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When Scott Raymond started buying real estate, he looked for a property management company to maintain his buildings. He couldn’t find anyone to care as much as he did, so Raymond decided to start his own property management business.
When Scott Raymond started buying real estate, he looked for a property management company to maintain his buildings. He couldn’t find anyone to care as much as he did, so Raymond decided to start his own property management business.
Despite falling into the business accidentally, Raymond built his property management company to 25 employees and $2 million in annual revenue when an acquirer approached him. MYND Property Management is a venture-backed company doing a roll-up in the property management space and was impressed with what Raymond had built.
Raymond knew real estate management companies were trading at 1-2 times revenue and viewed MYND’s initial offer as too low. Instead of walking away, Raymond worked with MYND to help them understand why they should pay more for his company. Raymond also approached one of MYND’s competitors kicking off a mini bidding war for his company.
In the end, Raymond got a deal he was happy with, and in this episode, you’ll learn:
One year on from selling, Raymond is thrilled with his decision because the sale has allowed him to focus on his passion, which is real estate investing. Getting clear on what you plan to do next is the first of four steps to a happy and lucrative exit. Discover the other three by getting your PREScore™ now.
John Warrillow: So how do you make peace with your decision to sell your company? I mean, how do you decide that you’re ready to separate yourself from your business and go do something else? One of the things that we’ve learned is that the happiest owners are the ones that have something they’re excited to go do next, which is exactly the situation my next guest Scott Raymond found himself into. He’s a real estate guy by training and by love, and he got into the business of managing properties almost by accident when he couldn’t find someone to manage the properties he bought. So he never really loved the property management business. So when he was approached by a potential acquirer, he was only too happy to engage in those conversations.
John Warrillow: In this episode, you’ll hear how he approached getting the acquirer to nudge up and improve their deal both in terms of value as well as how he was going to get paid his money. He’ll talk about how he told his employees and structured that presentation so that it kind of cushioned the blow a little bit for them. He’ll also talk about his earn out and the way he minimized his exposure to the ebbs and flows of an earn out. Here to tell you his entire story is Scott Raymond.
John Warrillow: Scott Raymond, welcome to Built To Sell Radio.
Scott Raymond: Thank you so much.
John Warrillow: So you were in the property management business. I think everybody has a vision of property management. Now this is going to date me, but mine goes back to Schneider. Remember the guy with the big key ring?
Scott Raymond: What show was that on?
John Warrillow: I think I had a crush on Valerie Bertinelli. Don’t tell my wife.
Scott Raymond: That’s great.
John Warrillow: I think I had a crush on her.
Scott Raymond: I think we all did.
John Warrillow: Schneider was the guy that went around and kind of managed the properties, right?
Scott Raymond: He was the maintenance man for the building.
John Warrillow: Yeah, yeah, yeah. So was that the business that you were in? Tell me more.
Scott Raymond: That was certainly a guy like that would’ve worked for me for sure. So we would’ve managed the building for the owner, for the owners, and we would’ve hired somebody like that to take care of things like changing locks, dealing with maintenance issues. Yeah, guys like that, we had plenty of those employees.
John Warrillow: Okay. So what was the business model? You would be contracted by the building owner to manage the property, is that right?
Scott Raymond: Yeah. So we focused primarily on residential real estate, and that includes single family homes, duplexes, triplexes, fourplexes, 10-unit buildings, 20-unit apartment buildings. And our largest was 100-unit apartment community. We had a few commercial office buildings, but it was mostly residential rentals.
John Warrillow: I’ve always wondered how do you sell your service because on the outset, one would assume that managing your property through ABC Company versus XYZ Company… I mean, they’re doing the same stuff. What did you guys do to convince people to use you?
Scott Raymond: Well, to be honest with you, I started the business… The other side of my business is I’m a real estate investor. So I went out in the post great recession, went out with some investor clients of mine, and we acquired distressed real estate. And fixed them up and sold some and held some. And it was during that process that I really started the management company almost by necessity because I wasn’t happy with the kind of management companies that were out there. And I needed a certain level of control for my partners and the buildings that we were buying. It was only after maybe a year or two of just managing our own stuff that the real estate community, real estate agents that represented clients that were buying, other property owners started to see what we were doing, liked what we were doing. Said, “Hey, would you consider managing for us as well?”
