BUYING A REAL ESTATE BUSINESS
HOW TO MAKE AN OFFER
RETENTION AND RESTRAINT
BUYER & SELLER SURVIVAL KITS
BUYING A REAL ESTATE AGENCY / RENT ROLL
If you are serious about purchasing a Business, it is important to understand the processes and time frames involved.
The Seller will be evaluating and qualifying you in terms of your capacity and commitment to complete the transaction, from the moment you receive the Business Sale Information Pack and start negotiating.
Whether the Seller is retiring or selling a one-off parcel of their Rent Roll, they have worked hard at maintaining their Business to their own high expectation and the last thing they are looking for is a Buyer that is going to prolong the process, make the transfer difficult and potentially cause a drop off in the numbers, resulting in a lower purchase price at Settlement.
Before making an offer, to purchase, you must be confident that you are in a position to complete the transaction. This includes, but is not limited to, your ability to secure finance and provide a substantial deposit. You should have spoken to your Accountant and have a high level of Real Estate Industry knowledge and business acumen.
Once your decision to purchase has been made, it is important that you read and understand the Terms and Conditions presented on the Expression of Interest. A Seller’s confidence is established around your negotiations and comprehension of what they have listed for Sale. It is paramount that you ask questions about fundamental terms of the contract, prior to submitting your offer; rather than waiting until the draft contract has been issued. On average, it should take no longer than 1 -2 weeks to negotiate an Expression of Interest that both parties will sign off on.
Whilst the draft contracts are prepared, it is a good idea to ascertain if your Solicitor has specific experience in Real Estate Business / Rent Roll transactions. Solicitors inexperienced in this field can hold up the time it takes to review the Draft Contract as they are not familiar with some of the important terms, for example: Retention dates, multiple settlements, restraint of trade and calculating a purchase price from a fluctuating asset. Occasionally solicitors will require subtle changes to the draft which they will communicate with all parties. It should take no longer than 1 – 2 weeks for all parties to be satisfied and execute the Contract.
Due Diligence and Finance are the two major terms that affect a Rent Roll transaction. These conditions have a period range of 14 days, 21 days and up to 30 days. It is quite common for Finance to be slightly longer than Due Diligence as it is dependent on the Financier’s workload, something neither the Buyer nor the Broker have any control over. To avoid frustration of all parties and unnecessary extensions of the contract, it is recommended to speak to your banker and ask them to provide an estimate of the time it will take to approve your Finance.
When conducting the Due Diligence investigations it is important for both the Buyer and Seller to work together in accordance with the contract should be clearly communicated. Availability for arranging time for the Buyer to attend the Seller’s office, which may occur out of business hours. Confidentiality is always one of the biggest concerns for a Seller and the Buyer must always ensure that information, files and data do not leave the premises after their inspection of the files.
Once the Contract becomes unconditional, it is important for both parties to want to achieve the maximum retention of managements. This can be a potentially stressful time and it is vital that you maintain communication with the Seller and your Broker for updates.
As a Buyer, it is best practice to create and provide the Seller, your letter of introduction and agency pack that you intend to use. These documents are an essential part of the transaction to ensure that your Agency is attractive to the Landlords and you do not lose the Managements during the Retention Period. The period between unconditional and first Settlement can vary, but the average is between 14 – 21 days, with the latter being the more conventional choice.
Retention of Existing Employees may have been included in the Contract. After the Contract has been deemed unconditional, you will now have to opportunity to interview all staff listed in the Contract and consider offering employment. It can be beneficial to consider retaining current staff in the Business, as the Landlords and Tenants have built relationships with the Property Managers, and it can assist with retaining Landlords. You may find that some staff may in fact be a hindrance to the business, which is why extensive interviewing is recommended. If the transaction is for the entire business, Sales People can also be interviewed for potential employment.
Settlements for a Rent Roll transaction have many key differences compared to a standard business sale, one being the multiple settlement dates. It is normal in a Rent Roll transaction for the contract to have First Settlement and Second Settlement dates, with an option for an additional Settlement to occur with agreement by both parties. Multiple Settlements are a necessity for a Rent Roll transaction, particularly when new Agency Agreements must be signed by landlords and returned prior to Settlement. Any Managements not returned in time for the First Settlement, can be purchased in the Second Settlement, which is normally 14 days later.
Retention period is 90 days from the date of Settlement, which is the industry standard. This is applicable to both First Settlement and Second Settlement. It is important that if you lose a Management in the Retention Period, that you document the loss with written confirmation from the Landlord, in order to claim back monies paid for the Management.
One of the biggest mistakes Buyers and Sellers can make during a transaction, is to go silent and avoid communication because they are unsure of the situation. It is important to acknowledge, that all parties involved have one goal in mind and that is a seamless and fruitful transfer of a Business.
Buying a Real Estate Agency and / or Rent Roll can be complex and take an extended period of time. However, transparency from both parties during negotiation through to the end of Retention can bring success and high returns for everyone involved.