Unlocking Value: Protecting Valuation Against Developer Runoff

Introduction

In the last article we provided a framework for validating developer-based earnings in HOA/condo management businesses. While traditional management fees are recurring in nature, developer-based fees can churn at significant proportions and result in steep revenue drop-offs. In this article, we discuss how management company owners can protect valuation of their businesses against runoff in developer earnings.

Example

Similar to our prior example, we show the estimated project by project profile of the developer client base of an HOA management company ("Company XYZ"). The business reached a relative peak in 2024, and anticipated developer-based revenue is expected to decline when factoring in project completions and standard contract churn.

We specifically value the runoff of the developer based earnings below, using a few key simplifying assumptions: (1) for now we exclude the cost of any account management/sales staff specifically focused on developer relationships, and (2) we cleanly estimate manager and accountant direct costs against developer revenue. In this example, the owner of Company XYZ may face valuation concerns as buyers dig into the projected decline in developer revenue as projects run off. On a simplified basis and without further detail, the buyer may estimate the enterprise value of the developer earnings stream at Company XYZ as $933k.

To support its valuation goals, Company XYZ should spend time analyzing prior performance of any account management staff associated with its developers. In the below further analysis, Company XYZ regularly tracks performance by account manager in its developer division, as well as projected housing starts in its local area. This combination of historical data and current staffing levels suggests Company XYZ should add on average $40k of new developer revenue into its business in 2025 and beyond (for simplification, we didn't factor in project churn). The valuation of the developer stream, once factoring in this additional information, is $1.4M.

Summary

Management companies with a developer presence should actively track historical data in order to support valuation when considering succession planning. In the above example, the ability to track and validate projected wins created significant value for the owner of the business. In later articles we will cover the same topic (value of tracking historical data) when specifically focused on all customers, not just developer relationships.

For more information on the HOA management industry, valuation metrics, or other questions, please contact contact@camadvisors.co or visit camadvisors.co.