John Warrillow: And what was it that you saw in those other property management companies that they weren’t doing well?
Scott Raymond: Well, there’s an inherent conflict of interest in the property management business. The property owner is looking to maximize revenue and minimize expenses, and depending on how the property management company operates their business model, they’re trying to obviously maximize their revenue and sometimes those things are in direct conflict. So the management company might not supervise a maintenance guy like Schneider as tightly as an owner would, and therefore Schneider ends up billing three or four hours when the job could’ve been one. Just small things like that. You follow me?
John Warrillow: Got it.
Scott Raymond: Yeah.
John Warrillow: Yeah, yeah. For sure.
Scott Raymond: Just making sure that the properties are given the attention as if an owner would be managing it themselves. So we tried to bridge that gap. The management company simply just try to get as much revenue from the owner as they can, which may not be in the owner’s best interest versus managing it like an owner would and still making a profit.
John Warrillow: How does Airbnb impact your business? Because although you’re doing some multi-unit, you’re also doing some residential stuff. Was that at an opportunity or a potential threat? What was your experience there?
Scott Raymond: No, it was never a threat because it’s not a big enough market compared to the overall market for long term rentals. It’s a market that many of my owners came to me and said, “Hey…” Let’s say we had a 10-unit building, “Can we try to do Airbnb in one or two of those units?” We consider doing it, but it’s a whole nother ball of wax just in terms of the scheduling. Our whole software platform was based for long term rentals. It was really not faced to deal with Airbnb interface.
Scott Raymond: There are companies out there that are doing Airbnb management services, these third party vendors between the owner and Airbnb. We just decided not to get into that space.
John Warrillow: Okay. So you’re investing in properties after the great recession. So you’re building up a portfolio, you’re selling some, you’re holding others. Then the ones you’re holding, you’re using your own… You’re kind of eating your own dog food, as they say. You’re managing your own properties, and then you’re accumulating other properties along the way. How big did you get the property management business before you decided that you wanted to sell it in terms of employees or whatever you want to use?
Scott Raymond: No, it’s a good question. So at the time we sold, we had about 1500 units under management throughout three or four regions in Northern California, primarily in most of the units were in Sacramento. We probably had 250 clients. So we got 1500 units, 250 clients, the average client owned four units or five units, whatever the math is. Some just owned one, some owned 10 buildings and units. I had 23 employees, which included… Don’t quote me on that exact math, but probably 10 in the corporate office and then the other 13 were in the field. Combined with Schneider type maintenance guys that were roving the field. I love the Schneider. I haven’t thought about that name in 30 years.
Scott Raymond: Then on the larger communities where the law requires you to actually have, and the business requires you to actually have a manager on site because the building is large enough that it needs that kind of service, we would have employees that actually worked for us but actually lived in those properties and serviced those properties. So about 23 to 25 employees total.
John Warrillow: Great. So what prompted you to think about selling?
Scott Raymond: Well, my real passion is on the investment side, frankly. I build a management company really out of necessity initially, and then it just kind of took a life of its own. I did get a lot of satisfaction growing a business. The satisfaction of servicing clients well and being appreciated. The satisfaction of building a real recognizable brand in the Sacramento region. The satisfaction or watching margins go up. The satisfaction of changing employees lives through offering healthcare and career advancement, and all that stuff was very satisfying. But at the end, it didn’t really satisfy my core. My core is just really in the investment side of things.
Scott Raymond: So I had a young protégé, because I lived in Marin County, and the primary business was in Sacramento County. So I had a geographic issue for myself.
John Warrillow: For those that don’t know California, roughly kind of how many hour drive would it be from Marin?
Scott Raymond: It’s about an hour 15 to an hour 30. So not something you want to do every day.
John Warrillow: For sure.
Scott Raymond: So in the beginning stages, I had a young guy just out of school, had his real estate license, and I saw an opportunity to kind of make him my local Sacramento presence. I mentored him basically throughout the entire cycle of our business, and by the time we sold, he was about 30. I’m 50. He obviously had a lot of life left in him and wanted to keep rolling with the company. We were starting to look at a succession plan, but we couldn’t really figure one out. Does he buy me out? Do I just get residual cashflow and sail off into the sunset? None of these things really stuck.
