Scott Raymond: Yeah. So when I started, and this might be helpful to the listeners too. When I made the decision to start my own management company, before I did that I actually went out to try to possibly acquire somebody because I didn’t know how long it was going to take to organically grow my company to profitability. So I had some capital resources, and I went out to a couple other companies to do what Mynd did with me. This was 10 years ago. So I went out and approached a couple other companies to see if I could buy them, and during that process, we got pretty close with one of them. Close enough that we did a business appraisal. During that business appraisal, I was able to really look under the hood on how a business appraiser was looking at their business. The owner of that business wanted far more than I was willing to pay, far more than the appraiser gave them value for. So that never went anywhere. But that was kind of my first glimpse on how to value my type of business.
Throughout the course of the 10 years that I’d built Raymond Management, we had acquired a couple of other small… When I saw small companies, the way property management companies generally do M&A, is the new company will not necessarily buy my corporation or shares in my S Corp. What they’re buying is the rights to my management contracts. So I still own the name Raymond Management. My S Corp is still active if I ever want to do something else with it, even though I’m under a non-compete. They really just bought the contracts, the rights to the contracts.
So I bought a couple of smaller portfolios, 100 units here, 50 units there from small, independent, one-off property managers who were looking to retire. So I had a little bit of an experience of doing M&As from the buyer side as well and kind of seeing what other management companies thought their companies were worth. So I had a pretty good idea.
John Warrillow: So how were they valued? What is the formula by which you value a property management company?
Scott Raymond: So we also had another buyer looking at us, which is important for your listeners. When we were approached by Mynd, we went out into the market to see if there were any other companies like them that were looking to acquire because we wanted to get two people bidding for us. And anybody considering selling, I would try to do the same thing. Obviously two buyers is better than one for your price. I only bring that up for that point, but I also bring it up because both of these companies looked at valuation differently. Mynd was looking at EBITDA. They were looking at gross management fee, and they were looking at a gross multiple on annual contracted revenue. Whereas the other company was looking more at a multiple on earnings.
John Warrillow: What were you thinking was a fair multiple of either EBITDA or revenue, depending on how you and your partner were thinking of what was a reasonable kind of multiple?
Scott Raymond: Without getting into details of my exact transaction, what we were seeing from the marketplace was gross revenue multiples between one and two, and we were seeing EBITDA multiples between three and seven.
John Warrillow: The offers that you got I’m assuming were sort of in that range. You felt that they were fair based on what you were experiencing.
Scott Raymond: Yeah. Initially they weren’t, so the negotiations stalled for quite a bit. But ultimately I think we came around. We ultimately got a deal done. So I think that both sides thought it was a win-win.
John Warrillow: What stalled the negotiation?
Scott Raymond: Mainly valuation and terms. We were looking for all cash deal, and a lot of companies in the space weren’t wanting to do cash deals. They wanted to do part cash-part shares in their company, drag the sale installments out over time, and then ultimately the price. So those were kind of the main thing. Then which revenue we were getting credit for. The primary revenue for management company is the monthly management fee. If you have a house that you and your wife were renting and you hire my company, I’m going to charge you $100 a month roughly. That’s $1,200 a year. That’s the bread and butter. Where we make a bunch of ancillary revenue is if the house goes vacant, we have to lease it up. We charge commission for that. If a water heater blows out, we got to send a guy out, we make a markup on that maintenance guy for scheduling him. We keep late fees if your tenant pays late. So there’s all these different fees that we earn. It can really, really add up over time. We’d also get a brokerage commission if the property owner used us to sell their property. So it was a matter of negotiating which of those income streams were going to get valued into the multiple equation as well.
John Warrillow: Wouldn’t they all be valued as part of the equation?
Scott Raymond: No because what the companies that are trying to acquire in my space are looking for is that sticky recurring revenue. Take the leasing commission, for example. If I lease your house out, that person may not move for five years. So I can’t guarantee when the next time is I’m going to earn that leasing commission. Your tenants may never pay late. I can’t guarantee when that late fee is going to come in.
