Introduction to Selling a Management Company Well, greetings. Robert Locke here. Thanks for taking the time to watch our videos. The conversation we're going to have over the next eight or 10 videos is staging your company to sell . We were asked by NARPM about April of 2021 to do this class at the national conference for the broker owner conference, and we did it.
Awful lot of interest, so we thought we'd shoot videos in the studio and drip them out to people so that they can walk through and think through what it might take to stage your company to sell. The real conversation is we're going to take the mystery out of selling your business . People talk about selling their companies , but unless you've done a few of them, it's kind of a black hole. Nobody knows really very much about it. You can't talk to business brokers much because they sell a sandwich shop one day and a manufacturing plant the next.
And trying to get you to sell your management company, they're kind of brand new at it. They don't know an awful lot about it. And there aren't really many trainers around that have sold 10 or 15, that have been involved in 20. And so Monica and I together have done about 30 deals, and none of them have overlapped. Well, one did.
So I did about 20, Monica did about 10, and so we kind of figured we knew something, and we could help people along, get through some of the mystery of how this works. So we're going to start at about a 10,000-foot level, get way up high, and I'm going to go through what we're calling the anatomy of a sale of a management company. Let's just kind of track me with this, okay? The anatomy of a sale of a management company. So we're going to talk about six different events and four different processes that you go through when you sell a management company.
Let's start out.
Timing and Staging The first one is it's time. There will be a moment in time in your calendar when you kind of decide it's time to sell my company. Sometimes you have control over that. I did. I was 70 before I sold CRAMP.
But I had a client in Tennessee about the summer of 2020, probably got COVID, had trouble with a rash on his arm, had trouble with his vision, couldn't figure it out locally. Went to Mayo for three or four days, couldn't figure it out, and about two months later, they had a funeral for him. And so sometimes when you get a doctor's report, it's malignant, or you get a divorce notice, or you find out your kids are on drugs, or you're just sick and tired of the business, or you get excited about a new business. Somewhere along the line, you don't always know exactly when it is time. So the event is it's time.
The process you go through ahead of that is staging, and that's what we're going to be focusing on today. What are the things you want to go through today? What are the things you want to start working on strategically over the next year, two years, three years, to where when it's time, that you have it set up and ready to go? You've dealt with all the issues in advance that are tripping points. You've kind of figured it out along the way.
And so we're going to go through a whole series of videos just talking about this one little ingredient of staging.
Executive Summary Now, the next moment in the process is you put together what's called an executive summary. Now, an executive summary is kind of like a listing agreement. It kind of lays out all the major issues in your company that you want to show a prospective buyer. What software do you use? Where's your market?
What's your average management fee? What is your average rent per one-bedroom and two-bedroom and three and four and five-bedroom? What zip codes do you cover? What does your new business development process look like? What kind of revenues are you generating?
There's all kind of metrics that you kind of put together a summary of what your company looks like . You might call it a listing agreement, but it's really important that you have all of that so when a buyer shows some interest, you can kind of shoot him a document that doesn't give away all your secrets. It just kind of tells you the metrics, kind of tells you the ingredients to your business.
Solicitation Process Now, the next process you go through is to start solicitation. You start contacting the big players in the market that are trying to buy management companies. Everybody kind of knows who they are. Or you talk to people in your NARPM chapter, or people around you that you've connected with, and you kind of talk it up a little bit, kind of keep it low profile . But you kind of go through a process of soliciting people.
Now, that might take a week, might take a month. In my case, it took two and a half years. From the time we had our executive summary together, I was in no hurry, and I just wanted to find the right partner to sell my company to. So we started talking to competitors and so on, and it took us a while, and we were patient with it. It was a good thing that we were.
Finding a Buyer Now, the next event on the calendar is when you find a buyer through the solicitation process. You put together what's known as a non-disclosure agreement. Now, that's a new document for many people, but it's kind of a standard document that says, "I'm going to share secrets with you, and you're going to tell me things, and we're going to keep it to ourselves." We're not going to let everybody know, "Hey, I'm in negotiations with this big management company to buy my company." It just kind of is a privacy agreement. It kind of handcuffs you to confidentiality.
And that agreement is not a monstrous legal document. A pretty standard form item. But you can get to a non-disclosure agreement, which means we're going to begin a conversation about selling your company, about buying your company. We don't want anybody else to know about it, okay? Now, the next process is that once you sign a non-disclosure agreement, you're going to start a due diligence process.
Now, with the technology today, that might mean you give them a read-only access to your software. It's not difficult. But they begin kind of going through and digging down a little deeper and figuring out if your executive summary says you've got 700 properties, and they start digging and find out that you have 500, that's going to create a problem. So the due diligence period kind of starts after the non-disclosure agreement. Now, somewhere along the line during the due diligence, they might send you what's known as a letter of intent.