Scott Raymond: So it wasn’t until just really we were approached by some companies that were trying to expand their management presence that we really decided to sell. We hadn’t actively gone out and put the business up for sale.
John Warrillow: Why would the negotiation, not negotiation, conversation I should call them with your protégé so difficult? Why was it difficult for you to find a solution with him?
Scott Raymond: I don’t want to say it was insurmountable or impossible. Frankly, we would’ve probably found a solution that worked for both of us. It’s just these other companies approached us right in the middle of that, and it was a much easier exit for me. It gave me much more what I wanted.
John Warrillow: I think a lot of people listening, Scott, would be like, “Wow. That’s so incredible that you get approached by an acquirer. What do I have to do to tart myself up, make myself sexy enough that people will actually come to me?” So how did they find you these other potential acquirers? How did they come to know-
Scott Raymond: Good question. In building our brand, we were pretty successful at PR. We got a lot of… If we took on a new project or when we were responsible for some dramatic remodel of a building, because that was part of our services too for our clients, we would do very well to get press out there. My partner was very good at social media. We were first page Google search for property managers in certain markets in Northern California. We were on Book A List for local business journals and these sorts of things. So when these companies decided they wanted to start acquiring, it was pretty easy for them to see who were the top companies in those markets, and we were certainly one of them.
John Warrillow: And so you were approached. Under what sort of conditions were you approached? Was it under the guise of let’s have a peer-to-peer conversation? Did they use the word strategic? Did they come right out and say, “We want to buy you.” How did they sort of couch the conversation in the beginning?
Scott Raymond: No. So the memory’s a little bit vague on the initial conversations, but it was something like a phone call. “Hey, we’re in the market to acquire a management. Would you consider selling?” I mean, it was a pretty basic right between the eyes kind of pitch, which I like. I’m not one to mince words. That was followed up by a lunch and then some more discussions and then an LOI and then off to the races.
John Warrillow: Got it. I want to get into all that. So you have this conversation, and what made you decide these guys were legit? Because a lot of our listeners would get those calls all the time, right? And sometimes they’re real, other times they’re a bit shaky. There’s some investor who thinks he can cobble together some money, but there’s… How did you know these guys were serious?
Scott Raymond: That’s an easy one. Unfortunately, probably won’t translate to a lot of what your listeners would experience. The company that came to us was a company that was founded by two pretty well-known entrepreneurs and had already built a company and took it public, and now this was their next mountain to climb. So very recognizable guys in the business world, in the real estate world. Furthermore, they were backed by some pretty substantial venture capitalists. So obviously we went and met with them a number of times. We talked to other companies that had been bought by them, and we talked to their VC guys as well. So we had a-
John Warrillow: And this company you’re referring to is called Mynd, is that correct?
Scott Raymond: Yeah.
John Warrillow: And it’s spelled a bit funny. It’s M-Y-N-D as opposed to the true-
Scott Raymond: That’s correct.
John Warrillow: Got it. Okay. So Mynd approaches you, these kind of all-star entrepreneurs at the end of it. So you figure they’re legit. Did you have any sense of what you thought the management company was worth?
Scott Raymond: Yeah. So when I started, and this might be helpful to the listeners too. When I made the decision to start my own management company, before I did that I actually went out to try to possibly acquire somebody because I didn’t know how long it was going to take to organically grow my company to profitability. So I had some capital resources, and I went out to a couple other companies to do what Mynd did with me. This was 10 years ago. So I went out and approached a couple other companies to see if I could buy them, and during that process, we got pretty close with one of them. Close enough that we did a business appraisal. During that business appraisal, I was able to really look under the hood on how a business appraiser was looking at their business. The owner of that business wanted far more than I was willing to pay, far more than the appraiser gave them value for. So that never went anywhere. But that was kind of my first glimpse on how to value my type of business.
Scott Raymond: Throughout the course of the 10 years that I’ve built Raymond Management, we had acquired a couple of other small… When I saw small companies, the way property management companies generally do M&As is a new company will not necessarily buy my… They’re not going to buy my corporation. They’re not going to buy the shares of my S Corp. What they’re doing to do is they’re going to buy the rights to my management contracts. So I still own the name Raymond Management. My S Corp is still active if I ever want to do something else with it, even though I’m under a noncompete. They really just bought the… Most companies in the space buy the contracts, the rights to the contracts.