John Warrillow: Got it. What was the duration on your management contracts?
Scott Raymond: Generally one year. We played around with one year contracts and month-to-month contracts. The benefit of the month-to-month contract is that it’s easier to fire a bad client, easier to make changes to your terms to adjust to the market or to your own margin requirements. But there’s also a much more transitory risk of management clients leaving and firing you. The one year contract provided a little bit more stability, but that’s the problem with a management company. That’s why multiples may not be as high as other types of businesses that have stickier, longer term relationships.
A company that acquires my contracts at the most is going to get a guarantee of a year’s worth of contractual revenue. But if they don’t end up providing a good enough service or the same quality service my customers were expecting, then that client may not renew at the end of that year. So they just paid me for a year’s worth of revenue. They just basically paid for a year’s worth of revenue.
John Warrillow: Got it. So let’s get back to the negotiations itself. So you’re in this. You got two kind of potential suitors. Your first is not meeting your expectations on either points, valuation or terms. So I think a lot of our listeners would really resonate with that experience or that situation where they’ve got an offer. Maybe they get low balled and feel like they’re not getting value for what they’ve created. What’s the secret to kind of nudging the acquirer up without being so standoffish that you kind of piss them off or they turn away and say, “This guy’s totally unreasonable.”
Scott Raymond: Yeah. So you get contacted by somebody who wants to buy your company, and assuming you’ve done some level of vetting and you feel comfortable with these guys, you sign a nondisclosure agreement, confidentiality agreement. Well, first of all, it starts with good books. You’ve got to have good books. Really tight financials. I looked at a company the other day on behalf of Mynd to acquire, and the guy was only booking a half year’s worth of his revenue. He was taking the other half under the table for tax purposes. You know what I mean? That guy’s not going to get a good price for his company. So you got to have really good books.
So if I’m trying to get them to value all of my different revenue streams, then I want to have two, three solid years of historicals to show them what the averages are over those three years. So I want to make the case as tightly as possible in financials of how much money I’m making and how sticky and continuous that revenue is. It starts with that.
I know a lot of owners may get calls, and they don’t want to just start throwing financials out to just anybody. So I get that. I get there’s a reluctance to share your information. But once you can get over that hump, that’s really how you choose the valuation is to really, really get under the hood of your financials with the buyer and make your case of why perhaps your company’s worth a higher multiple than the guy next door because of longer term clients or higher end properties or more loyalty or better brand recognition or whatever.
John Warrillow: You’re trying to make this case almost… Sounds almost like a lawyer would make a legal argument in front of a jury.
Scott Raymond: Yeah, kind of. Yeah.
John Warrillow: Kind of plead your case.
Scott Raymond: You’re selling your business. Even though I got approached, I went into full on sales mode. I was selling my services. Property management is not a high margin business. The buyers’ approach to it was to try to squeeze margins out of more efficient deployment of personnel through the use of technology. So they’re really taking a heavy technology approach. So for me, the sales pitch was really about how efficiently I was running the business, how I was able to manage perhaps more units per person, per employee than the average management company, how we were able to use technology to staff maintenance guys more efficiently. These sorts of things.
John Warrillow: Doesn’t that kind of make the opposite argument though? Meaning you were already so efficient in squeezing so much juice that there wasn’t much incremental they could squeeze if they bought you guys?
Scott Raymond: Good point. But they had some other technology that we didn’t. They had some proprietary technology that was going to allow them to squeeze out even more margins. What they liked about us specifically is they didn’t have any exposure in Sacramento, and we were a pretty major regional player. So they could just come in and plug and play with us. They didn’t have to hire a bunch of new employees or what have you. It was really just a really synergistic move for them.
John Warrillow: Got it. So you were approached by Mynd, but then you did a great job of getting a second offer on the table. How did you get that second offer? What was your pitch to the second company to bring them to the table?
