Getting your figures right
By Frank Higginson01 Nov 2010
We are not accountants. We do not propose to be (or in fact ever want to be) accountants, but in terms of what is causing the most difficulty in management rights transactions at the moment, is the verification of figures.
There are some recurring themes to these issues. If you are looking to sell, this is probably one of the most important emails you could read, as getting all of these things right will lead to a far more seamless transaction.
So here are some simple accounting rules that we believe you should follow if you are listing to sell:
- Make sure you get a recognised management rights industry accountant to do your sales figures. Do not run the risk of doing them yourself. In our experience, vendors preparing their own figures will make mistakes. Vendor prepared figures do not necessarily take into account the latest industry trends in terms of verification issues and purchaser’s accountants’ normally like to tear them apart - sometimes just for sport.
Horror stories abound both ways. We had a client last year purchasing a complex off some vendor prepared figures. The vendor had made a mistake in their calculations and understated their income by $20,000. Suffice to say, we were instructed not to slow anything down in that matter and this created a windfall gain for our client on settlement when you take the multiplier into account.
- Understand what you can charge under your letting appointments. In recent times we have had several instances where vendors have been charging amounts different to those recorded in their appointments (eg a postage fee of $4 per month in the appointment whereas the invoiced amount was $7 per month). While this might seem a small amount, it becomes a lot larger when you multiply it by 12 months and then across 100 units in a rental pool and then by the multiplier on the sale.
- A source of some contention in larger complexes is usually what level of staffing is required to operate them. The standard management rights contract provides that the net profit will be verified based on what work a two person management team could perform. Where there are additional staffing requirements beyond that two person team it is sometimes a question of balance as to what is actually required to run the business as against what is a lifestyle choice for that particular vendor. For example, a large holiday building could be run completely under management. It would be for the vendor’s account for preparing sales figures to add back in (as income) what salary might be paid to that two person management team.
In addition, sometimes buildings engage other employees or contractors such as a receptionist, a gardener or other ground staff. These might be proper expenses or considered a lifestyle choice. Ultimately, there is no black and white rule with these issues but if you do have wages in your profit and loss, it makes sense to be able to explain to any prospective purchaser (and therefore their accountant) as to how that lifestyle choice was added back in or allowed for in your sales figures. This would certainly remove some of the grief we see with wages on large complexes.
- As usual, the assignability of letting appointments remains an issue, but by and large it is becoming less frequent. Most buyers understand the commerciality of one or two appointments not being correct, but if you get to the stage where more than 20% of your appointments do not comply with legislation, or are not assignable, there is simply going to be trouble with your sale.
Never has it been truer that you need to surround yourself with experts from the start. Understand what you are trying to achieve, make sure you have the right advice and that will make the process smoother for you. It will save you both money and headaches.