John Warrillow: Yeah. In other industries, it often comes down to the difference between buying assets and shares of a company. In your case, it sounds like they bought the assets as opposed to the shares.
Scott Raymond: Exactly.
John Warrillow: For those listening-
Scott Raymond: Well, to finish that thought. So yeah.
John Warrillow: Please.
Scott Raymond: So I bought a couple of smaller portfolios, 100 units here, 50 units there from small, independent, one-off property managers who were looking to retire. So I had a little bit of an experience of doing M&As from the buyer side as well and kind of seeing what other management companies thought their companies were worth. So I had a pretty good idea.
John Warrillow: Okay, excellent. So how were they valued? What is the formula by which you value a property management company?
Scott Raymond: So we also had another buyer looking at us, which is important for your listeners. When we were approached by Mynd, we went out into the market to see if there were any other companies like them that were looking to acquire because we wanted to get two people bidding for us. And anybody considering selling, I would try to do the same thing. Obviously two buyers is better than one for your price. I only bring that up for that point, but I also bring it up because both of these companies looked at valuation differently. Mynd was looking at EBIDTA. They were looking at… I’m sorry, they were looking at really gross. They were looking at gross management fee, and they were looking at a gross multiple on annual contracted revenue. Whereas the other company was looking more at a multiple on earnings.
John Warrillow: Got it. Got it. What were you thinking was a far multiple of either EBIDTA or revenue, depending on how you and your partner were thinking of what was a reasonable kind of multiple?
Scott Raymond: Yeah. Without getting into details of my exact transaction, what we were seeing from the marketplace was gross multiples between one and two, and we were seeing EBIDTA multiples between three and seven.
John Warrillow: Got it. Got it. And when you say one to two, you’re referring to one to two times gross management fees or revenue is another way of saying it.
Scott Raymond: Correct.
John Warrillow: Got it. Got it. Or three to seven times EBIDTA. Of course, EBIDTA stands for earnings before interest, taxes, depreciation, amortization. Kind of pre-tax profit in a way. So those were the numbers you were working with in your own mind. The offers that you got I’m assuming were sort of in that range. You felt that they were fair based on what you were experiencing.
Scott Raymond: Yeah. Initially they weren’t, so the negotiations stalled for quite a bit. But ultimately I think we came around. We ultimately got a deal done. So I think that both sides thought it was a win-win.
John Warrillow: What stalled the negotiation?
Scott Raymond: Mainly valuation and terms. We were looking for all cash deal, and a lot of companies in the space weren’t wanting to do cash deals. They wanted to do part cash-part shares in their company, drag the sale installments out over time, and then ultimately the price. So those were kind of the main thing. Then which revenue we were getting credit for. The primary revenue for management company is the monthly management fee. If you have a house that you and your wife were renting and you hire my company, I’m going to charge you $100 a month roughly. That’s $1200 a year. That’s the bread and butter. Where we make a bunch of ancillary revenue is if the house goes vacant, we have to lease it up. We charge commission for that. If a water heater blows out, we got to send a guy out, we make a markup on that maintenance guy for scheduling him. We keep late fees if your tenant pays late. So there’s all these different fees that we earn. It can really, really add up over time.
Scott Raymond: Let’s say you and your wife wanted to sell. Sometimes clients who we were managing for would let us us sell them as well, so we’d get the commission on the brokerage opportunity. So it was a matter of negotiating which of those income streams were going to get valued into the multiple equation as well.
John Warrillow: Wouldn’t they all be valued as part of the equation?
Scott Raymond: No because what the companies that are trying to acquire in my space are looking for is that sticky recurring revenue. So the leasing commission, for example. If I lease your house out, that person may not move for five years. So I can’t guarantee when the next time is I’m going to earn that leasing commission. Your tenants may never pay late. I can’t guarantee when that late fee is going to come in.
John Warrillow: Got it. Got it. When you did deals with customers, I’m assuming you would sign a contract of some sort, a management contract.
Scott Raymond: Right.
John Warrillow: What duration were those contracts?
Scott Raymond: Generally one year. We played around with one year contracts and month-to-month contracts. The benefit of the month-to-month contract easier to fire a bad client, easier to make changes to your terms to adjust to the market or to your own margin requirements. But much more transitory risk of clients leaving and firing you. The one year contract provided a little bit more stability, but that’s the problem with a management company. That’s why multiples may not be as high as other types of businesses that have stickier, longer term relationships.
