2017 Clip: Growth Through Acquisitions – Michael Catalano & Jock McNeill

 

 

Talk Overview:

Michael Catalano and Jock McNeill are both experienced players in the acquisition market. Their talk will cover the tips/tricks and do’s/don’ts of growing through acquisition. While it is not something that should be implemented as your only growth strategy but it can definitely help augment your success.

Talk Notes:

Why consider acquisitions?

  • It’s the quickest way to grow your company.
  • Growth opportunity for your employees – helps you stay competitive and keep quality employees.
  • Build equity in your company
  • Opportunity to enter a new market

Important: When looking at the cost of an acquisition, it is a lot more expensive that growing slowly.

Don’t do this if:

  • you are cost conscious.
  • you don’t have the adequate infrastructure or experience – you’re going to overwhelm yourself.
  • You are busy and don’t have the bandwidth
  • You prefer being small and doing it all

What makes an ideal acquisition?  

  • Mutually beneficial

You want to make sure both parties are benefiting by how you are putting it together.

  • Similar structure

Portfolio + Portfolio = easier to combine

  • Well maintained properties

You need to be detail oriented and analyze what the condition of your acquisition is in

  • Immediately profitable
  • Off-Market deals
  • Opportunity for innovation

If you haven’t moved on to some of the technologies that are out there, this could provide that opportunity

Keep in mind, the things that make an ideal acquisition also make it more expensive.

The things that make an ideal acquisition also makes it more expensive because there are less opportunity to add value.

Watch out for Red Flags:

  • Are they in distress or poor condition?

Is it a function of the property management not doing what they were supposed to or a function of the culture established? Culture is tougher to fix.

  • Unhappy employees or unhappy clients

Unhappy employees is an easy fix – you don’t have to take them on after the transition.

Unhappy clients can represent a threat and an opportunity at the same time

  • Licensing issues
  • Embezzlement
  • Lawsuits

Often symptoms of larger problems

All of these can present opportunities for you but you need to get in there and do your due diligence.

Why an owner is selling:

  • Retiring or leaving the industry
  • The D’s (death, divorce, drunkenness, drama, etc.)

Knowing why they are selling is going to give you important incite as to what is important to them during the transaction.

When is it not the right fit?

  • Buyer and seller aren’t compatible.

It’s all about teamwork to get this done right. Make sure you are working well together.

  • Can’t agree on price

it’s worth what you’re willing to pay. You have to run your numbers and if you can’t agree on price it may not be worth it.

  • Can’t agree on terms.
  • Below average property

Purchasing power by size:

  • Small:

Owners are very hands on. If you are buying a 200 acquisition, that’s going to be difficult to scale.

You’ll need to onboard employees, which can cut in to cash flow.

  • Medium

Possibility to keep employees

Ability to absorb some units

Owners are in charge of some operations.

  • Large (750 and above)

Self-financed

Ability to absorb all units

They are familiar with growth – most have done acquisitions before

Less personal touch: who are their employees, can you trust them?

Contracts and Clauses

  • Indemnity agreement
  • Clawback clause* (see more below)
  • Non-compete agreement
  • Seller availability
  • Records retention
  • Brand and website acquisition
  • Who is responsible for what?

Is each party responsible for their own fees?

  • Mediation or arbitration?

How will disputes be settled.

Financing Options

  • Personal loans

You can be more flexible with your terms and becomes a write off.

  • SBA loans

SBA loans love property management companies because of residual income.

  • Seller Financing

One of the most popular loans. Seller and buyer work close together to finance.

  • Venture Funding

This is best for larger scale acquisitions. You have to have your business plan set up and be strategic about what you are trying to do. They will also want a piece of the pie if they are giving you money.

Where do you find someone interested in selling? (and vis versa)

  • You need to know your industry and local community (NARPA, Rotary, Real Estate Agents). Build relationships and let them know that you are willing and able to fulfill an acquisition.
  • Look for reasons that people will sell (retiring, etc.)
  • Reach out to brokers – their involvement in acquisitions has increased in the last 4 years.
  • Send introduction letters
  • Speak at conferences – tell people you are looking to do this!

Case Study

  • 80 units in portfolio
  • paid $200,000
  • 25% down payment and seller carried the remaining loan.
  • $5,000 ins startup expenses
  • Bought the brand because it had an established reputation
  • Clawback clause – mechanism that allows you to adjust your sale price if you lose units within a certain amount of time (3 months, 6 months, etc.)

By the end of the 6 months, they had lost 7 units and gained 10. Ended up with a profit in the end after reduced purchase price.

Conclusion:

  • Be brave
  • Take risks
  • Nothing can substitute experience.

About Michael Catalano:

Mike is a second generation real estate entrepreneur. His company REC Rentals currently manages over 1,000 rental properties in the heart of the Silicon Valley in California. Mike has deep experience in driving growth through acquisitions and knows how to evaluate and strucure portfolio purchases / sales. He’s a past board member of CALNARPM and has spoken at a number of NARPM events.

About Jock McNeill:

Jock is responsible for overseeing the daily operations of Alliance Property Management and Rent Napa Valley, as well as sales, business development and acquisitions. He is an adjunct instructor in property management at Santa Rosa Junior College, holds the NARPM MPM® designation and is three time past president of the Marin-Sonoma chapter of NARPM.

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