Over the past five years or so, M&A activity (mergers and acquisitions) has been a huge part of the property management industry. While this was a topic of conversation occasionally in prior years, and we all knew a few people here and there who had purchased books of business, it was largely a rarity. That all changed when institutional money got interested in the SFR, PropTech, and PM spaces. Once that money started flooded in around the 2019 timeframe or so, it changed the landscape, and everyone was suddenly interested in either acquiring or being acquired.

This article won’t talk about being acquired. We’ll save that for another day, since, as many of you know, I have a LOT of thoughts on that topic. Instead, we’re going to talk in this article about acquiring doors or PM companies yourself and why I generally think this is a bad business decision.

For frame of reference, I have personally purchased several PM companies, and I’ve sold a portion of my portfolio, so in addition to the consulting work I do for clients on this, this is something I’m intimately familiar with in my own operation. I have the scars to prove how this can go sideways.

When Acquisitions Make Sense

But first, let’s cover the cases where I think it actually makes sense to engage in acquisitions, as I think this is a pretty limited set of circumstances.

You have to start off with knowing what your long-term goals are for the business. By long-term, I’m looking out 10+ years. If your immediate reaction is that you don’t plan to be in the business for 10+ years, then you may be a candidate for acquisitions. Why? Because the only case where it really makes sense to grow by acquisition is when you are looking for a relatively quick exit. If your goal is the maximize growth over say the next five years and then exit the business for the maximum possible multiple, then growth through acquisition is almost a necessity, as organic growth will simply take too long to reach your goal. It generally isn’t possible to grow any PM company organically by thousands of doors per year, even in the largest markets, and starting up multiple markets from scratch can be incredibly capital intensive. Even if the capital is available, growing a brand from scratch in a new market is a steep up-hill battle, and starting off a new market with an acquisition can make a lot of sense.

For Everyone Else, the Numbers Don’t Work

If the above doesn’t sound like you, then I’m about to show you why the numbers simply don’t pencil out for growth by acquisition. If you have no desire to be the next Pure or Evernest, with 20,000+ doors and a large corporate infrastructure, then there is basically no mathematical case to be made for growing any way other than organically.

Let’s start off by looking at what companies are expecting for purchase prices, and what we have seen as averages in the industry the last few years. A great source of information on potential acquisition targets is Peter Lohmann’s newsletter. He includes a link at the bottom of each newsletter with new companies seeking acquirers. For me, this section of the newsletter is always a great source of comedy each week, as the prices that people are demanding are absolutely outrageous. Let’s look at a screenshot of this section from the most recent newsletter:

Only three of the five companies listed here list both their desired price and their door count, but they’re pretty typical of the prices we see week after week, so they can serve as our representative sample. If you run the numbers, you will find that the average price per door being asked is $5,852. And that average is actually dragged down by the one “reasonable” company above that is only seeking $2,500 per door. The other two are basically at $7,500/door.

Folks, that price is insane. To understand why, let’s look at a couple of metrics from the NARPM Benchmarking Guide. First, the screenshot below shows the table from the Benchmarking Guide that is looking at “PPU,” or “Profit Per Unit.” PPU is expressed as a monthly dollar amount of net profit received for each occupied unit under management.

As you can see, the average company is only generating $24 per month of profit, and the very best of the best companies are only generating $68 per month of profit. Now, let’s think about that in terms of the prices we reviewed above for purchasing doors. Let’s use the average of $5,852. At that price, it would take you 7.17 years just to break even on that acquired door, and that’s if you are in the top 25% of PM companies in terms of profitability (the reality is that most companies growing fast by acquisition are NOT the most profitable, as growth is expensive). If you are only generating average profitability, it would take you twenty years to break even on each door acquired!

I don’t think I really need to elaborate on how bad of an idea that is and how unrealistic it is to think that you’ll actually profit on this endeavor with those kinds of numbers. But let’s still dig a little deeper. Maybe you’re someone who thinks REALLY long-term, and you’re confident you can hit that max profitability per door and start making money on that door after 7 years. Let’s take a look at another NARPM benchmark, the Unit Lifetime metric:

This table is broken up into quartiles, with the first number representing the bottom 25% of PM companies, and the last number representing the top 25% of PM companies. Far too many companies make the mistake of looking at the second row down, which is the Unit Lifetime Revenue. They divide that number by the acquisition cost and think they’re getting a hell of a deal! But the thing is, revenue doesn’t matter; only profit does. As your number of units scales up, your expenses scale up with it, and particularly as you start scaling above about 800-1,000 units, your costs start to skyrocket as levels of middle and senior management have to be added to manage the growing team and business. That takes a very well run PM company from a margin of 35% down to a margin of 15% in a typical case, and that number doesn’t start to recover until many thousands of units are under management, finally creating the necessary economies of scale. So as you acquire these units, you’re also acquiring the expenses needed to manage them, which means your profit per unit is staying relatively consistent (or even dropping). This means you need to ignore that Unit Lifetime Revenue number and look instead at the Unit Lifetime Profit number.

As you can see, this is a frightening number. The number we need to look at is the one second from the bottom, because this is the number that excludes acquisition costs from expenses, as we’ll need to add back in the actual acquisition cost since we’re not growing organically. Even the top 25% of PM companies are only achieving about $8,851 of total profit, and that’s over the course of about 13 years. That’s a really long time to wait to only make $2,999. Yes, that’s how that math works out. Remember, the average cost per door we talked about above was $5,852. So if we’re getting a total profit over the course of 13 years of $8,851 before factoring in acquisition costs, and we take that acquisition cost of $5,582 off, we’re left with only $2,999 in net profit over 13 years. That’s only $231 per year of profit, on an investment of $5,582, which is a 4.1% annual return. Folks, you could do better by putting your $5,582 in a decent corporate bond ETF with zero work and almost no risk. This is not a wise investment. And remember, this is using the average number. Two of the three companies above wanted much more than this per door, which would take that profit down to almost nothing.