Scott Raymond: A company that acquires my contracts at the most is going to get a guarantee of a year’s worth of contractual revenue. But if they don’t end up providing a good enough service or the same quality service my customers were expecting, then that client may not renew at the end of that year. So they just paid me for a year’s worth of rev. They just basically paid for a year’s worth of revenue.
John Warrillow: Got it. So let’s get back to the negotiations itself. So you’re in this. You got two kind of potential suitors. Your first is not meeting your expectations on either points, valuation or terms. So I think a lot of our listeners would really resonate with that experience or that situation where they’ve got an offer. Maybe they get low balled and feel like they’re not getting value for what they’ve created. What’s the secret to kind of nudging the acquirer up without being so standoffish that you kind of piss them off or they turn away and say, “This guy’s totally unreasonable.”
Scott Raymond: Yeah. So you get contacted by somebody who wants to buy your company, and assuming you’ve done some level of vetting and you feel comfortable with these guys, you sign a nondisclosure agreement, confidentiality agreement. Well, first of all, it starts with good books. You got to have good books. You got have really, really tight financials. I looked at a company the other day on behalf of Mynd to acquire, and the guy was only booking a half year’s worth of his revenue. He was taking the other half under the table for tax purposes. You know what I mean? That guy’s not going to get a good price for his company. So you got to have really good books.
Scott Raymond: So if I’m trying to get them to value all of my different revenue streams, then I want to have two, three solid years of historicals to show them what the average out over those three years. So I want to make the case as tightly as possible in financials of how much money I’m making and how sticky and continuous that revenue is. It starts with that.
Scott Raymond: I know a lot of owners may get calls, and they don’t want to… If the guy’s not serious, if they don’t believe the buyer’s serious, they’re not going to want to just start throwing financials out to just anybody. So I get that. I get there’s a reluctance to share your information. But once you can get over that hump, that’s really how you choose the valuation is to really, really get into the hood of your financials with the buyer and make your case of why perhaps your company’s worth a higher multiple than the guy next door because of longer term clients or higher end properties or more loyalty or better brand recognition or whatever.
John Warrillow: You’re trying to make this case almost… Sounds almost like a lawyer would make a legal argument in front of a jury.
Scott Raymond: Yeah, kind of. Yeah.
John Warrillow: Kind of plead your case.
Scott Raymond: You’re selling your business. Even though I got approached, I went into full on sales mode. I was selling my services.
John Warrillow: Part of selling is really I go back to Neil Rackham in SPIN selling or your Xerox sales training where you find out what the customer wants and then provide them with that solution. Were you capturing what they were interested in, what their hot buttons were? How did you kind of go about diagnosing their situation?
Scott Raymond: Yeah. The property management business is not a high margin business, and their approach to it was to try to squeeze margins out of more efficient deployment of personnel through the use of technology. So they’re really taking a heavy technology approach. So for me, the sales pitch was really about how efficiently I was running the business, how I was able to manage perhaps more units per person, per employee than the average management company, how we were able to use technology to staff maintenance guys more efficiently. These sorts of things. So I really-
John Warrillow: Doesn’t that kind of make the opposite argument though? Meaning you were already so efficient in squeezing so much juice that there wasn’t much incremental they could squeeze if they bought you guys?
Scott Raymond: No. It’s a good point. But they had some other technology that we didn’t. They had some proprietary technology that was going to allow them to squeeze out even more margins. What they liked about us specifically is they didn’t have any exposure in Sacramento, and we were pretty major regional player. So they could just come in and plug and play with us. They didn’t have to hire a bunch of new employees or what have you. It was really just a really synergistic move for them.
John Warrillow: Got it. So you were approached by Mynd, but then you did a great job of getting a second offer on the table. How did you get that second offer? What was your pitch to the second company to bring them to the table?
Scott Raymond: Frankly, I’m surprised they didn’t approach us because they were out actively looking for companies as well, similar strategy to Mynd. We had just heard about them through the trades that they were out trying to do the similar thing. So we just called their CEO and said, “Hey, look. We’re in play. Do you want to come to the table?”
John Warrillow: What was their reaction?
Scott Raymond: Yes. We’re interested. Send us your financial.
