Unlocking Value: Validating Developer-Based Earnings

Introduction

In previous articles we have discussed how buyers and sellers may think about valuing HOA/condo management companies. In this article we will touch upon developer-based management fees.

Developer management fees are significantly different from standard management fees due to their shelf life: once a developer community reaches a critical mass, it often flips to a different management company entirely. The ability to retain developer communities as ongoing communities is a significant benefit to management companies.

‍Basics of Validating Developer-Based Management Fees

In the above, Company A earned $700k of developer revenue in 2024. The business is for sale, and both the buyer and seller are fine tuning valuation expectations. While the seller may anticipate that its EBITDA should not be discounted in any way due to the developer concentration, the buyer may take a different view. After conducting basic due diligence, the buyer uncovers that the 2024A developer revenue stream comprises six projects, shown below. In order to validate the earnings base, the buyer wants to investigate whether or not the developer revenue will deteriorate meaningfully as projects flip to being potentially managed externally.

After conducting diligence, the buyer determines that, given (1) current estimated completion date of each project and (2) the likelihood that the management company retains its developer communities (set at 30% in this example), the earnings base associated with developer communities is relatively secure. For instance, in order to earn $700k of revenue each year from developer communities, the business only needs to run off its existing developer communities and convert 30% of the developer revenue into ongoing revenue. In the final year of the projection, the revenue base is $250k light from the 2024A balance of $700k. However, the buyer believes that the existing developer relationship managers should be able to generate at least that number in new contract wins in the years after the close of the transaction.

In fact, the seller's advisor would probably argue that Company A could justify a positive run-rate adjustment (and thus, a higher EBITDA) for the anticipated revenue from its developer base, given the jump in subsequent years after 2024. In later articles we will cover developer earnings in even more depth including (1) factoring in projected developer account manager / salesperson wins and (2) how to consider valuing developer earnings in an opposite scenario in which they decline rapidly.

Summary

Developer earnings are amongst the most difficult streams for buyers and sellers to value in a sales process. CAM Advisors believes developer earnings should generally be viewed on a cohort basis with an anticipated conversion rate, along with projected wins derived from account manager / salesperson activity.

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