Tips For Selling Management Rights by Multimedia AU/NZ

TIPS FOR SELLING MANAGEMENT RIGHTS

Think about selling when you buy When selling any business, the key outcomes of a successful sale typically include achieving a quick and pain-free sale at the highest possible sale price. Sounds easy in theory, however can be quite challenging in practice. As with most things though, by careful planning and getting the small things right and trusting in the industry professionals to guide you through the process, you will certainly improve your chances of maximising your sale outcome. Ideally your planning for a sale should start the day you settle on purchasing your management rights. What were the things that created concerns with your purchase? Are they still an issue after you have settled? One common example is the letting agreements, issues that might have been raised with the agreements during your due diligence are still going to be there when you sell unless you take action to get them resolved. All too often the agreements end up in the bottom draw of the filing cabinet and don’t see the light of day again until your buyer is undertaking their due diligence. At that time it may be too late to rectify the issues or at best will lead to potential long delays in your sale.

Tony Rossiter, Holmans streams of the business, improving relationships with unit owners and maximising revenue outcomes. If your management rights has not already bundled charges, talk to your industry accountant and ideally have the new system in place at least 12 months prior to going to market to sell.

Preparing a sale of business statement that will stand up to scrutiny Against the best advice from industry professionals, management rights owners continue to prepare their own

Bundling for a better outcome Another strategic decision you could make early on in your management rights journey that could pay dividends when you go to sell is the bundling of fees and charges to unit owners. Increasing in popularity over the last few years, bundling has led to successful outcomes for many management rights sales by simplifying the revenue © Copyright 2020 Resort Publishing • Phone 07 5440 5322

sale of business statement when they go to sell. Although this do-it-yourself approach is quite admirable and it may lead to savings in professional fees, it is also likely to increase the possibility of a sale contract falling over or a dramatically reduced sale price due to some common errors. The opportunity cost of not maximising your sale price may be many times that of the savings in professional fees. Preparing your figures yourself or engaging an inexperienced accountant to advise on your sale purely because they are charging less can lead to the same unhappy result. Generally, the old adage “you get what you pay for” couldn’t be more true. Although not rocket science, the preparation of a sale of business statement is not entirely intuitive. Getting a single figure wrong will cast a shadow of doubt in the mind of an experienced accountant preparing the financial verification for a buyer. We see simple errors such as including 13 months-worth of one income item or making inappropriate

assumptions regarding adjusted figures. These can easily lead to a terminated contract or a drastic reduction in sale price.

Minimising your tax liability Typically a management rights owner will sell for one of two reasons, either to retire or to upsize their complex. Either way the more cash remaining after the sale process is complete, the better. Write a cheque to the tax office as a result of a capital gain on the sale of your business and you won’t see it again. Legally minimise that tax payment and you have suddenly increased that retirement nest-egg or the size of your next complex. The greatest opportunity for minimising tax is by accessing the small business Capital Gains Tax (CGT) concessions. In practice the owner of a management rights complex can make a capital gain of $500,000 or more on the sale of goodwill and pay no tax. Although these concessions have been available for a number of years now it is amazing how few people plan to ensure they are in a position to access them. In reality the planning for minimising tax should start before you even purchase your management rights business. Ensuring you have the most appropriate business structure from the outset will maximise your opportunity to access the small business concessions when you sell. Even if the business structure is not the most appropriate from the outset you may still be able to minimise any CGT exposure by appropriate planning in the year of sale. The Small Business CGT concessions include a 15-year retirement concession, an active asset concession and several rollover concessions. RESORT NEWS - JANUARY 2020

TIPS FOR SELLING MANAGEMENT RIGHTS

Selling? Be prepared well in advance… In reviewing the last article I wrote for ResortNews on the sale of management rights businesses, a point I highlighted back then about the quality of a prospective buyer is perhaps even more important today. 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 the last couple of years though, an even more important element of a sale has been the selection of the buyer.

Qualified 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

In addition, applying the general 50 percent discount may reduce CGT. One of the common examples of mistakes in planning for the Small Business CGT concessions include operating your management rights business through a company rather than a family trust. In a company structure you will not be able to access the 50 percent discount and the application of the active asset concession will be ineffective in minimising tax. In addition, where your management rights business is operated through a discretionary trust the Small Business CGT concessions may

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. In addition, new entrants should, for their own benefit, source and undergo training in regulatory compliance. John Mahoney, Mahoneys appropriate training, both theoretical and practical. 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

not be available if appropriate distributions from the trust are not made in the year the Capital Gain is realised. Finally, if applying one of the rollover concessions and payments aren’t made within the correct timeframe or the correct approved forms are not completed, the tax office may not allow the concession. Recently we had occasion to advise a new client who was fortunate enough to be making a capital gain on the sale of their business in excess of $1 million. The business owners had received advice from their

If 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.

Letting appointments 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,

long-time accountant that the gain would attract a CGT liability in excess of $250,000. After some careful consideration of the relevant legislation and applying the Small Business CGT Concessions we were able to determine that the CGT liability could legally be reduced to below $50,000. Suffice is to say the client was ecstatic with the lower tax liability meaning the individual could retire comfortably today rather than face the prospect of working for several more years after paying the higher amount of tax. The moral of the story is choose

buyers are insisting that at settlement the purchase price be reduced for noncompliant 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.

your advisors carefully, saving a few dollars today in professional fees may be lost many times over in the future when you come to prepare your business for sale and ultimately calculate the CGT liability on your gain. The information, opinions or conclusions provided above are generic in nature and do not express individual advice or recommendations. You should always consult a suitably qualiﬁed professional before taking any course of action outlined above. Holmans welcome any queries you may have in relation to the above matters.