John Warrillow: Where did it go from there?
Scott Raymond: We got really close. I mean, at the end of the day, it was almost a coin flip to be honest with you. But at the end of the day, I felt what Mynd offered my partner because I was going to sail off into the sunset for the most part. But what Mynd offered my partner and my employees was a better cultural and long term career fit.
John Warrillow: I love to talk about employees because you had in your own admission sort of 25 employees, many of whom you were… I was reading between the lines. Correct me if I’m wrong, but you felt like you were giving them an opportunity that maybe they wouldn’t have had without your company in some cases.
Scott Raymond: Yeah.
John Warrillow: Maybe talk a little bit about the team you built and then how you sort of shared the news with them and involved them in the process.
Scott Raymond: I was a big proponent of hiring from within. There’s a lot of very basic kind of menial tasks that are required for property management company. So when you’re going out and you’re hiring people, you may be hiring people that don’t have college degrees. You may be hiring people that are new to the workforce, maybe don’t have a tremendous amount of skillsets, but they can satisfy kind of the basic lower level requirements of a management company’s needs. Then when you see their work ethic, their reliability, their skillset, their intelligence, as other opportunities present themselves, you have great opportunities to move them up through the company and that happened to a number of my employees. They started out in very, very basic tasks, and ended up in pretty serious critical path tasks, positions for my company. That builds a lot of loyalty, a lot of trust between you and the employees.
Scott Raymond: That’s why it made it really, really hard. We had set up a pretty friendly, loving family type culture with Raymond Management, and now I had to break the news that we were going to be going into a company that had plans to take over the world, based in another city. So I did it the best I could with multiple kind of group presentations, and I brought the new guys in and let them kind of introduce themselves to everybody. We had a lot of off-site kind of team building, combined team building experiences.
Scott Raymond: In the transition, I think we only lost one employee that said, “I came to work for you, Scott. I don’t want to work for these other guys.” That only happened one time.
John Warrillow: What was your timing around telling them? Did you have the check in hand from Mynd by the time you told them, or did you tell them prior to-
Scott Raymond: We pretty much did. We pretty much did because I didn’t want… As much as you tell people to keep their mouth’s shut on this… There was a sequence. I had to tell the employees, and I also had to tell my clients. I wanted to tell the employees before I told my clients because I didn’t want the word to get out to my clients before I had a chance to tell them. So the sequence was very important. I wanted to make sure I had a contract, check in hand. Then I told the employees, then I told the clients. That happened about-
John Warrillow: What was the reaction of the employees?
Scott Raymond: A lot of shock and awe. A lot of nervousness. It happened around the holiday time too. It was the holidays at the end of 2018. So in some ways that was a good time because everybody was kind of winding down for the year, getting into happy, family mode. Our business kind of slows down a lot during that time, so that was a good time. But it was a lot of hand holding. A lot of, “Things are going to be good. I’m going to still be involved.” And I was. I was involved very, very carefully. Very much in the transition for the first year. Just hand holding.
John Warrillow: I was going to ask you, if you could redo that announcement meeting, if you had a mulligan and you could have a do-over where you brought everyone together and shared the news, what might you do differently?
Scott Raymond: I think we pulled it off as best I could honestly in hindsight. We rented out a big kind of coworking space. We had a presentation, Dan and I. Created this slideshow that took us back to some of the beginnings when it was just Dan and I working out of basically a condo unit. All the way up to 23 employees and hundreds of clients and great brand recognition. And then we transitioned into, “Where do we go from here?” So it was really a beautiful, well-done, empathetic, compassionate presentation with a lunch afterwards and a lot of Q&A. And then a second one, a second one where we brought the new guys in and just kind of carried on with that. I always made my office open for questions and these sorts of things.
Scott Raymond: The other thing that helped, which was part of the negotiations, is that the employees… Nothing was going to really change right away for the employees. Their comp if anything was going to go up. They got better healthcare. They got some better perks. They certainly got better career advancement because I had really taken the company as far as I could take it or wanted to take it. So all those things helped a lot in getting them over the initial fear of change.
John Warrillow: What was the reaction among customers?
Scott Raymond: Some reluctance and some concern. Like, “Okay, Scott. We’ll see how it goes. We hired you. We hired you because we like you. We hired you because we know when we call you, you’re always going to answer the phone and take care of our problems. So we’re happy for you. We want the best for you, and if this is the move you need to make, Scott, then that’s good. But we’re going to watch very carefully that the balls don’t get dropped in this transition.”
