BEP 2 | Company Transition

 

It is undoubtedly challenging for owners to sell their businesses to entirely new management. But on the other hand, the buyers of such assets also undergo a complicated company transition, which could be messy if things are not handled properly. More often than not, the difficulties lie with the people involved. Brian Loring sits down with Matt Walker of Walker & Associates Property Management to share his experiences in closing two handshake real estate deals in the smoothest way possible. He explains how he created a strong initial connection with the clients, tenants, vendors, and employees of the companies he has inherited by making phone calls and how this affected his entire management system.

Listen to the podcast here:

How To Successfully Transition Your Company To A New Owner With Matt Walker

We have a great guest for you with some key insights about buying a property management company specifically about creating a successful transition, retaining the clients after the sale. This gentleman has bought two portfolios in his management career. He’s Matt Walker of Walker & Associates Property Management. Their office is in Santa Maria, California. You can find them at WalkerRentals.net. Matt and his wife, Marlena, had built a terrific single-family and multifamily management business on the Central California Coast. I used to live in Santa Maria and San Luis Obispo. Those areas are the primary markets for Matt and Marlena’s business.

I wanted to talk to Matt about his experiences buying these two residential portfolios and how he managed the process of keeping the books of business that he had intact after the sale. It can sometimes get a little dicey when a new owner comes in and takes over the operation. It’s sometimes not easy keeping your property owners and your clients happy, and keeping your tenants satisfied at the same time with your service, and keeping your employees in place. All of that can be very difficult. When you do all those things right though, you’re going to succeed when you buy a property management company. Sometimes it’s a lot easier said than done. It’s a great conversation we had with Matt. I hope you enjoy it.

Matt, thanks for joining us. I appreciate it. I wanted to start by having you briefly describe the two portfolios that you bought in your business past, how big they were, what type of properties were in the portfolio? Give us a little sense of why the sellers were leaving in each of these two cases and what the background was?

Thank you for having me, Brian. Both portfolios I bought were very similar in the sense that both were people who had been in the business for decades. They were looking to get out. One was due to a serious medical condition. They had to get out in a hurry, but they were both similar sizes. I believe one was about 25 units and the other is 35. They are not large units by any stretch of the imagination, but very quality units. It’s all single-family from both of these portfolios. What I found interesting was that both of them were interviewing me as much as anything about how I was going to treat their clients once I took over the accounts. They were very concerned.

It’s a commonly big issue. They want to make sure that it’s getting handed off to somebody with the proper skillset and the proper mindset.

One of them was offered more money from somebody else, but decided to go with me because they believed that I would be better for their clients.

[bctt tweet=”Most people don’t like change very much.” via=”no”]

Were both of these something that was being marketed actively in public or were these private deals?

They were private deals. I was approached by their family member from both of them. My wife and I have been in this town 3rd and 4th generation respectively. They came to us thinking that we would be a good fit.

You approached them with an offer. What did that look like? Did they submit financials to you? Were they reluctant to share information? How did that process go?

The financial information we were given was very basic. We have this many units. The average rent is this amount. We’re getting 7% to 8% management fees. It gave a roundabout figure but fairly accurate of the monthly revenue.

How did you get comfortable with knowing that it was a deal that you wanted? Was it strictly in the financials you were looking at? How did you get comfortable?

When you look at property management numbers and what you want to pay for them, it makes a lot of sense quickly. If I’m going to give somebody a year’s worth of revenue, let’s say, that means in twelve short months, I’m in the black. How many investments can you make? That would be the case. That was it. I looked at them and thought these are a no-brainer for me as a newcomer to the business. One of them, I was only in the business for a couple of years. The other one was about 4 or 5 years. It was a very fast way for me to grow my own portfolio and to increase my revenue significantly.

What was the situation with the outgoing sellers? Did they both just want to be completely done with the business? Did they want to have an existing role post-sale? What did that look like?

BEP 2 | Company Transition

Company Transition: When text and email are not going to work, pick up the phone and make a personal human connection with somebody.

 

One of them didn’t have a choice. Unfortunately, she had had a stroke and her family was the one that I was talking to. They needed someone to come in right away and take over everything. The other person was retiring but also didn’t want anything to do with it. They wanted to be able to hand it over to someone who would take it over and they could go to Fiji.

Did you work through a broker or accountants? Were there third-party people involved? Was it simply you and the owners in both of these deals?

Because they were so small, it was a handshake deal on both of them. We all felt very comfortable with each other. We didn’t have a third-party involved.

How did you originally find out about these deals? Had you known them through the community? How did it come about?

I had known both of these managers through being in real estate since 2001, when I first got my real estate license. I always knew these people and they knew me. Their families approached me and one other property manager about taking over their accounts.

