What's in Your Pocket? How to Value a Property Management Company by Earnings

When a company owner says "we do $500,000 a year," ask one question: "What do you put in your pocket?" Revenue tells you how big the company is. Earnings tell you what it is worth.

Why is revenue the wrong number to value a property management company?

Picture this. You are on a call with a company owner, and they tell you, "We do $500,000 a year." Your brain does what every brain does with that number. It starts multiplying. A couple times revenue, maybe more, and within seconds you have decided it is either a steal or wildly overpriced, and you have not seen a single page of financials.

If you have ever nodded along to a big number on a call so you would not look like the new kid, you are in good company. Most of us have.

What should you ask a seller instead?

I recently recorded an episode with two people who hear that sentence all the time: Patrick Hurley of PM Broker Group and Jordan Coleman of Live Oak Bank. Patrick's answer to "we do $500,000 a year" is one question: "What do you put in your pocket?"

If the owner says $150,000, the whole conversation changes. Half a million in revenue and $150,000 in earnings are two different companies, and only one of them is the company you would be buying. As Patrick put it, nobody is going to pay a million dollars for a business that earns $150,000.

What is SDE and why does it matter?

Patrick pushes buyers and sellers toward SDE, seller's discretionary earnings. That is what the business truly puts in the owner's pocket once you normalize the numbers. Until you know that number, you do not know what you are buying.

So on your next call, ask what the owner takes home, not what the company brings in.

Where can you hear more?

You can listen to the full conversation on my latest podcast episode. Patrick, Jordan and I are also doing a panel at NARPM National on this topic and more. If you will be in Vegas, I would love to hear from you.

Frequently asked questions

What question should you ask when an owner quotes annual revenue?

Ask, "What do you put in your pocket?" The answer shows earnings, which is what the company is worth, rather than size.

What does SDE mean?

SDE stands for seller's discretionary earnings. It is what the business truly puts in the owner's pocket once the numbers are normalized.

Why does revenue alone mislead buyers?

Revenue tells you how big the company is, not what it earns. A company with $500,000 in revenue and $150,000 in earnings is a very different business from one that only sounds big.

If you are thinking about buying a property management company, learn more about Built to Acquire, my three-month group program.