RESORT NEWS - JANUARY 2020

TIPS FOR SELLING MANAGEMENT RIGHTS 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 many 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.

Financial figures 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.

Servicing Resident Managers throughout Australia

info@mahoneys.com.au

RESORT NEWS - JANUARY 2020

TIPS FOR SELLING MANAGEMENT RIGHTS

How do you maximise your asset for sale? Irrespective of whether you’re considering a sale, it is in your best interest to be well organised at all times with your management rights, so that you can either borrow money or sell when you want, and potentially save yourself some money through the process. It makes sense that the more organised you are, the better your business will value and it’s likely that you will attract the right kind of potential buyer, as well as costing less to sell. All vendors at some time in their career decide to sell their management rights. So, when is the right time? Are there buyers looking? Are the financiers active? What is the market going to do? We are regularly asked these questions, and plenty more. Regardless of whether it’s a buoyant market or a depressed economy, there is always some form of prospective purchaser looking for what they imagine is their perfect match. Some are wanting / needing a job, and others are after the purported lifestyle.

Michael Philpott MR Sales Vendors need to be aware that if they are even considering a sale, then they need to be appropriately prepared. One can’t approach a transaction like this in a halfhearted manner as it is unlikely there will be a second chance; MR Sales expect the coming year to be a tough calendar year as far as management rights sales are concerned. To ensure you get the desired result, it is recommended that you seek professional assistance – the perfect outcome is usually achieved when you have all aspects reviewed and prepared by industry specialists – accountants and lawyers alike – and then ensure that you’re dealing with a competent and professional industry broker.

AUSTRALIA’S LEADING MANAGEMENT RIGHTS BROKER Specialising in Management Rights Sales Australia wide Thinking of Buying or Selling? Phone: 1300 928 556 Email: sales@mrsales.com.au © Copyright 2020 Resort Publishing • Phone 07 5440 5322

In our experience, contracts are most often terminated because of a failure to meet contract conditions and these usually occur as follows: •

the verified net profit is incorrect,

•

the due diligence of agreements has legal issues,

•

the manager’s real estate fails to value up and the financier’s valuation falls short of the contract price.

Unfortunately, in some cases, the broker handling the sale has not been proactive - failing to give the vendor the service being paid for. Selling management rights can be an expensive and stressful time / process for all parties, but if managed correctly, the drama can be avoided. A word to the wise: Do not let the management rights sale be handled by a broker trying to buy your listing. The listing becomes just that - a listing and not a sale. None of these contract breakers will occur if you prepare for the sale with the same positive professional attitude that you adopted when you purchased. Purchasers and banks who lend the money needed, prefer to deal with well organised professionals with established and simple systems. Check your caretaking and letting agreements and deeds of variation to ensure they have as many years as possible to run. The banks and buyers prefer to see at least 10 years on standard module and 20 years or more on accommodation module agreements. The longer the term, the more appealing the loan conditions offered by financiers.

unit owners to get them done at the last minute. The annexure of charges should also reﬂect the actual charges to unit owners that are being charged. As mentioned before, have a current profit and loss (P&L) statement prepared by an industryrecognised accountant, and if you have cleaners and a receptionist in your business have those expenses included on the P&L. It is easy for a verifying accountant to pick things up and identify when someone is increasing the bottom line by removing some expenses. In all things, be honest. Manager’s residences can be a contentious issue with buyers who don’t understand the commercial value of the manager’s residence and office, so it is in your best interest to have an independent valuation that eliminates a possible argument over the price of the real estate. Everyone knows someone that has access to RP Data and therefore the sale price of units in the building. Although this is not an exact reﬂection, it can create doubt in the buyer’s mind of the real estate value. With lending criteria as strict as it is currently, and with committees and their lawyers wanting more and more information from both sellers and buyers, it is paramount that everything lines up to make the sale process easy for buyers. If all of the above factors have been covered and you have the business priced appropriately for market expectations, a sale can, and will be achieved by working closely with an experienced broker.

Often managers neglect to top agreements up, and this can be viewed as a sign of personal issues with their committees. This usually comes home to roost at the worst possible time, resulting in not being able to meet contractual requirements. Had they been topped up along the way these issues may not have arisen. It is of vital importance to have committees get used to managers saying “I would like to put a motion to the AGM with committee support to top my agreements up.”

You owe it to yourself to approach an impending sale with the same dedication you had when buying the management rights, and your ability to achieve the desired conclusion to a contract of sale is 100 percent dependent upon correct and factual information being collated by your management rights broker. Select your broker carefully, a full time professional with a proven track record. Present the facts backed up by prepared documentation ensuring you market the management rights at “today’s marketable and achievable price”.

Check your authorities to act (Form 6) and make sure they are up to date so that you are not chasing

Lost opportunities can be expensive, and we only have one life to live. RESORT NEWS - JANUARY 2020