Thinking MR

Sustainability:

Meaningless catch cry or call to arms?

As always, I have decided what to write about this month. That’s pretty much as far as I usually get before writer’s block sets in, and I resort to Google for an appropriate opening quote. It always works but not today!

The word ‘sustainable’ has been hijacked by the woke, the deluded and the thought police and must now only be used in the context of saving the world. All manner of sustainable practices and defi nitions pop up, mostly meaningless parenting statements and sadly none addressing infi nite population growth on a fi nite ball of spinning rock. In my mind sustainability is the concept of maintaining a process, relationship, practice or dynamic which can be reliably replicated over time. Of course, if any such practice diminishes a fi nite resource, then it’s not sustainable. Simple. As an example, I am not an easy bloke to live with and the ‘managing director’ has a fi nite level of patience. As such, my demeanour is not sustainable unless the ‘MD’ makes a concerted eff ort to move to an infi nite patience sett ing. Despite my best eff orts to convince her of the benefi ts of such an arrangement there seems litt le prospect of success. Put simply, to sustain my relationship with the ‘MD’ I need to make an eff ort to be a more beautiful and compassionate person. Simple… Of course, there are those who argue that a practice can be sustainable even if it relies on a fi nite resource. That is, the use of the fi nite resource will be replaced with a diff erent process before the resource runs out. The fl aw in this argument is that the ‘diff erent process’ is oft en an unproven and un-costed concept that fails to account for resource use in its delivery. Those carbon fi bre wind turbines aren’t made from fairy dust apparently. A tangled web to be sure! All this, dear readers inevitably leads me to the point of this month’s missive. About time you say! In the management rights and motel industries businesses are bought, sold and valued with reliance on a range of information. In recent times buyers and their advisors have started to pay att ention to the sustainability of the business. That is, can current business practices be sustained over time and can the business maintain or improve profi tability based on historical levels. In fact, we are starting to see sustainability of net profi t creeping into contract conditions. Not before time?

The challenge as always is that vendors want to maximise price. The strategies to do so range from highly professional presentation of the opportunity through to what some might think of as misleading and deceptive conduct. Of course, the best way to maximize price is to maximize net profi t, either real or imagined. To this end, in nearly all cases we see vendors argue that their actual operating costs are infl ated by practices that are discretionary in nature. Labour costs are the big-ticket item and the easiest to fudge. For example, in management rights the typical two-person team, despite arguments to the contrary, is not an infi nite resource. As such the sustainability of the business profi t needs to be predicated on the reasonable performance of the managers and the support they will require. When a vendor says that they have staff they don’t need, all they are really saying is that they are trying to sell an unsustainable business model.

While adjusted operating costs is an obvious area of discussion, I think the concept of sustainability needs to inform vendor due diligence in all facets of the business. For example, can current vendor practices be perpetuated while maintaining a cordial relationship with a body corporate, unit owners or landlord? In an environment of increasing holding costs and interest rates will investor owners be happy with current lett ing agents’ fees and commissions? Can advertising levies continue to derive profi t in cases where the direct use of those levies cannot be satisfactorily explained? Is it fair to adopt the current body corporate salary in the profi t where there’s been a recent increase but ignore proportionate cost increases in delivering caretaking services? Can the goodwill of the body corporate be relied upon for future agreement top ups? Of course, it’s not all bad news. Plenty of these businesses have an upside and provided a buyer can readily assess the opportunity there’s no reason not to factor profi t or value uplift into price considerations.

For buyers there is a simple solution to ensuring the sustainability of the business. Take into account all the information provided, adjust the profi t and loss statement to refl ect your expectations, refl ect on your risk appetite and make an off er accordingly. The profi t and loss for sale purposes is not engraved in granite and you have every right to disagree. Just make sure you can justify your position. In doing so remember that a truly sustainable business model is worth more than a one-year wonder!

Mike Phipps,

Director, Mike Phipps Finance

Sustainability is the concept of maintaining a process, relationship, practice or dynamic which can be reliably replicated over time