Now, that's a pretty serious document. That kind of lays out the general framework for how we might want to buy your company. It's going to talk about closing dates and due diligence and price and down payment if there is one, or earn out. Going to talk about clawback provisions. It's going to be a broad framework of how they might want to buy your company.
So when I sold mine, we had nine of these, and we had seven different companies come up with a letter of intent. Now, if you're a small company, that can kind of be done on a yellow scratch pad, but larger companies like ours, we ordered a thousand houses. That was a very serious document of buyers going to a lawyer, maybe spend a thousand or two in order to put together a letter of intent. So that can be a very serious document. One of the things that it says is, you're going to stop talking to any other buyers.
In other words, one of the elements of a letter of intent is that it ends all of the discussions. It kind of says, no more dance partners. You're not going to date around anymore. We're going to be engaged, so to speak, and we're going to kind of spend the next few weeks trying to move this conversation along, but the seller can't talk to any more buyers once that letter of intent is signed.
Letter of Intent Overview It's kind of one of the purposes of a letter of intent . So, the next event is continue with the due diligence process . Typically, when you get to the letter of intent, you're actually sending the buyer maybe tax returns, maybe secrets, kind of how you do property management. You're letting them dig deeper once you get to the point of a letter of intent.
Sales Contract and Closing Then you go to a hard document, which is a sales contract. Now, the sales contract is just fleshing out what was laid out in the letter of intent as modified by the due diligence process that you've gone through. So the letter of intent is kind of a simple, broad framework. The sales contract has got all the deep language in it. This is the kind of thing you want a lawyer to look at pretty carefully, because when you close, you're going to do it just exactly according to the sales contract.
Now, the next event is a closing, and that obviously, you know what a real estate closing is, kind of the same idea where you kind of bring all the documents together , and if it's a large one, you've got lawyers on both ends, and you got maybe a business development person or a mergers and acquisitions person that's a part of it. In ours, I had a mergers and acquisitions expert, I had lawyers representing us, and the buyer had lawyers representing them. Now, it was a Fortune 500 company, so obviously their lawyers were in-house. Mine, I had to actually pay for.
But the sales contract and then the closing are kind of the culmination of all the things that you've done in advance.
Post-Closing Issues And then typically, there's another process, and that's kind of some post-closing issues. Typically, the selling manager might stay on for a little while, might provide consulting. When Coldwell Banker bought me, they didn't talk to me after the closing. Kind of wished me well and said goodbye, which was perfectly okay with me. I was 70 when it happened.
Now, understand that if you're a smaller company, 50 or 100, 200, you might burn through this whole process in a month. You might get to here and find a specific buyer and get to a letter of intent. You can make this whole thing happen in a month or so. When my friend in Tennessee died last October, from the day we had the executive summary put together to the day of actual closing was 30 days, and that was only 200 properties. So it was a small company.
The bigger the company, the more formal each of these steps take. If you had a company with 50 or 100 and somebody else is just taking over your management accounts, that can be done pretty quickly. And when I bought, I bought 14 companies during my tenure with Crown growing them up, and we didn't go through any of these steps. It was kind of a yellow scratch pad, hip shoot, kind of the seat of the pants type because there weren't a lot of property, 50 to 200, and I kind of knew enough about the business to make it work, and they all closed. They all worked just right.
So this whole thing can happen very quickly, or it can drag out, like the Coldwell Banker purchase of my company, it took five months for the whole thing, beginning to end.
Operational vs Legal Sides Now, there's two sides of the buying and selling a management company. There's two sides. There's an operational side and there's a legal side. Lawyers can't help us very much with the operational side. When you're thinking about staging your company and getting it ready to sell, you're going to have things in your contract the lawyer wants to deal with, or you're going to want a lawyer to deal with.
But in terms of putting your metrics together and putting an executive summary together and talking to buyers and companies on the outside, that's not a lawyer thing. That's an operational thing, and that's why I'm kind of contributing to this process. When you get to certain parts of this process, when you get into the letter of intent, the sales contract, that's a legal issue. You really want a lawyer involved in that, especially if it's a large company. So since there's two parts of it, I'm going to do some of the training through these videos, and Monica will do the others.
So I'm going to introduce you now to Monica Gilroy. Now, most of you have been around NARPM a while. You know who Monica is. I partnered with her about 20 years ago with Crown. She guided me through all the landmines of the management business, and she's defended us in court, and I brought her into the NARPM world, and now she's general counsel for the NARPM chapter in Atlanta.
You see her in videos at national NARPM events and fair housing events and legislative events. She's been around the industry for quite a long time. She's defended an awful lot of property managers, both at the state level and the federal level, and so she's been around NARPM for quite a while. So she is a trial lawyer. Let me tell you why that's important.
If you're going to write a prenup agreement, you want to hire a lawyer who's slugged it out in divorce court for 30 years. Why? Because they know what the chaos is going to look like when you get in front of the judge, and they're the ones to step back and write really good agreements. Well, Monica has handled mold claims, fair housing claims, Georgia Real Estate Commission claims. She's handled federal lawsuits.