You had mentioned that in both cases, both of these owners were very sensitive to who was going to be buying the business, and how they were going to treat it, and what changes they were going to make. Did you have to convince them of things that you were going to do differently or were they overly concerned with how you might change the business?

[bctt tweet=”If you can keep your mouth closed and your ears open, it’s amazing what you can find out.” via=”no”]

The biggest thing that they were concerned about and they had a hard time wrapping their heads around was as you know, we’re a 21st-Century company. They had done everything very hands-on. They would deliver checks to people. They’d pick up rent from some of their tenants in person. When I told them the type of company that we are, that was their only apprehension. They knew that as far as handling their clients and their tenants, and taking care of things, that would be fine. They were a little apprehensive as to how someone was going to be able to do what they did without being so hands-on.

One of the reasons I wanted to invite you onto the show and talk a little bit about your deals and your experience is not so much what happened before the transaction closed but after, specifically about retention of the relationships with the owners, tenants and vendors. The most important is the property-owning clients. Did you know going in that it was going to take a good amount of time to massage that process of getting to know these people and letting them get comfortable with you? What was that strategy like?

I knew that many of the clients that these people had, they had been with them for decades, for years and years. Most people don’t like change very much. I had to approach it especially considering the age of these two folks and the age of their average client. I had to think about the best way to approach them. It’s a lost art these days but I picked up the phone. I called their phone number and talk to them personally. It’s something that I’ve carried throughout several years now of doing business. It’s knowing when text is not going to work and email is not going to work, you’re going to have to pick up the phone and make a personal human connection with somebody. That’s what I did with each one of them.

Was there any resistance on most of their parts? Did you get a lot of pushback? Did you get people saying, “I might not want to keep going with the company?” What was the reactions?

I’ve got to give a lot of credit to the previous managers. They had made it where I was almost making a warm call. They had to let them know that they needed to exit the business, and that they were going to be selling their portfolios to a property manager who was going to take care of them. I was able to call them with them already having a little bit of an idea about who I was. I needed them to hear that I was someone that was going to be there like Mary was and the other person was. I was going to be there, answer the phone and be able to speak to them if they had an issue. I was going to take care of things like they had been before.

What I tried to emphasize is that I was hoping that they would not only experience the level of customer service they had before, but some enhancements to their experience, ease of communication, being able to always reach me no matter what time of day it is. It doesn’t mean I’m going to return an email at midnight, but if they woke up and they had a question, they could send one. The next morning when I get in, they’re going to get an email response. That was something that improved their experience. They didn’t have that before. It was all old-school phone calls.

Would you recommend to anybody in that situation to make that initial phone call with the owner, with the outgoing seller on the line? Do you think that was necessary?

BEP 2 | Company Transition

Company Transition: The biggest thing that a new owner can do is paint as positive a light on the previous manager.

 

The outgoing seller wasn’t on the line.

You didn’t utilize that, but to others out there, do you think that would be valuable for them in that situation?

It could be. I want to make my own phone call. I would like the seller to call them first. Number one, you get many phone calls now that you’re not sure about. It’s nice to be expecting a phone call from a specific person. That part of it is good. As far as calling them with the seller on the line as well, I would go that far. I could see how maybe someone else would.

How did it go then with the existing employees that you are now inheriting? Did that go pretty smoothly? Was there any resistance there?

The first portfolio I bought was a husband and wife situation. They were both retiring at the same time. I quickly figured out after taking over their portfolio, they had kept their favorite clients and their favorite properties. I bought a very high-quality client list because it was very obvious to me very quickly why they kept these folks around so long. They were very easy to deal with. They took care of their properties. The other person was retiring and was a one-man show, so no employees to deal with.

How about on the tenant side? Did you get any resistance or did the tenants seem to bristle in any way?

[bctt tweet=”There are not too many things more rewarding than owning your own business.” via=”no”]

I felt that it was important to reach out to the tenants. We first sent them a letter letting them know of a change. I also called them. I let them know especially that they would be receiving a lot more service and the way of options to pay rent, to submit work order requests. The tenant’s response was very positive. I felt like they were a little relieved that they would have someone that was a little more dynamic as their manager.

Dynamic is a good word like active. There are a lot of good terms you could put to that. You get through this process and come out at the other end. You had told me in a previous call that you learned a couple of things, some tips and tricks in terms of some of the language and some of the positioning to speak to an owner, and some things to say and not say when you first approach your client owners. Did you find some things that were not the right things to say to them initially?