John Warrillow: You mentioned that you were trying to get as much of your money up front. I’m assuming there were some element of earn out that you had to accept or transition…
Scott Raymond: Yeah.
John Warrillow: Can you give us a sense of how big a nut that was for you?
Scott Raymond: Without getting into my specific details, the earn out was an important negotiating point because obviously the buyer wants as little as an earn out or what they refer to as churn, a churn penalty. If you lose clients, how does that affect the final valuation. They want that to be as big as possible. They want the earn out to be as low as possible, and you want the opposite. So that’s a big, big negotiation and one that your listeners should pay very, very close attention to. And lawyer’s can be super helpful for that because what ends up happening is even though my employees are still servicing the needs of the clients post-sale and I’m still involved from a client relation standpoint, we are losing a certain amount of control over the service. It’s now a new way of doing business. So there’s certain aspects that I don’t have control over anymore, and if a client leaves because they’re unsatisfied with the new of things, that isn’t necessarily anything I was responsible for. So how much should I get penalized for that is a very negotiable point.
John Warrillow: Yeah. What proportion of a total deal, total sale of a company would you say is sort of reasonable to expect an earn out for versus what would you say is too much for-
Scott Raymond: In my industry, it’s anywhere from 10-50%.
John Warrillow: 10-50. That’s a big range.
Scott Raymond: Yeah. I mean, that’s what I’ve seen in negotiations. And when you’re talking… So I don’t know if we’re talking about the same thing. So when I think of earn out, I’m thinking of what I was able to negotiate was any new business… Because we had a pretty powerful, organic lead generating pipeline. So I wanted to get credit for that in valuation for some period of time. So that was negotiated into it. Then any client loss I negotiated a floor on that, and that’s where my 10-50% comes in. It could be as little as 10. If they buy 100 contracts, a good deal for the seller would be if you lost one of those contracts or 10%, that’s the maximum they could take off the price. A bad deal for the seller would be 5 contracts, that example. Where your valuation was cut in half basically because you lost those clients in the transition. That churn usually lasts a year.
Scott Raymond: If you can negotiate a shorter churn, like three months of six months, that’s great. If you can negotiate a churn somewhere between 10-20%, I think you’re doing well.
John Warrillow: Yeah. That makes sense. Of course that varies quite a bit by industry. We seen some industries, marketing communications where the earn out can be multi… Five years, seven years I’ve heard in one case, typically three years. So it will vary depending on the industry, but that’s helpful to know kind of what you think is a reasonable proportion.
John Warrillow: One of the things I wanted to ask you about, Scott, is your name was on the door, right? It was Raymond Management, and you’re Scott Raymond. You’re the Raymond. How did the acquirer react to that, that your name was on the door?
Scott Raymond: I don’t think they were caught up in one way or the other about my name being on the door because their strategy is to rebrand any company that they acquire. I think they were more impressed with what that brand represented in the marketplace. Our name was associated with quality properties, quality services, was very recognizable logo and colors. One of the unique things about property management is when we have a new building that we manage, we immediately put a sign in front of the building. Even if we’re not trying to lease it, even if it’s fully vacant, we’ll put the sign there just to let people know. So we had these little billboards all over town. So we got a lot of business from that as well.
Scott Raymond: So yeah, that name wasn’t that important one way or the other for them. Where it is important is when you’ve got an organic lead generation pipeline, social media, internet, Yelp, these kinds of things. That’s where a lot of our leads came through. It’s very important how you manage that kind of social media/online transition. We were getting probably five leads a week from Yelp. Well, you don’t want to just shut down your Yelp the minute you close, but yet they need the leads to start going through their Salesforce system. So you’ve got to really think through how that’s going to work. Do you do a cobranding thing? Do I keep the website up, and do I keep my Yelp up? Do I keep my Google AdWords up without any changes, or do I start to incorporate their name? Do you just go cold turkey right to their systems, which I wouldn’t recommend because then you’d lose all your organic leads.
John Warrillow: It sounds like you’re advocating for what you did in your case was a more a gradual sort of shifting the [crosstalk 00:37:09]
Scott Raymond: Honestly as gradual as you can.
