Sales, acquisitions, and mergers all start in the same place - with the valuation of the business. Valuations for rent and strata rolls is a specialised area and one which, if not handled correctly from the beginning of the negotiation, can derail a sale or result in a suboptimal outcome.
As a Certified Business & Property Valuer with the Australian Valuers Institute and a Registered Business Valuer with the Australian Institute of Business Brokers, Ross has decades of experience in real estate deals.
BDH Solutions recently executed a complex rent roll sale and real estate agency merger which eventually saw all parties arrive at an agreeable settlement.
THE SET UP
In this scenario, the agency principal was ready to transition out of his business. He had it independently valued to gain an understanding of how much it was worth.
Two parties were interested in taking on the business.
The first, two partners who were interested in buying the Principal’s share of the business. They requested an independent valuation of their own.
Subsequently, a third party became interested when two other agents expressed interest in merging with the initial interested party to create a new partnership. Again, an independent valuation was requested.
It was a complicated situation but with potentially good outcomes for the Principal due to there being more than one buyer option.
THE CHALLENGES
Prior to negotiations, the Principal had his business valued using up to date ‘settlement data’. Using very recent figures, the valuer placed the business value at over $3 million.
However, the second two parties both looked at historical data. This took into account average earnings and expenses of the rent roll over a longer period of time. The rent roll had grown and improved prior to being listed for sale but the use of historic data meant its value was set closer to $2.5 million.
A half-million-dollar discrepancy in perceived value does not make for easy negotiations! Both parties ended up frustrated because of the large gap between values.
To make matters more complicated, all three parties had their own accountants. Each accountant had used a completely different methodology to set the value of the rent roll. This brought even more figures into the equation.
THE SOLUTION
With so much confusion, BDHS came on board to help broker the deal and create outcomes each party was happy with.
First up, the accountants’ figures were disregarded. While it is not uncommon for an accountants’ valuation to be used in a rent roll or agency transition, all parties need to be aware of this and agree to the methodology at the beginning of the agreement. If it hasn’t been agreed the accountants’ information will come into play, these values should be disregarded.
It was then a matter of working closely with each of the parties to negotiate an equitable outcome everyone felt satisfied with.
AVOIDING CONFUSION IN A RENT ROLL SALE
A great deal of back and forth could have been avoided if the valuation methodology had been agreed on at the beginning of the process and each valuer was notified.
If you’re thinking of selling your strata or rent roll, be specific about the valuation methodology in the Heads of Agreement so there is no confusion over final valuation figures.
If you’re looking to purchase a strata or rent roll, determining the valuation data upon which the method can be based will help you avoid asking your lender for more than you need. You will also avoid thinking you are about to score a bargain, only to realise the vendor doesn’t wish to let the sale happen at the price you have in mind.