BEP 1 | Selling Your Business

 

It’s one of the biggest worries business owners have when they attempt to sell their company – what if a buyer wants to steal my sensitive information and use it against me? It’s happened. Today’s guest, Myron Von Raesfeld, executed his privacy strategy perfectly during due diligence with his buyer. He also managed to sell his company for three times annual revenues, which is quite an accomplishment. Myron joins Brian Loring to share some great tips for getting a deal across the finish line without endangering your confidential information.

Listen to the podcast here:

How To Protect Your Client List When Selling Your Business With Myron Von Raesfeld

This PM Owner Made Sure His Info Stayed Private – Til the Deal Was Done

Welcome to the debut episode of the show, where we talk about deals done for folks looking to buy or sell property management companies, as well as landscape maintenance, cleaning companies, property-related businesses in general, excellent recurring revenue companies. We’re truly unique in the US, the only sales business firm dedicated exclusively to selling these types of companies. That’s why we call ourselves The Property Management Business Marketplace. We bring together buyers and sellers who realize that these recurring revenue businesses can be great to own and often very challenging to run and even more difficult to purchase.

We have a terrific episode for you. We have a guest who has some insights into how to structure a deal when it’s time to sell your property management company. Myron Von Raesfeld owned Realsource Property Management in Santa Clara, California for many years. He started RealSource back in 1998. He managed a few properties for himself and his friends. As time passed, the business started to grow. The company managed single-family properties in the South Bay portion of the Bay Area if you’re familiar. It went from Morgan Hill in the south up through the San Jose area into Los Altos and Palo Alto, stopping short of the San Mateo-Santa Clara County line.

Over the years, he brought in his wife, Pam, who handled accounting and management tasks. He also brought in his oldest son, Jason, who works in the maintenance side of the business while also handling advertising, marketing and leasing tasks. The business got to about 110 doors under management when Myron decided to sell. That was in early 2020. One of his strongest selling points was that a vast majority of the units they were managing at that time were concentrated around Santa Clara University. That’s where demand is high, vacancy is low, and the students and the parents who need housing in that area can usually afford full market rents.

Myron wound up getting a terrific deal, close the transaction at nearly three times his annual gross revenue and more than five times earnings, which is pretty stout. Being centered around Santa Clara University was a huge draw for buyers who were mostly nearby competitors who saw a strategic advantage in buying the company. He had interested buyers wanting his business but he also needed to make sure that the deal was structured properly.

Like all management company owners, he was especially concerned about disclosing his relationships. It’s a very important key point when it’s selling a company. He wanted to make sure that the competitors around him wouldn’t take advantage of them by getting hold of his enormously valuable information and possibly using it against him. That’s one of several interesting aspects of his deal that we discussed in this episode. It’s a helpful episode for owners who are curious about how to structure a deal when it’s time. I hope you enjoy my talk with Myron.

Myron, thanks for joining us. I appreciate you being here.

Thank you. Thanks for asking me.

First off, congratulations on getting your company sold. How long has it been since the closing and how long did it take?

We closed on November 1st, 2020.

[bctt tweet=”When you’re selling a company, try to find the guys that have the most to gain by working a deal with you.” via=”no”]

How long did it take to go from beginning to end and the deal time?

It was about 5.5 to 6 months from start to finish.

Anytime you can do it in less than six months, in our world, that’s considered a fast deal.

I could have done it sooner, except I was trying to find and make sure I was getting the guy who was paying the most or wanted to pay me the most values. In a little about two months if I had not done anything else, but it worked out fine.

You’re about weeks into the transition. How has that gone so far? Is the first month been okay?

It’s been good. You have that overlap of tenants still paying rent to the old company while we sent it to the new. You’ll deal with that for about 1 to 3 months. We deal with a lot of younger kids that aren’t necessarily on top of things because they pay. Getting them to change their auto payments and stuff, that’s a little bit of work on that, but it’s all coming together. Our agreement is whatever comes in, we forward it directly over to the new management company. It’s working fine.

I want to take a step back and go back in time to the months previous when you had begun this process, and you were starting to entertain offers. You told us at one point that you had five offers that you were considering. Three of those were in the form of actual LOIs that had been presented to you, and then two of them were verbal expressions of interest. People were hovering. What was the purchase price at that point, the biggest consideration at that time? Did you feel like the other deal points were more important? How did you weigh those?

