5 Questions an Investor Might Ask An Association Manager

If you’re in the community association management industry, you’ve probably noticed more and more investors (from competitors to private equity firms) are interested in acquiring your business or joining as partners. But before they sign on the dotted line, they’ll have questions about a few key aspects of the business:

1. “How long have your customers been around?”

Investors are wildly attracted to the concept of recurring revenue. That is a theme one can find again, again, and again. The gold standard of recurring revenue is in the form of long-term contracts. Fortunately, community association management is an industry with such contracts in place. Early on in a diligence process, post-IOI, investors are going to ask for a list of contracts for your largest (and potentially all) customers.

If you don’t have contracts (or have been working on an honor system with a long-term customer for a long time), don’t fret. What is more important is the repeatability of the customer relationship. Tenure or length of time that a customer has been dutifully paying your company matters just as much as a formal contract – potentially even more so. Just make sure to have proof of recurrence. 

The number investors are looking for is ~90% customer retention (or ~10% customer churn, in different but equivalent words). That means for every ten customers only one is lost a year on average. 

Communities transitioning from developer control to homeowner control may be a retention challenge, making hitting that 90% level difficult.  That said, demonstrating strong retention through transition (>80%) is a strong sign of superior customer service and top-notch community managers.

2. “What kind of customers do you serve?”

A varied customer mix can be a double-edged sword for investors.  Most types of customer diversity (e.g. developer control, HOA size, geography, and housing unit type) can be positive or negative, depending on the situation.

Serving some developer-controlled boards can be attractive to investors, because developer relationships can be a reliable, sustainable source of growth for the business–that is, if you successfully minimize churn during the transition period.  If not, developer-controlled boards may actually be a drain on efficiency and profits.

The mix of community sizes in your portfolio is another topic an investor will want to understand. Larger associations may need (and may have the budget to support) additional CAM services beyond dues collection, financial accounting, board governance, DRB facilitation, regulatory compliance, and common-area maintenance. While it certainly costs more to maintain the customer relationship, full-service partnerships can be more valuable and long-lasting if managed efficiently.  On the other hand, smaller associations requesting basic services may also be a simpler offering, requiring fewer hours of a community manager’s time in any given week. A good blend of large and small customers allows for management companies to appropriately staff community managers, and maximize utilization while also limiting burnout. 

Another dimension to consider is the type of customers you serve. HOAs (and CDDs if you are in Florida) have different operational dynamics than COAs, which require more active property management and in-house staff to maintain everything from elevators to boilers to parking decks. Both customer types are inherently valuable and demonstrate your ability to manage various constituencies, but can lead to operational difficulties if your community managers have to switch between customer types. 

3. “What’s your average manager tenure?”

At the core of a good management company is a team of dynamic community managers. Good community managers are a rare breed, combining the patience for what can be a thankless job, attention to detail for seamless board meetings, and no small measure of grace on the phone with angry or worried residents in the community. Combined with the odd hours of attending evening HOA board meetings, it’s no surprise that community manager turnover can be stubbornly high.

Additionally, some organizations have community managers focusing on the full range of services for a client – from handling inbound communication from residents to coordinating and paying vendors like landscapers, collecting dues, and creating board materials. 

So, if your managers are handling a wide range of tasks across a large number of customers of different sizes and types, with little support from the “back office,” eventual burnout is likely. And depending on how your organization is staffed, there may not be much in the way of a backstop if that manager leaves, disrupting operations and potentially jeopardizing the future customer relationship.

Ultimately, investors want to see community managers who are long-tenured, focused on a few key elements of the community relationship (as opposed to handling everything), and report a sense of fulfillment in their day-to-day duties.

4. “What’s your revenue mix?”

Another important element to consider: the various ways your firm is paid for serving its communities. Some fees are considered transactional (one-time in nature) while others are recurring and stable. 

Management fees are contractual and – when charged on a per-door basis – the most stable base of revenue. Investors will be looking for this to represent a larger share of your revenue, as it is paid even in a recession. 

Revenue from processing transfer and DRB applications is typically connected with macroeconomic events. The past year has seen strong demand for both services, as homeowners refinanced their mortgages to take advantage of low interest rates (driving transfer fees) and started renovations after months of working from home (driving DRB application fees). With the global pandemic (hopefully) approaching an end, it is likely that the demand for these services will decline, reducing these types of revenue. Or, perhaps some new, unpredictable event occurs that bucks the trend and drives more demand for transfer and DRB services. It is this potential volatility that investors pay attention to.

Investors are eyeing stability, and a mix of revenue that ensures this will be highly valued. That said, revenue from transfer and DRB fees can improve CAM profitability, which is what investors ultimately assess when determining an offer price.

5. The bottom line – profitability

Ultimately, investors pay for a company based on its profitability, often referred to as your “take home,” “bottom line,” “earnings,” “EBITDA,” or “free cash flow.” Offer amounts are frequently expressed as a multiple of that amount (e.g., “4x-5x Earnings”). Therefore, the higher the profit, the higher the purchase offer. 

But absolute number isn’t the only important factor – consistency and growth are also important.  A track record of profitability is important, as it demonstrates your ability as a leader to balance the many challenges of the CAM industry: maintaining strong customer relationships, paying your employees fairly/rewarding them for a job well-done, and keeping operational expenses (like rent) under control. 

Growth is important, too — it demonstrates that your services are in demand (and that your pricing is working).  If the company’s revenues have grown, investors will want to see that profitability grows as well. This suggests the leader of the CAM has been able to stick to a budget and maybe even improve efficiency over time.

At the end of the day, showing years of growing profits is the simplest and quickest way to prove that you have been successful in managing the four concepts discussed above.