As I contemplate an attempt to make some sense in this article there\u2019s an old English expression that
springs to mind.
“May you live in interesting times” is claimed to be a translation of a traditional Chinese curse. While
seemingly a blessing, the expression is normally used ironically; life is better in “uninteresting times” than
in “interesting” ones, which are usually times of trouble. Talk about ironic alright.
Anyway, I digress.
Rather than write my usual meandering stream of consciousness I\u2019ve decided to cut to the chase and
outline some specific thoughts that might hopefully assist buyers to navigate a management rights
purchase in a world of apparent uncertainty.
The Fundamentals Have Not Changed
While the world has most certainly changed the basics of purchasing a management rights have not. The
process of accounting verification, legal due diligence, finance and settlement remains the cornerstone of
a successful acquisition.
Sure, there are some extra hoops to jump through and some days more hoops than others. However, it\u2019s
important for buyers to appreciate that a proven process that has held the industry in very good stead with
lenders continues to deliver positive outcomes. There is simply no reason to reinvent the wheel. Maybe
put a couple of extra spokes in it and some performance tyres but it\u2019s still a wheel.
Get Pre-Qualified
The first, and perhaps the most important step. Talk to us about your situation and gain some level of
certainty. No point having a grand plan if you fall at the first hurdle. Our brokers will assess your personal
and financial situation and offer guidance. They will be a sounding board and help you review
opportunities, pointing out the potentially good and not so good aspects of the business you are looking
at. While we encourage anyone who is interested to research the industry there\u2019s simply no point in making
listing enquiries or inspecting properties until you are pre-qualified.
The Covid era has delivered an incredibly volatile lending policy environment. It\u2019s imperative that buyers
speak with a finance specialist who\u2019s talking to the banks on a daily basis.
Know What You Want and Why
If you don\u2019t know where you\u2019re going any road will get you there. It\u2019s an old clich\u00e9 but also pretty accurate.
We encourage buyers to think long and hard about what\u2019s important and what boxes a listing needs to tick.
Lenders are keenly interested in why you are buying a particular asset.
We love talking to clients about the opportunities they see in a particular listing and how best to make the
deal happen. Part of that process is making the deal look as compelling as possible for lenders.
Insist On The Vendor Playing Fair
While the fundamentals haven\u2019t changed there\u2019s no denying that Covid has had an impact on how we
assess a lending opportunity. Regrettably, there are vendors out there who would prefer to pretend that
Covid didn\u2019t happen. The vendor mindset of \u201cI bought it this way, I\u2019m selling the same way\u201d needs to be
avoided if possible. On the flip side of that coin there are management rights businesses that have actually
benefitted from Covid driven demand. We think that vendors need to be realistic in respect of additional
information and buyers have every right to ask. The bank simply doesn\u2019t care how the vendor bought or
financed the asset, the game has changed.
You\u2019ll know you\u2019re in good hands when your agent has already asked the tough questions and has the
answers ready.
Covid Impact \u2013 What Happened and What\u2019s Next?
Lenders will focus on this question above all others. Regardless of what happened we need to explain why.
If it\u2019s a holiday building enjoying record occupancy due to international travel restrictions that\u2019s great. But,
what happens when borders reopen?
A permanent property may be enjoying strong rental demand based on inter and intra state migration.
How much of this is Covid life change driven ? Is it sustainable? Will government first home owner
incentives and other economic policies impact letting pool numbers?
The trick in presenting a compelling case to a lender is to summarise how the business was travelling preCovid, what\u2019s happened since and what the likely future holds. The better we can demonstrate that our
client understands these three Covid impact phases the more likely a finance approval.
Financial Due Diligence \u2013 A Mixed Bag
I think its fair to say that the bank\u2019s are treating every deal on it\u2019s merits when it comes to trading history,
current performance and future prospects. Remember, in the absence of compelling data bank credit
managers will default to their imagined worst possible scenario. We don\u2019t want that !
The historical benchmark in the industry has been the review of the past 12 months financial performance
of the business. In this regard management rights are unique. No other going concern business is bought
and sold on the strength of a single accounting period. I would argue that the Covid era has pushed the
tide out and found our industry sans bathers.
So, what to do? At the risk of dodging the question\u2026\u2026.it depends. For a permanent management rights in
the \u2018burbs I\u2019d be happy to go to the bank with a one year P and L review. The reality is that these businesses
are easy to analyse with likely profitability being an outcome of a basic set of data. The industry has
developed a Covid impact info summary for permanent management rights which I think does the trick.
