by John Mahoney - Mahoneys
29th January, 2019
Be prepared well in advance…
In previous articles on the sale of management rights businesses I have focussed on the importance of preparing for your sale well in advance.
Not a lot has changed. It is still the case that before you actually list the business for sale, there is so much that can and should be done to make the sale as smooth as possible. In recent times however, an even more important element of a sale has been the selection of the buyer.
As a consequence of some bodies corporate failing to properly investigate an incoming manager’s qualifications and experience, accepting anyone put up to them and then finding they have a poorly performing manager, bodies corporate today are quite rightly demanding that proposed new managers are properly qualified and experienced or if not, that they have undergone appropriate training.
There used to be a misconception that a body corporate could not refuse to consent to an assignment unless the proposed new manager was a criminal or a bankrupt. That is far from the case. A body corporate is entitled to be satisfied that a proposed new manager has the qualifications, experience and financial capacity to perform all of the duties under the management rights agreements.
You should therefore properly vet any proposed buyer to make sure that the buyer will be acceptable to the committee. If the buyer is a new entrant to management rights there are various training and educational opportunities available in the market place that you should insist the prospective buyer undertakes. The ARAMA induction course is, in my view, a must for such buyers.
If you do not, there is a very real possibility of experiencing problems with the assignment process, huge legal fees from the body corporate’s lawyer and the real likelihood of the assignment being rejected.
First, check your letting appointments. POA forms 6 are automatically assignable but not all PAMD forms 20a. Ideally, you would have had all forms 20a replaced with new forms 6 but if not and you are relying on these, then (depending on the version used) to be assignable, they will need to have the assignment section ticked and initialled or you will have to obtain the consent of all owners to an assignment to the buyer.
Almost without exception, buyers are insisting that at settlement the purchase price be reduced for non-compliant appointments. We have seen purchase prices heavily discounted and some contracts terminated because the sellers did not want to, or were not able to, produce compliant appointments.
Management rights agreements
Next, check your body corporate agreements.
Locate copies of all of the relevant agreements with the body corporate – copies of the caretaking and letting agreements, deeds of assignment, deeds of variation and the like. If my firm has acted for you, you would have all of these documents in the indexed binder or on a USB stick we provide to our clients after settlement of their purchase.
Get the real estate agent you have selected to scan electronically, and/or take photocopies of these to give to prospective buyers. You should also give your solicitor copies of these documents for two reasons. First, your solicitor can check that everything is in order - for example, that options have been properly exercised. Secondly, if the buyer’s solicitor or financier raises questions about the agreements during the course of the transaction, your solicitor will be able to deal with the matter quickly and efficiently.
Term of agreements
The term remaining on your agreements is critical. Unless you have long-term agreements with your body corporate, you should be thinking about how the term of your agreements will impact on a future sale as early as the time you buy.
You must also consider that most (if not all) buyers looking at a complex in the standard module will, these days, want close to the full 10 years to run on agreements when they purchase. With complexes in the accommodation module, most buyers will be looking for at least 15 years but some buyers and their financiers want even longer, depending of course on the amount being borrowed.
The transfer fee rules will not penalise you just because you sell within two years of getting a new agreement or adding a new option. It is only if you sell within one or two years of becoming manager that the transfer fee applies - three percent of the business sale price in year one, or two percent in year two.
Adding a new option to an existing agreement is technically prescriptive. Apart from getting a new agreement, this is the only way that the term can safely be extended. Because of these technical requirements, many lawyers and body corporate managers have failed in their attempts to extend the term.
Because of our involvement in the legislative changes (in fact, we designed the prescribed statutory form that must accompany the motion to add the new option), we have been called upon on a number of occasions to remedy ineffective additional options.
Termination clause in agreements
Much has been written about the Gallery Vie QCAT decision and the changes that financiers want made to the termination provisions in management rights agreements to deal with the problem created by that decision.
If you have not already done so, you should have your lawyer check your agreements to make sure they are Gallery Vie compliant. If they are not, you really should take steps to amend the agreements to deal with the issue.
The changes can be done in a simple and straight forward way but do require an AGM or an EGM as it is increasingly rare that a financier or a body corporate committee will accept this being done as part of the assignment. Most managers are dealing with the matter at the same time as they are topping up their agreements.
You will need up-to-date financial figures. Take the time and spend the money to get up-to-date figures for sale purposes from an accountant with management rights expertise. So many sellers rely upon outdated financial figures or on figures that are not really prepared for sale purposes.
I have seen a number of sellers grossly underestimate their net profit and find that the buyer’s accountant has verified a net profit well in excess of that shown in the contract. With multipliers of around five and above, a difference of only $5,000 will cost you more than $25,000 – enough to cover a fair component of the agent’s commission.
Make sure you get the most up-to-date figures you can. The buyer’s bank will want figures no older than a month or two.
Make sure your body corporate salary has been updated to take into account the latest CPI increases or any market review that might be permitted under your agreement.
Get expert help
Above all, use the experts.
You might think that you don’t need a specialist accountant to put together your net profit figures. As any honest accountant will tell you, it is a very specialised area. As a general rule, figures prepared according to normal accounting standards will show a net profit lower than the way in which it is calculated for sale contract purposes. Only a specialist accountant will be able to produce accurate figures.
You might also be tempted to use a local or suburban lawyer because they offer a cheaper rate. Although, as a general rule, there are fewer legal issues when you are selling than when you are buying, I have seen so many sellers get themselves into trouble because they have tried to save money by using a lawyer who does not specialise in this area.
You need someone who understands management rights to be able to deal with any issues raised by the buyer or the buyer’s solicitors – so often, we are able to salvage a sale transaction because of our expertise and ability to convince other solicitors of our view of the legal position.
Perceived savings on commission might encourage you to market your business yourself rather than use an agent and sometimes you might succeed. But there are downsides. A good agent will help guide a buyer through the purchase process and often keep together a sale that might otherwise fall apart. I have seen that happen on more than one occasion.
A good agent should also pre-qualify a buyer to ensure that your time is not wasted by unqualified buyers or buyers who will not get finance approval.
On the other hand, if you are able to find a buyer yourself, then an experienced lawyer will be able to handle contract preparation and negotiation.