We have a personal relationship with all of our clients. Finding the right person who could take good care of our clients with their special needs and dealing with student rentals. It is a little bit different than dealing with non-student rentals. Having somebody that had the infrastructure in place to deal with all of those issues, dealing with students was very important to us so that our clients wouldn’t be thrust upon somebody else who now has a year of a learning curve trying to figure out how to deal with all these massive amounts of students, all the issues, and problems that students bring to a management portfolio.

One of the aspects of the deal that I wanted to get into detail was how you structured the deal and specifically a couple of the deal points you made sure that were in your transaction. One of which was how the dissemination of information and the release of information was going to be structured in the deal specifically about how you would release the client information, the client contact information, and the list of properties that you had under management. This is always a bugaboo and a very sensitive point with a lot of the property managers that I talked to in the early process when they’re concerned and anxious about the potential for competitors or for people who don’t have the best of intentions to possibly get their information and use it against them. In your deal, you had structured it in a not creative way, it’s a way that a lot of owners do structure it, but it worked out to your benefit. I was going to have you explain that a little bit.

I truly believe that the real value to a management company is your goodwill and your clients. Without those, you’re just another real estate broker out there trying to do something to make a little money here or there. Especially to me, it was critical because two of the potential buyers that I was dealing with work direct competitors to us. The last thing I wanted to do would be to give my competitors a freebie look and contact information for all of my clients, in which they would then go and say, “We’ll do this and we’ll do it for this much less or whatever.” In which case, it would do two things. It would hurt my company drastically and would hurt the value. In the negotiation process, we did all the P&Ls and the general stuff.

BEP 1 | Selling Your Business

Selling Your Business: Have a personal relationship with all of our clients. Take good care of them and their special needs.

 

I was confident because everything we gave them was 100% accurate about what my company was doing and how we’ve been performing. I had no concerns that they’re ever going to come back and say, “We didn’t know that this was an expense or whatever.” I was never worried that a buyer was going to back out on me because my information wasn’t accurate. However, I was a little concerned that a buyer could back out for some other reason. After they have my list of clients, they could certainly run their own direction with that, then I’d have a huge problem with the units people calling. Let’s face it, I’ve been in real estate for many years, and most realtors are good realtors. They’re good brokers, honest and good, but there are some people out there that make you shake your head sometimes. Not that I felt I was dealing with anybody, but you never know.

It was important to put a provision in there where they wanted a non-compete with me so that when they buy my company, I’m not going to compete with them for the next five years. That’s fair and reasonable because I’m giving them my company. The last thing they want to see happen is me go back out, get back into business, and take all my clients back after I get a bunch of money. I said, “That’s fine. I’ll agree to that, but you have to agree that if we get past your due diligence, when you look at the generalness of my company,” and you say, “We want this, we’re going to move forward with this.” It gets to me disclosing who my clients are, then the money has to be non-refundable and hard. In other words, it’s released to me, which it was.

When we got to that point, they literally wrote the check and gave me the check. It was substantial and it needed to be substantial because the last thing I want to get involved in is a bunch of lawsuits, suing people and all that kind of stuff. It’s like, “If you’re going to take something from me, then at least I got a significant amount of money, and we can deal with lawsuits or whatever later, but hopefully we never have to go anywhere like that.” I felt one of the best ways to do that was to make it substantial. In my case, they paid a $250,000 non-refundable release of the deposit of their earnest money. It was released to me upon me, giving them our client lists.

You said it was a check that was literally handed to you. They didn’t even submit it to escrow. There was no escrow involved with that.

In my case, I did it without an escrow. It was fairly simple. I’m not a huge company. We didn’t sell any of our equipment. Nothing was sold other than he bought my clients and my goodwill. He also bought us being around for the next six months to help him in the transition of things, which anybody who sells is going to want to do that. You want to make the transition as smooth as possible for all of your clients, so they stay with the guy that’s buying your business so they don’t come back to you later and say, “I don’t have these clients and you didn’t give me this business. I want to reduce the price and take some money off of the deal.”

In terms of the mechanics there, he hands you a check, you deposit the check and you wait for the check to clear before any of the information is disseminated. Is that how it works?