Scott Raymond: Frankly, I’m surprised they didn’t approach us because they were out actively looking for companies as well, similar strategy to Mynd. We had just heard about them through the trades that they were out trying to do the similar thing. So we just called their CEO and said, “Hey, look. We’re in play. Do you want to come to the table?”
John Warrillow: What was their reaction?
Scott Raymond: Yes. We’re interested. Send us your financials.
John Warrillow: Where did it go from there?
Scott Raymond: We got really close. I mean, at the end of the day, it was almost a coin flip to be honest with you. But at the end of the day, I felt what Mynd offered my partner and my employees was a better cultural and long term career fit.
John Warrillow: I love to talk about employees because you had in your own admission sort of 25 employees, many of whom you were… I was reading between the lines. Correct me if I’m wrong, but you felt like you were giving them an opportunity that maybe they wouldn’t have had without your company in some cases.
Scott Raymond: Yeah.
John Warrillow: Maybe talk a little bit about the team you built and then how you sort of shared the news with them and involved them in the process.
Scott Raymond: I was a big proponent of hiring from within. There’s a lot of very basic kind of menial tasks that are required for property management company. So when you’re going out and you’re hiring people, you may be hiring people that don’t have college degrees. You may be hiring people who are new to the workforce, maybe don’t have a tremendous amount of skillsets, but they can satisfy kind of the basic lower level requirements of a management company’s needs. Then when you see their work ethic, their reliability, their skillset, their intelligence, as other opportunities present themselves, you have great opportunities to move them up through the company and that happened to a number of my employees. They started out in very, very basic tasks, and ended up in pretty serious critical path tasks, positions for my company. That builds a lot of loyalty, a lot of trust between you and the employees.
That’s what made selling really, really hard. We had set up a pretty friendly, loving family type culture with Raymond Management, and now I had to break the news that we were going to a company that had plans to take over the world, based in another city. So I did it the best I could with multiple kind of group presentations, and I brought the new guys in and let them kind of introduce themselves to everybody. We had a lot of off-site kind of team building, combined team building experiences.
In the transition, I think we only lost one employee that said, “I came to work for you, Scott. I don’t want to work for these other guys.” That only happened one time.
John Warrillow: What was your timing around telling them? Did you have the check in hand from Mynd by the time you told them?
Scott Raymond: We pretty much did. We pretty much told the employees first, after the deal was closed, and then we had to tell my clients. I wanted to tell the employees first before I told my clients because I didn’t want the word to get out to my clients before I had a chance to tell them. So the sequence was very important. I wanted to make sure I had a contract and a check in hand. Then I told the employees, then I told the clients.
John Warrillow: What was the reaction of the employees?
Scott Raymond: A lot of shock and awe. A lot of nervousness. It happened around the holiday time too. It was the holidays at the end of 2018. So in some ways that was a good time because everybody was kind of winding down for the year, getting into happy, family mode. Our business kind of slows down a lot during that time, so that was a good time. But it was a lot of hand holding. A lot of, “Things are going to be good. I’m going to still be involved.” And I was. I was involved very, very carefully. Very much in the transition for the first year. Just hand holding.
John Warrillow: I was going to ask you, if you could redo that announcement meeting, if you had a mulligan and you could have a do-over where you brought everyone together and shared the news, what might you do differently?
Scott Raymond: I think we pulled it off as best I could honestly in hindsight. We rented out a big kind of coworking space. We had a presentation, Dan and I. Created this slideshow that took us back to some of the beginnings when it was just Dan and I working out of basically a condo unit. All the way up to 23 employees and hundreds of clients and great brand recognition. And then we transitioned into, “Where do we go from here?” So it was really a beautiful, well-done, empathetic, compassionate presentation with a lunch afterwards and a lot of Q&A. And then a second one, a second one where we brought the new guys in and just kind of carried on with that. I always made my office open for questions and these sorts of things.