The biggest thing is that you always want to paint as positive a light on the previous manager. It’s one of these things where you want to tell them that you’re going to enhance their experience while at the same time, not saying you’re better than the previous manager. That’s the only thing I would say is that you want to make sure they know, “I’m going to be here. I’m going to handle everything the way the previous manager did.” You have to also consider when you’re saying that, what if there were things about the previous manager that they liked or didn’t like? Those were questions I straight asked like, “Were there things that they did that you would prefer were done differently? Are there things that you would like to stay the same?” I let an owner lead the conversation with questions to where I could know what they had expected from the previous manager, but what maybe they would like to have in a new manager.

You don’t necessarily force the conversation. Let them drive it, sit back, listen and learn. That’s a good way to go.

It’s like what I tell my kids, “If you can keep your mouth closed and your ears open, it’s amazing what you can find out.”

Your deals did not have any earnouts or clawbacks or any deferred payments based on performance of any kind?

No, I could see why they would on a larger transaction, but because these were so small and such handshake deals, there was not any of those provisions in those. Plus, the way that the sellers had spoken to the owners and the warm phone call into it, everyone was going into it knowing who was staying and who was going. There were a couple of people who bailed right away before I even made the phone call when they were saying they were selling, they went and found somebody else. It was one of those things where it was so small, it didn’t need that.

BEP 2 | Company Transition

Company Transition: People assign too much risk to the idea of buying a business, and so they purchase real estate that barely has any cash flow.

 

At ManageVisors, we get a lot of existing property management owners who have built their own company. They come to us and say, “I would love to buy another one or another couple of more companies.” They get somewhat frustrated in the process of either not knowing how to approach someone on the outside or a total stranger who they don’t know, or how to even find those persons who might be wanting to sell a business. Did you come out with any particular experience or thoughts about how to approach somebody out of the blue in striking up a conversation about the possibility of selling their business? I know you’d love to find another one to purchase.

I did come out of it with a lot of thought about how I would approach someone about selling their company. I have sent out some unsolicited letters. I start them very non-confrontational.

It’s open-ended and very friendly.

It’s more of an introduction of, “I’m a guy who him and his wife and they’re few employees run this company. We’ve built a company the right way based on customer service and all that good stuff.” I let them know, “If you’re ever considering exiting the business or retiring, I don’t know what your situation is, but keep me in mind if you decide to sell.” That’s not quite as eloquent as I put it in the letter but it’s the gist of it.

Talk about some of the good stuff. The fact that in both of these cases in your portfolio, you were profitable quickly. That is one of the advantages and one of the points of being an aphrodisiac for these recurring revenue businesses. They do perform generally well, don’t they?

They’re incredible investments. Within a year of purchasing both of them, I also do real estate sales. I had one real estate sale for me, which paid back a whole chunk of what I bought them for. Moving forward, because I did so well for them managing their properties, I got referrals from these people. Most of them are still with me. I believe one of the purchases was eight years ago and other one was six. Most of these clients are still with me. The only ones I believe that have left have been the ones who use me to sell the property. I’ve never done the numbers. I guess I should because they’re meant.

[bctt tweet=”Once you get entrepreneurship in your blood, you’d never go back to being an employee.” via=”no”]

One of the articles I wrote was headlined, Why buy a four-cap building when you can buy a 40-cap business? In many ways, that is almost the case. They assign too much risk to the idea of buying a business. They go buy real estate that barely has any cashflow. Here in California with prices and what they are, it’s almost impossible to buy great cashflow right off the bat.

What you’re saying is what I say all the time. I know my business is selling people homes, but would you rather buy a $400,000 home that has a revenue of $2,000 a month, or $400,000 business that may have a revenue of $15,000, $20,000 a month?

Matt, this has been great. I appreciate it. One of the things that we try to get across to people is that the risk is out there. There is a risk that you have to weigh, but don’t let that sway you. Go after the deals. They’re out there. A lot of people sit back and they worry. They fret and they don’t want to take a chance. I know you took a chance and it paid off nicely.

There is a lot of risk in owning and running your own business, but like being a parent, there are not too many things more rewarding than owning your own business. It’s not for everyone. Once you get it in your blood, you’d never go back to being an employee. I can tell you that.

Thank you so much. We’ve been speaking with Matt Walker of Walker & Associates Property Management. Matt and his wife, Marlena, have a great business. I appreciate you spending some time with us. Thank you, Matt.

You’re welcome, Brian. Thank you for having me.

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About Matt Walker

BEP 2 | Company TransitionMatt Walker is co-founder and president of Walker & Associates in Santa Maria, CA.

With more than two decades of experience in property management and real estate, Matt and his wife Marlena build a customized Individual Management Plan (IMP) based on the unique needs of their property owner/clients.