We could have, but I didn’t. It turns out he uses the same bank I use. I took it from his account, and put it into my account. It was seamless. The guy is an honest guy that purchased my company. I wasn’t worried about him putting a stop payment on it. If he did, and if that were the case if something like that would have happened after I gave him, then there would have been a lawsuit, and I don’t think they would have won with the documentation that we had by any stretch of any means. It would have been detrimental to them and to us. The guy that we sold to is the right guy. He would not have done that. I gave him the list and he gave me the check. We went through the list and gave him a rundown of all the particulars about the clients, what they are and their history. They have a good data point for them when they’re working with our clients that are now transferring over to be his.

At that point, by the time he hands you that check, he’s already gone through due diligence, which I presume was several weeks to more than a month. I don’t know how long that period was.

In his case, it took him a little less than two weeks. We were very forthcoming with all of our data.

At that point, he had reviewed all of your financials and corporate tax returns. He had reviewed any receivables or payables and notes that you had. He had a broad brush keystroke for your financials. He didn’t have the specifics of your client, customers and property.

[bctt tweet=”Many real estate brokers are not necessarily the smartest guys on Wall Street, but they are good, hardworking people.” via=”no”]

He had all the end results, but he didn’t have the keys to the locks, so to speak. Not your clients, emails, contact information and all that stuff.

Was there any other information besides those specific clients and contacts that were held back as part of this or was that it?

We were forthcoming as far as I know. Anything that he asked about our company that he wanted, we gave him information or supporting documentation if he wanted that. Like our tax returns, he looked at that. I’m not just giving him a P&L that says, “We’re making all this money here. Isn’t it great?” We showed them the tax returns, “This is what we’re doing. How many tax returns do you want to go back on?” In this case, he only wants to look at two years. It wouldn’t have bothered me if he asked her four. It wouldn’t have mattered to me because it is what it is. I was confident in the value of our company and what it does for his company. Another side point I would say is that when you’re selling a company, try to find the guys that have the most to gain by working a deal with you. If you can find those people, you’re going to get the best value, I believe, rather than finding just anybody.

That’s one of the points that we tell all of our clients and that is you should always put all the buyer pool out there into two different buckets. One is the strategic buyers and one is the financial buyers. The strategic buyers are the ones to seek out because they inevitably will find more value and more reasons to move forward with the transaction. Most of the time, they’ll wind up paying more and be more equipped to get the deal done. It won’t be nickel and diming you as much during the course of the transaction.

That is great advice. I agree with that 100%. It is exactly what I see happening. I had both people. I had the strategic buyers and I had the financial buyers. There was a significant difference in the offerings between the financial guys and the strategic guys.

At that point, you’ve gone over all the contacts. Since he’s in the area and he knew some of your customers and some of your properties by the time you reveal that, was there still some nervousness on your part now that he knows all that stuff or by virtue of the fact that you’ve got all that money, you’re presuming that he’s going to get a deal done no matter what?

I looked at it from the perspective that if he’s willing to put up that much money, non-refundable, he’s not looking to hurt me. If he was, he wouldn’t put up the money. $250,000 is enough for me to hire an attorney to take anything and tie everything up for a whole long time. I’d be using his money while I’m doing it. I figure if they’re willing to do that, that’s like the golden ticket. You get the ride. Let’s go, we’re in this together at that point. I’m committed to him and he’s committed to me. I feel very comfortable. Even when we came to the agreement that when we get to the point where we’re going to release the confidential information and they’re willing to go non-refundable, I was comfortable working with them from that point on. I’m like, “Nobody is going to agree to do that if they’re looking to try to find a way to hose you.” I felt good, the transaction went very smooth, and it’s still running smooth to this point.

The $250,000 at that point is in the ballpark of 20% to 25% of the total transaction. That’s a hefty amount.

That’s how I felt. I go, “If they’re willing to do that, then they are good people to work with.” They didn’t balk at it. Between you and I, I figured they go, “We’ll give you $125,000 or something.” I told them what I wanted. They said, “That sounds good. We’ll do that.”

You mentioned that it was a five-year non-compete, which means that within a given geography, you’re not going to do any property management within a certain radius that would compete with them. You said that it also went the other way and it protected you from him not competing against you in the event that the deal went south. Is that right?