The other thing that helped, which was part of the negotiations, is that the employees… Nothing was going to really change right away for the employees. Their comp if anything was going to go up. They got better healthcare. They got some better perks. They certainly got better career advancement because I had really taken the company as far as I could take it or wanted to take it. So all those things helped a lot in getting them over the initial fear of change.
John Warrillow: What was the reaction among customers?
Scott Raymond: Some reluctance and some concern. Like, “Okay, Scott. We’ll see how it goes. We hired you. We hired you because we like you. We hired you because we know when we call you, you’re always going to answer the phone and take care of our problems. So we’re happy for you. We want the best for you, and if this is the move you need to make, Scott, then that’s good. But we’re going to watch very carefully that the balls don’t get dropped in this transition.”
John Warrillow: You mentioned that you were trying to get as much of your money up front. I’m assuming there was some type of earnout you accepted, right?
Scott Raymond: Yeah.
John Warrillow: Can you give us a sense of how big a nut that was for you?
Scott Raymond: Without getting into my specific details, the earnout was an important negotiating point because obviously the buyer wants as little churn as possible, so they want as big a churn penalty as possible in case they lose clients. If they lose clients, that’s money lost, so they want to create as big a penalty as possible to reduce that risk. So that’s a big, big negotiation and one that your listeners should pay very, very close attention to. And lawyer’s can be super helpful for that because what ends up happening is even though my employees are still servicing the needs of the clients post-sale and I’m still involved from a client relation standpoint, we are losing a certain amount of control over the service. It’s now a new way of doing business. So there’s certain aspects that I don’t have control over anymore, and if a client leaves because they’re unsatisfied with the new things, that isn’t necessarily anything I was responsible for. So how much should I get penalized for that is a very negotiable point.
John Warrillow: Yeah. What proportion of a total deal, total sale of a company would you say is sort of reasonable to expect an earnout for versus what would you say is too much for-
Scott Raymond: In my industry, it’s anywhere from 10-50%.
John Warrillow: 10-50. That’s a big range.
Scott Raymond: Yeah. I mean, that’s what I’ve seen in negotiations. And when you’re talking… So I don’t know if we’re talking about the same thing. So when I think of earnout, I’m thinking of what I was able to negotiate was any new business because we had a pretty powerful, organic lead generating pipeline. So I wanted to get credit for that in the valuation for some period of time. So that was negotiated into it. Then any client loss I negotiated a floor on that, and that’s where my 10-50% comes in. It could be as little as 10. If they buy 100 contracts, a good deal for the seller would be if you lost one of those contracts or 10%, that’s the maximum they could take off the price. A bad deal for the seller would be 5 contracts, that example. Where your valuation was cut in half basically because you lost those clients in the transition. That churn usually lasts a year. If you can negotiate a shorter churn, like three months of six months, that’s great. If you can negotiate a churn somewhere between 10-20%, I think you’re doing well.
John Warrillow: Yeah. That makes sense. Of course that varies quite a bit by industry. We seen some industries, marketing communications where the earn out can be much longer, like five years, seven years. I’d guess the typical is three years. One of the things I wanted to ask you about, Scott, is your name was on the door. It was Raymond Management. How did the acquirer react to that, that your name was on the door?
Scott Raymond: I don’t think they were caught up in one way or the other about my name being on the door because their strategy is to rebrand any company that they acquire. I think they were more impressed with what that brand represented in the marketplace. Our name was associated with quality properties, quality services, was very recognizable logo and colors. One of the unique things about property management is when we have a new building that we manage, we immediately put a sign in front of the building. Even if we’re not trying to lease it, even if it’s fully vacant, we’ll put the sign there just to let people know. So we had these little billboards all over town. So we got a lot of business from that as well.
