Welcome to ManageVisors
Are you New to MV or a current User?
All industries have their own jargon. Their unique set of terms and expressions. In some cases, they tell a story beautifully. In others, they doom the situation.
The process of selling a property management company carries a unique set of pleasures and pitfalls. Investors are attracted to the recurring revenues. The scalability. The profitability. The low barrier to entry. The recession-proof nature of the industry.
Over the years, I’ve come to loathe a word which many PM sellers love to toss about. They presume it will entice potential acquirers to dive deeper into the story of their business.
Unfortunately, it does the opposite. It usually sends them running to the next deal.
So what’s the dastardly word to avoid at all costs?
In business sales, it’s a death sentence. But most sellers don’t realize it.
The term gets thrown around a lot in commercial real estate circles. Investment opportunities almost always boast of their upside potential. Most commercial investment properties are marketed utilizing a Pro Forma, a sometimes-preposterous assumption of a property’s future profitability. Residential property marketers also like to discuss their subject’s future potential as well.
But in business sales, it’s a different ballgame. A company claiming to have great potential usually gets nowhere on the open market. Why?
Several reasons. Most buyers see it as a red-flag, a back-handed admission of some serious problem. Successful, profitable businesses never talk about their potential. They talk about their successes. Their growth. Their effectiveness.
Troubled or disappointed owners talk about potential. For whatever reason, they haven’t achieved their goals.
Potential is a term that annoys business buyers because it’s often untrue. Or unprovable. Or the chief architect of unreasonable expectations. Sometimes there really isn’t much potential there.
Businesses don’t trade on potential. A buyer may indeed see some unrealized potential down the road through improving efficiencies, better marketing or hiring sales people. But buyers aren’t in the business of rewarding sellers for work they haven’t done.
Business broker Ted Burbank wrote a terrific book nearly a dozen years, “How to Become the Best Business Broker in Town,” that made a lasting impression on me. One excellent point he makes is the distinction between potential and opportunity. The two words sound quite similar but he astutely points out the tremendous differences for business buyers and sellers.
“Owners are unaware of the damage inflicted on their business’s value by emphasizing its potential. It’s a natural and innocent mistake virtually everyone makes.” He compares it to a schoolboy whose teachers and parents constantly talk about Johnny’s potential – and how he’s not achieving it.”
Property management buyers are super smart folks. They make purchases based on verifiable information and historical data. They resist paying sellers for potential profits. After all, why should their hard work down the road go into the seller’s pocket today?
But here’s what they will pay for – opportunity. Burbank writes “It’s perceived differently. Opportunity has already been created by the seller. It’s there. You created the opportunity and are willing to let the newcomer reap the advantages of your hard work. Any reasonable person must be compelled to compensate you for the opportunity you have created. It’s only right.”
Prices based upon opportunity are always superior to those based on potential. The two ideas may sound the same but how it’s communicated and substantiated is very different.
The buyer who sees the most opportunity pays the highest price. That’s where it becomes so important to hire an experienced intermediary who will properly position your company for maximum value. Without a proper guiding hand, it can be trouble. Look at how many businesses sit on the market for months and years without any activity. There are a lot of discouraged sellers with stories to tell.
So stay off the Potential Train. It’s a rough ride to nowhere.
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.