BEP 1 | Selling Your Business

Selling Your Business: The real value to a management company is your goodwill and your clients. Without those, you’re just another real estate broker trying to make a little money here or there.

 

Yes. It was bilateral non-compete. In other words, I wouldn’t compete with him and he won’t compete with me because once he gets the name of my clients, it becomes very easy for someone to send out notices or whatever emails, all kinds of things you can send to people and work around all the other ethics and things in some people’s minds. I would never do it, but people could. I don’t think this guy would have done that, but I didn’t know at that time. When you’re in the early stages of negotiation, I’m looking for ways to protect myself and my company and its value as well as protecting him because I know this. I never will have any intention of competing with him in any way whatsoever. I’m selling my company, I’m done. I’m out. Also in the event he didn’t do it, I didn’t want him to start coming in and whittling off any of our clients through any offerings or anything that would hurt my ability to sell it to somebody else for the greatest possible value.

That makes total sense. That was very astute of you and your attorney because that is the way you should do it. You mentioned the word whittling there. One of the things that I know that you had in your transaction was a clawback provision. Those who might not be familiar with that, that’s a provision that’s put into contracts and transactions that allows the buyer of the level of security in the event that clients and customer relationships don’t get maintained after the sale is complete. They’re able to take some of the money off the table, I presume held in escrow in your case. In your case, from what it sounds, the clawback provision hasn’t had to be invoked because everything’s going fine.

I structured my deal for tax reasons. I didn’t want my entire payment all in this year. There are tax reasons why, so I have a large payment coming in February 2021 so we get past the first of the year and then they’ll make the next big payment. They were fine with paying it all off. I said, “Why don’t we stretch it out? I’ll take another payment in 2022.” I structured mine so that I have two large payments coming in two more installments. In the meantime, they’re paying me 100% of what my gross revenue was on a monthly basis. That all applies to the purchase price.

You hit on a couple of topics there. One was that you’re deferring taxes in an installment sale transaction. That spreads out your tax liabilities and makes the tax hit a lot less because you’re not taking it all in one lump sum. That’s always a smart thing if you can do that if somebody can accommodate that. For argument’s sake and better understand the people who are reading about the clawback, let’s say that for whatever reason, the company did struggle with retaining clients, and the new buyer coming in and started losing clients left and right. What did the clawback provision exactly give him as a protection? How did it work?

I’ll use a dollar amount. If he lost $10,000 in revenue, then that would reduce the value that he’s paying me by $8,000. There’s still some value to it other than that. If $10,000 went away through clients leaving or whatnot, we would give him back or reduce what he would have to pay by that amount of money, whatever that calculation would end up working out to be fit upon.

In terms of the mechanics, it’s not as though anything was held back in escrow or put into some third-party fund of some kind. You simply were going to have to write him a check if that happened.

In this case, because I’m doing it on an installment with some payments, we would end up reducing what the final payment would be. We won’t reduce unless many people left that it would affect the next large payment or whatever. It won’t affect that and it won’t affect the monthly payments. It will affect the final payment if in the event somebody ends up leaving. In my case, the clients that I transfer, if they switch over to him now, which all of them are, but if they don’t switch, then that’s when the clawback provision takes effect. If they leave in a year from now, that’s not my problem, that’s his problem.

The clawback has a six-month window on it.

It’s the transition. If somebody does not transition over, then there’s a reduction, but if everybody transitions over and then January 30th, they all change and want to go somewhere else that’s not me as long as I’m not competing with him, then that’s the risk he takes in doing that. I don’t think any of my clients will be leaving. There’s always 1 or 2 that might say, “This isn’t a good time. We’re going to take care of our property ourselves.” It’s small things here or there. I don’t even know if he would even trigger it for 1 or 2 tiny things at all. He would even say, “It’s fine. We’re good. Let’s move forward.”

It is almost inevitable especially as we’re dealing with a pandemic. There are going to be life circumstances and changes that will prompt somebody to make a couple of decisions.