So yeah, that name wasn’t that important one way or the other for them. Where it is important is when you’ve got an organic lead generation pipeline, social media, internet, Yelp, these kinds of things. That’s where a lot of our leads came through. It’s very important how you manage that kind of social media/online transition. We were getting probably five leads a week from Yelp. Well, you don’t want to just shut down your Yelp the minute you close, but yet they need the leads to start going through their Salesforce system. So you’ve got to really think through how that’s going to work. Do you do a cobranding thing? Do I keep the website up, and do I keep my Yelp up? Do I keep my Google AdWords up without any changes, or do I start to incorporate their name? Do you just go cold turkey right to their systems, which I wouldn’t recommend because then you’d lose all your organic leads.
John Warrillow: How did you personally feel about their decision to rebrand?
Scott Raymond: In hindsight, I probably wouldn’t have named it after my last name. There was really no ego tied up in that. It was really almost lazy. Having to think of some creative name, it was just easier to go with my name. So I didn’t really have any ego tied up in my name honestly. So I had no problem. I had no problem with those signs going away.
John Warrillow: It’s been a year I guess or so since the transaction went through.
Scott Raymond: Yeah.
John Warrillow: How’s the decision sitting with you now a year on?
Scott Raymond: Couldn’t be more thrilled.
John Warrillow: Why?
Scott Raymond: I think we made the right choice with this company. I think the employees are happy. I think the clients are being serviced. I’ve gotten myself personally to exactly where I wanted to be.
John Warrillow: Where is that?
Scott Raymond: Not involved in the management company anymore. But knowing that my employees and clients are being cared for.
John Warrillow: What was it about that sense of freedom? Maybe I’ll use that. Why was that so important to you? What is that feeling of freedom is giving you?
Scott Raymond: The management business is a very maintenance intensive business in terms of managing clients. You’ve got on any given day, you’ve got owners calling you about reports that they can’t understand or tenants calling you with toilets that don’t flush. You know what I mean? It’s just one of these things. Employees that are trying to get vacations or want their next raise or dealing with issues with other employees. These are daily things. I’m not an operations guy. Those things don’t fire me up in the morning. What fires me up in the morning is looking to real estate deals and buying real estate deals and rehabbing real estate deals. So stepping away from the management company just gave me the freedom to do that and not really have to deal with all that.
John Warrillow: Speaking of real estate investing, do you think the days of outsize real estate opportunities are beyond us? I mean, will there be another great recession level of buying opportunity in our lifetimes?
Scott Raymond: I’ve seen what I’m going to call two generational real estate opportunities in my life, and I’ve been following real estate since I got out of college in the early ’90s. The first one was the S&L crisis of the early ’90s.
John Warrillow: Savings and loans crisis.
Scott Raymond: The savings and loans crisis, and it was during that time where you had an absolute complete destruction of real estate value across the country. You had a credit system that was fundamentally flawed, and real estate got crushed. That was a tremendous, once in a generation buying opportunity. The next one was the great recession. Everything in between were just kind of minor, the dot com bubble, this, that or the other. You can find good buying opportunities in those markets, but they’re like once in a lifetime opportunities. The S&L crisis in the early ’90s and the great recession in ’07 and ’08.
There’s going to be another one because people forget about the past and lenders get a little too aggressive. Credit markets get out of whack and real estate prices get out of whack. But I can’t tell you if it’s going to be… I mean, we’re already 10 years past the great recession and no signs of it. The lending systems are much better than they were back in 2007. But human nature works in cycles. There will be another one, but it may not be for another 10 years. So right now, yeah. For example, I haven’t bought anything of any substance in really two years because I haven’t seen the values.
John Warrillow: Scott, I appreciate you taking the time to spend with our listeners. Thanks for doing it.
Scott Raymond: Wonderful. Thanks so much.
Excerpted from Built To Sell Radio
This post intended for informational purposes only. It is not intended to constitute legal, tax or investment advice. There is no guarantee that any claims made are accurate or will come to pass. ManageVisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.