She's handled sales of companies across state lines. So she knows what it's going to look like in front of a judge, which means she is the one you want to be writing your contracts to make sure they're enforceable and defendable and have all the right language in it to make it work. So Monica, 30% of her time is spent in front of judges and juries. That's why she's out of pocket a lot.
She's out of her office a lot because she's over in court. Now, Monica is all into property management. Now she handles a lot of foreclosures and federal litigation, but her specialty is property management. That's why most of us in the MARPA world know her so well. She's handled over 10 sales and in multiple states.
There was a buyer in Nashville and a seller in Michigan, and she was in Georgia. There was obviously a lawyer looking over things for each of the buyers and sellers, but she was able to handle it because she knew every step of the process, kind of explained to the lawyers how it was going, and everything worked fine. Some of them were small, 200, 300 properties, and some of them were up in the 1,500 and 2,000 properties. So Monica's a great contribution to this conversation. I'm going to pause here just a second and bring Monica into the conversation.
Well, thanks so much for that introduction, Robert, and of course, my friend Robert Locke, someone who I've had the pleasure of working with for many, many years really needs no introduction. The important reason why Robert and I are here today is because you need to remember he's been doing this for 35 years. Thirty-five years he's been in this industry, and during that time, he has had 14 acquisitions, and these are running the gamut from some pickups of, say, 50 doors, some ranging as high as 250, but all part of his growth, right? The strategy of getting these doors in, acquiring these companies, to ultimately continue to grow his portfolio. Now, also it's important to know that although it was a controlled downsize, Robert did have a controlled, what we'd call crash.
He brought down his inventory from about 750 down to 350, had to let a lot of people go, but did it very pointedly as part of a process. And then ultimately, after the years had gone by, as we know, was very successful in cashing out to a Fortune 500 company with his portfolio and had placed himself by virtue of all of this experience in a place to really maximize what he was able to get upon sale.
Preparation for Selling And that's why we're here today . That's what we want for you. During our times helping clients in this, we have some that are bailing out, and then we have some who are cashing in. And we don't want you, Robert and I, to bail out. We don't want that.
We want you to maximize when you're ready to sell and cash in, and have it be something that really is a reflection of all your hard work for all these years. And the key to this, as we're going to tell you, is simply preparation, being ready for it, getting the company properly staged, ready to go so that we don't have you finding yourself in the graveyard of property managers, which is unfortunately where so many folks that we have counseled have been because they had to bail out due to a lack of preparation and due to a lack of not knowing where those tripping points might be.
Reality Checks and Legal Issues So here's our agenda for today . First of all, Robert's going to talk to you about reality checks. Just the concepts, the hard truths about if you're getting ready to sell, what's it got to look like for you and your company. I'm then going to pop in with some legal issues that we see that can both impede and also enhance the staging of your company to sell.
Tripping Points And then finally, the two of us will talk about tripping points, things that can come up in the process or things that can make the path not as smooth as it needs to be, which we can help you to fix . Now, if you haven't signed up already, please do sign up for this series. You can do so by going to gilroyfirm.com/staging. I would love to have you sign up to be a part of this ongoing series and the information that we're providing to you. Right now, though, we're going to toss to Robert.
He's going to tell you five realities of selling your company. So Robert?
About the speakers Monica K. Gilroy Esq.
Real estate litigator, The Gilroy Firm
Founding principal and managing partner, The Gilroy Firm J.D., University of South Carolina School of Law, 1993; B.A. Political Science, University of Wisconsin, 1990 Named a Top 50 Woman Attorney in Georgia Past Chair, Real Property Law Section, State Bar of Georgia Outside national counsel to NARPM and General Counsel of its Atlanta chapter American Land Title Association (ALTA) National Education Committee since 2014 ALTA National Title Action Network (TAN) Chair since 2020; ALTA National Title Professional designation AV peer review rating, Martindale-Hubbell Peer-nominated Georgia Super Lawyer in real estate since 2008 Hundreds of jury trials, bench trials, arbitrations and mediations; licensed arbitrator and mediator; Special Master in Fulton County Robert M. Locke RMP®, MPM®
Property management trainer and consultant
Residential Management Professional (RMP®) designation, 1998 Master Property Manager (MPM®) designation, 1999 Led Crown Management to the Certified Residential Management Company (CRMC®) designation, 2000 Founded Crown Management in 1980 and grew it to over 1,000 single-family homes under management Sold Crown Management in 2015 to a Fortune 500 company Past president and board member, Atlanta chapter of NARPM Certified instructor, National Association of Residential Property Managers Georgia Association of Realtors Partner in Education (PIE) Expert witness on real estate disputes in magistrate, state and federal courts Licensed in real estate since 1973; B.A. in Business and Marketing, Michigan State University, 1969 