[bctt tweet=”If you manage and take care of your clients, that has great value to a lot of people.” via=”no”]

The other interesting part was in my case and with my company, from the time we use the specific date from our rent roll. We had a rent roll as of September 30th, 2020. We use that as the value. Since September 30th, we have added four more clients to our portfolio in that period of time. We have a buffer. I could lose 2 or 3 people and still be fine. It won’t affect me because I added some people to it. What I should have done is I should have put a closet in there and says, “That’s fine. We’re going to use September 30th. If we add anybody, the price of the company goes up by that amount.” I didn’t do that but maybe I should have done that in hindsight.

You mentioned that the transition is going well. Talk a little bit about your role as a seller, how you have done calls, done introductions, and made the transition on his behalf. Do you sit in on all those calls? Is it a bunch of Zoom video calls? What does that look like?

We’re doing Zoom because of COVID. We also have clients that are even out of the country, so Zoom is the only way to do that. What I did initially was I called all of my clients. I spoke to every one of them personally, without him, just me personally saying, “Here’s what’s going on in our lives. This is what we’re doing. We brought on a new guy.” I explained to them the whole situation. I said, “What I’d like to do is set up a time where we can do a Zoom or a conference call with the new guy.” Most of my clients were so great. They were like, “We wish you well and you’ve been the best ever. Have him call us, you don’t need to be involved. You take care of your things and go do your stuff. We’re here. If we ever need you, we’ll call you. Thanks a lot.”

We’ll do a few Zoom calls with some of the clients that we have done them already. Certainly, not all of my clients want to do Zoom calls. Many of them do a Zoom call with him at some point or whatever, but most of my clients have been with me for a long time. We’ve established a relationship for many years, it’s almost like family to some extent, and we’ve done a great job for them. When we told them this is the best thing that we can do, it’s going to be good for them and good for us, they were all on board with it. That was the best feeling and the best thing to have when you’re talking to your clients and telling them you’re not going to be there anymore, but they are so supportive of you. It’s a wonderful feeling.

That goes to your credibility, Myron. For somebody who’s been doing this for so long, when you tell them finally that you’re going to be going, but you’re not going to be going just yet, and you’re going to help coordinate a transition, that speaks a lot to your credibility. You should take some kudos for that.

I did tell them I’m still selling real estate. If they want to sell, they can always come back to me.

Good for you. You’re a capitalist.

We still got to eat.

The other thing you touched on, and I appreciate you doing this, we’re close to the end here, is the fact that you did have a lot of counsel from your accountant about how to defer payments, spread out the taxes and not make the tax hit. When I talked to many owners out there about the prospect of selling their business, a lot of them don’t realize how much of a burden it’s going to be. In your case, you started the business in ’98, so your basis would have been low. I’m sure you had your first initial discussions with your accountant, and you had a holy crap moment at some point I would imagine.

That’s why I chose the installment side of things to spread it out a little bit, so I don’t pay a big bunch all at one time. In hindsight, with the way the election worked, this is all pre-election, keep in mind. Now, the elections happened, and they’re talking about rolling back all these taxes. Maybe I should have taken the whole hit this year, but it’s the way it goes.

BEP 1 | Selling Your Business

Selling Your Business: Most realtors are honest and good brokers, but there are some people out there that make you shake your head sometimes.

 

You don’t know how it’s going to play out, but that could be that way. You had also mentioned to me that it’s your opinion that a lot of these property management companies in the marketplace that we’re in are highly undervalued. Owners sometimes don’t appreciate the value of their customer relationships and their client relationships that they developed all these years, and how that is an enormously valuable commodity that some of them don’t quite understand themselves, even though they’ve done it. I thought that was a very interesting point you made with me.

I would agree with that. Many of us are real estate brokers and we’re not necessarily the smartest guys on Wall Street, but we are good, hardworking people. It’s very easy to get wrapped up in your daily grind of doing all the stuff you do and then not grasp what value you’ve created. I sell properties to people and we sold the apartment buildings, duplexes and fourplexes, and the people are buying them. I sold one at a 1.7% cap rate and I’m like, “Who on earth?” I was happy that they bought it. It was fine and I was a listing agent and they’re going to pay over exorbitant prices.

As a listing agent, I’m cool with it but on the other side, I’m looking and shaking my head, “I can’t believe this is selling this for this.” I look at the management company the same way. It’s a revenue-producing asset that you have. If you manage and take care of your clients, that has great value to a lot of people. Unfortunately, there are a lot of people out there because they’ve been doing it for a long time or what. Maybe I’m wrong on the values but I don’t think so because I did well with mine. When people ask me why I’m asking so much, I explained it to them and they’re like, “We didn’t think of it that way.” I go, “I’m thinking of it that way because if I’m going to give my company away, then what’s the point in doing that? I’ll close up shop and let people go find it wherever they want. I don’t need to give somebody else a windfall where there’s nothing in it for me.”

