by Trent Pevy - Pevy Lawyers
12th March, 2021
Where do I start?
It is hard to believe it has been twelve months since much of what we took for granted was turned upside down.
But even harder to believe might be how transacting a management rights business and the fundamentals behind it have not. Waking to daily case numbers and riding the rollercoaster of border restrictions may have changed sentiment and types of management rights on the market right now, but the guidelines to being prepared to buy, and then buying a management rights business remains remarkably similar to pre-pandemic times.
Some commentators will put this down to the resiliency of the industry, the entrepreneurial nature of those within it or even the types of management rights transacting through the pandemic (and those that are not). But it is also a reflection of a decade’s old tried-and-tested purchase process and a small(ish) group of experienced professionals providing brokering, accounting, legal, finance, training and handover services to the sector. Most of us specialising in the management rights sector have now done so for many years, through good times and those more challenging. There is a respect for each professional’s opinion, even if we do not always agree.
Summarised very briefly... The purchase process sees a buyer go to contract with a ‘get out’ right typically lasting five to six weeks. This ‘get out’ can be triggered if, for any reason they are not satisfied with any aspect of the business, or their ability to secure satisfactory terms of finance. Only after that has occurred, is a buyer compelled to settle (subject to the body corporate consenting to the sale). The presence of this ‘get out’ period ensures that the seller and its broker want the buyer to get the best possible advice. This ensures the business is tested and financed on its merits by those capable of identifying them, rather than cowboy professionals that proliferate many other industries where no due diligence or short cutting is all too frequent.
The by-product of this process is the basics of what makes a good or bad management rights business are constantly being scrutinised, at every step of the way. The outcome? Very few ‘bad’ or misrepresented businesses make it to market, let alone make it through a purchase process to settlement. And needless to say, this is a good thing, as every buyer (be they a first timer or not) can have absolute confidence in the process.
So, we have established that following the process will allow a buyer to better understand if a management rights business is appropriate for them and will give them the best chance to achieve their objectives. But it will also save you money! Not just from the obvious one of helping you avoid a potentially bad investment if a business is not right for you. It will also supply you with a treasure trove of information about opportunities within the business once you have purchased, and how you can make it more appealing when you go to sell.
Like many of our colleagues, we place a high emphasis on proactively sharing all our knowledge of what works and what does not. Following the process also ensures that if you do not proceed, you have committed only those funds necessary to get to the step which has caused you to reconsider going ahead. With that in mind, the best buyer tip, as my fellow scribes have echoed, is follow the process! Engage, and then take the advice of, those specialised industry professionals tasked with guiding you through it.
So, without detracting from this top tip, or from any of the other tips provided by Alex and Mike elsewhere in this guide, what else can you do to ensure you are best prepared before and during the purchase process?
- Familiarise and involve yourself in the industry. The industry body, ARAMA, is a great place to start to understand day to day matters that impact managers. It is also a great avenue to meeting others in the industry.
- Attend training opportunities to help keep you abreast of best practice. The purchase process may not have changed all that much, but the way in which management rights operators interact and communicate with lot owners and others in the strata environment has. Do not get me wrong the down to earth operator will always have their place. But pairing it with a professionalism and confident, sound judgment based on an informed awareness of what could go wrong is absolutely crucial in a strata ecosystem which is much more demanding than 20 years ago.
- When going to contract on your dream management rights business, do not mentally buy it on day one. Yes, I appreciate this is easier said than done. But understand that you have made an offer based on assumptions, which, whilst often correct, are not always. That risk free period of five to six weeks is there to get you comfortable with your capacity to buy, verify the numbers, test the representations the agent or seller have made about the business (yes, including those numbers!) allow for a rigorous legal due diligence process to occur, and to obtain a satisfactory finance solution to enable the purchase to proceed. If you ‘mentally purchase’ before this has occurred it can compromise your bargaining position when things are not as represented, or worse still could cause you to make a bad decision against professional advice.
- Understand that the management rights sector operates within a dynamic property market. This will see different trends emerge from time to time as to what qualifies as value and what attributes are non-negotiable or a luxury. For example, the pandemic has changed how people invest, where people want to live, and what they are prepared to pay for certain services (in some cases more, and in some cases less). This has seen a shift in property use and in turn the makeup of some letting pools. Identifying and trying to stay in front of these trends can deliver strong opportunities and rewards.
Embarking on the purchase journey need not be a stressful one. Surrounding yourself with industry experts and following ‘the process’ will ensure one less uncontrollable in these strange times we are thankfully appearing to emerge from.