John Warrillow: Yeah. How did you personally feel about their decision to rebrand?
Scott Raymond: In hindsight, I probably wouldn’t have named it after my last name. There was really no ego tied up in that. It was really almost lazy. Having to think of some creative name, it was just easier to go with my name. So I didn’t really have any ego tied up in my name honestly. So I had no problem. I had no problem with those signs going away.
John Warrillow: It’s been a year I guess or so since the transaction went through.
Scott Raymond: Yeah.
John Warrillow: How’s the decision sitting with you now a year on?
Scott Raymond: Couldn’t be more thrilled.
John Warrillow: Why?
Scott Raymond: I think we made the right choice with this company. I think the employees are happy. I think the clients are being serviced. I’ve gotten myself personally to exactly where I wanted to be.
John Warrillow: Where is that?
Scott Raymond: Not involved in the management company frankly anymore. But knowing that my employees and clients are being cared for.
John Warrillow: What was it about that sense of freedom? Maybe I’ll use that. Why was that so important to you? What is that feeling of freedom is giving you?
Scott Raymond: The management business is a very maintenance intensive business in terms of managing clients. You’ve got on any given day, you’ve got owners calling you about reports that they can’t understand or tenants calling you with toilets that don’t flush. You know what I mean? It’s just one of these things. Employees that are trying to get vacations or want their next raise or dealing with issues with other employees. These are daily things. I’m not an ops guy. I’m not an operations guy. Those things don’t fire me up in the morning. What fires me up in the morning is looking to real estate deals and buying real estate deals and rehabbing real estate deals. So stepping away from the management company just gave me the freedom to that and not really have to deal with… Like I said, I’m not an operations guy, and management companies are very operations intensive.
John Warrillow: Yeah. No. It sounds like a great fit for you and onward. Where are you now? If people want to reach out to you to say hi on social media, for example, is LinkedIn okay or Twitter? What’s the best way to-
Scott Raymond: I’m on LinkedIn. Scott Kelly Raymond. I’ve got an Instagram, Scott K. Raymond. They can reach out to me either those two places. I’m also on Facebook at Scott K. Raymond. So what I’m really focused on now is just doing real estate investing, but I’m also writing a book on really the last 10 years, and I’m working with some publishers on kind of the direction of the book. It’s going to be sort of a how-to, real estate investors how-to manual for the really kind of advanced investment. How I built up a portfolio after the great recession and built a management company. So it’s got kind of this entrepreneur rags to riches kind of backstory. But it’s really primarily detailed real estate how-to investing.
John Warrillow: Fantastic. I have to ask just out of curious not because it’s related to our show per se. Are the days of outsize real estate opportunities beyond us? I mean, there never going to be another great recession hopefully anytime in our lifetime. Is that opportunity passed us by?
Scott Raymond: I’ve seen what I’m going to call two generational real estate opportunities in my life, and I’ve been following real estate since I got out of college in the early ’90s. The first one was the S&L crisis of the early ’90s.
John Warrillow: Savings and loans crisis.
Scott Raymond: The savings and loans crisis, and it was during that time where you had an absolute complete destruction of real estate value across the country. You had a credit system that was fundamentally flawed, and real estate got crushed. That was a tremendous, tremendous, once ina generation buying opportunity. The next one was the great recession. Everything in between were just kind of minor, the dot com bubble, this, that or the other. You can find good buying opportunities in those markets, but they’re like once in a lifetime opportunities. The S&L crisis in the early ’90s and the great recession in ’07 and ’08.
Scott Raymond: There’s going to be another one because people forget about the past and lenders get a little too aggressive. Credit markets get out of wack and real estate prices get out of wack. But I can’t tell you if it’s going to be… I mean, we’re already 10 years past the great recession and no signs of it. The lending systems are much better than they were back in 2007. But human nature works in cycles. There will be another one, but it may not be for another 10 years. So right now, yeah. For example, I haven’t bought anything of any substance in really two years because I haven’t seen the values.
John Warrillow: Well, we’ll look forward to the secret sauce in the book.
Scott Raymond: For sure. For sure. Hopefully I get it done this year.
John Warrillow: Scott, I appreciate you taking the time to spend with our listeners. Thanks for doing it.
Scott Raymond: Wonderful. Thanks. Thanks so much.