I thought it had to be reasonable and fair. That falls back on what you had talked about earlier which is finding those people that are the strategic buyers for you. If you do your homework and you find those people, they’re the ones that will see the real value in your company and your clients much more so than somebody that’s looking, “We want to expand and want to do this or whatever.” I had those people too. I had nice conversations with them and I said, “Save yourself some time. Don’t waste your time. I don’t want to waste mine. I’m good.” If that was my company’s value what some of those people were talking about offering me, I wouldn’t sell it. If there’s nothing in it for the seller, what the heck is there? I don’t need to do that.

Until you get to larger deals where the companies are doing a maximum north of $10 million in revenue or something, you will get out of town buyers. For the most part, you can draw about a 20-mile ring around wherever you’re located for smaller companies. Your buyer is more than likely going to be in that ring somewhere. Even though it is appealing with the recurring revenues and the management structures that these have, the reality is they are local businesses. People want to build outgoing from wherever they’re at to build a larger, more profitable base by going outward. They’re going to be local. Myron, you’ve been helpful. I appreciate it. It’s been a great discussion. I wanted to double-check and I know that you retired your old Realsource website. Do you have a new website that we should go to or do you want me to plug that at all?

I’m a Keller Williams broker and I’m in the business. We take care of all my existing and past clients. I’m not necessarily looking to grow my business a lot more, although I do have a whole team as well on the East Coast. I’m licensed in both California and North Carolina. I found that there’s a real niche right now in people taking their money from California and going to other states, North Carolina is one of them. That Research Triangle area is an amazing place. If there’s any of your audience interested in knowing more about going from one place to another, I’d be a good resource to help them give them some good information on that.

That certainly is a trend we’ve seen for many years here in Southern California. People are taking their money and going to Texas, Florida, Arkansas, Missouri or something.

I’ll tell you my personal sense on Texas is that the waves already hit there, and the tide is already high. You’ve got to go where the tide hasn’t risen yet. That places are Nashville, Tennessee, Idaho and the Boise area. That’s starting to rise quickly right now, but the Raleigh Durham Chapel Hill area, I believe it’s an area that’s going to be like Silicon Valley years from now.

That’s good to know. Myron, I appreciate it. Thank you so much for doing this. You’ve been great.

Thank you. Have a great day.

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About Myron Von Raesfeld

BEP 1 | Selling Your BusinessWithin a year of graduating High School from Bellarmine College Prep, Myron was hired by the Oakland Fire Department where he quickly began to move up the ranks within the Fire Department. Shortly after being promoted to Engineer, Myron was forced to retire as a result of an on the job injury. It did not take Myron very long to find his stride in his next career, Real Estate Sales. Myron has continued to excel in the Real Estate industry and year over year and has been a top producing Broker in the Santa Clara County area. In 1992 Myron was recruited to the position of Sr. Vice President for Prudential California Realty to manage their Cupertino office.

Within 2 years under Myron’s management, the Cupertino office was recognized for becoming one of the top producing offices in the Prudential Realty Network nationwide in its size category. In 1996 Myron left Prudential to begin work on a new concept for the real estate industry. In 1998 with his Business partner Rick Smith they started RealSource. In 2002 they incorporated the name of ClickHome and began offering the Clickhome employee benefits program to medium and large-sized companies. Currently, ClickHome represents over 80 companies in the SanFrancisco Bay area and they are continuing to grow.

Specialties: ClickHome is a Real Estate Brokerage of in which Real Estate services are marketed to larger companies as an employee benefit. This company was founded in 1997 by Myron Von Raesfeld and Rick Smith.

They currently provide this Real Estate Benefit to over 80 companies located in the San Francisco Bay area. In addition, Myron owns and operates RealSource Property Management Inc. RealSource is a full-service property management company that specializes in student rentals surrounding the University of Santa Clara. In addition, RealSource Property Management manages residential and commercial properties from Morgan Hill to Fremont.