My observation would be that the impact sheet has, to some degree, been rendered obsolete by the
demonstrated resilience of permanent MLRs, many of which are showing improved trade, zero Covid
arrears and rising rents.
For leisure based short stay properties the process is a little more \u201chorses for courses\u201d. If we come from
the old adage that certainty = value then the more info the better is a good place to start. There won\u2019t be
many leisure based MLRs that did not see some sort of negative Covid impact in 2020. The trick is to
normalise the 2020 calendar year and achieve some sense of what sustainable net profit looks like. Setting
a trend line or benchmark based on a couple of prior years makes sense so I think, if possible, a look at
2018 and 2019 calendar years is the place to start. Provided those years show trading stability or growth
it\u2019s reasonable to review 2020 through the prism of year in, year out trade. I also think it\u2019s reasonable to
reconstruct the 2020 P and L to identify Covid impacted months and compare those with the same trading
months of the prior years. At the end of the day we are trying to assess sustainable net profit over time so
a once in a lifetime event certainly needs commentary and adjustment. In my mind it\u2019s no different to
having a unique event that drives occupancy and tariff up, it has to be netted out to get to the likely
sustainable $NP. If, by some miracle, Covid had zero impact on a leisure property we still need to explain
why so best to be ready.
There is merit in preparing a projection based on the best market intel at this point. The report should be
supported by commentary explaining what happened and why and justifying the projections. I don\u2019t think
projections should be a \u201cmust have\u201d as I\u2019ve never seen one in any industry that didn\u2019t predict a positive
result. However, as an indication of expectations driven by the business plan and broader economy a
projected reconstruction of the 2020 calendar year P and L is a handy report to have and will be well
regarded by the lenders.
Valuers appointed by the banks will certainly be looking for insight into the sustainability of the net profit
so the more compelling and complete the data the better.
The Plan
The last piece of the jigsaw puzzle. We encourage all buyers to write a business plan. Not some
enormous document filled with waffle and motherhood statements. The plan should cut to the chase
and demonstrate that you know what you\u2019re buying, why you\u2019re buying it and what you plan to do in
order to be successful. We know what banks are looking for and we can help but\u2026\u2026it\u2019s important that
you are able to articulate the why, what and how of your decision to buy a particular management
rights. If you\u2019re stuck remove the title Business Plan and replace with Here\u2019s Why I Won\u2019t Go Broke.
In closing I think it\u2019s important to appreciate that we are dealing with an incredibly fluid situation and
the banks are in this boat with the rest of us. Today\u2019s business plan can be rendered obsolete by a
snap border closure or new strain of the dreaded virus. But, I believe Australia has managed the
situation better than most. We have a very stable and well capitalised banking sector, a mostly
competent government (at Federal level anyway) and a reasonable economic outlook. Add record low
interest rates, a population in transition and all the big spenders trapped in Oz and I\u2019ve gotta
ask\u2026\u2026.what are you waiting for ?
PS : We have had 6 different lenders approve finance for short stay leisure based management rights
in the past week. Our advice, don\u2019t believe any stories you hear about banks not lending<\/p>\n","protected":false},"excerpt":{"rendered":"
As I contemplate an attempt to make some sense in this article there\u2019s an old English expression thatsprings to mind.“May you live in interesting times” is claimed to be a translation of a traditional Chinese curse. Whileseemingly a blessing, the expression is normally used ironically; life is better in “uninteresting times” thanin “interesting” ones, which are usually times of trouble. Talk about ironic alright.Anyway, I digress.Rather than write my usual meandering stream of consciousness I\u2019ve decided to cut to the chase andoutline some specific thoughts that might hopefully assist buyers to navigate a management rightspurchase in a world of apparent uncertainty.The Fundamentals Have Not ChangedWhileRead More →<\/a><\/p>\n","protected":false},"author":1046,"featured_media":1806,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mbp_gutenberg_autopost":true},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1896"}],"collection":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/users\/1046"}],"replies":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/comments?post=1896"}],"version-history":[{"count":2,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1896\/revisions"}],"predecessor-version":[{"id":1898,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1896\/revisions\/1898"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media\/1806"}],"wp:attachment":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media?parent=1896"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/categories?post=1896"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/tags?post=1896"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}