|For the past 20 years, a management rights business has been one of the most successful businesses one can purchase.
Management Rights Businesses can offer:
- A guaranteed income fixed to CPI
- Good tenure length on agreements
- A lifestyle business
- Multiple income streams
- Any increase in profit is reflected in the sale price
- Little if any responsibility for repairs and maintenance
- A business in a growth industry – tourism (where applicable)
The core aspect of the management rights contract with the body corporate is to care take and maintain the common property. Assuming the manager completes all the duties competently, remuneration is paid. This remuneration is usually fixed to CPI with a ratchet clause.
The caretaking agreement is usually for a total term of 19 – 30 years in New Zealand and up to 25 years in Queensland and 10 years in New South Wales. The agreements normally run on a 3 by 3 by 3 term. For example the first term will for 5 or 10 years and the manager will have the option to renew for a further defined term.
Management rights businesses can be purchased as a lifestyle business. Some of the best properties are situated in resort towns, across from the beach for example. A retired couple could take on a smaller business in a superb location where they spend more time enjoying themselves, while still earning an income.
It is always desirable to find a business that is not reliant on one form of income and some management rights businesses offer multiple income streams. For example, if the business has a restaurant attached to it that may be open to the public, or a conference room. Not only do you continue to earn your salary for caretaking and income from letting, but income could come from room hire fees or food and beverage.
Almost all management right purchasers have been successful and the purchaser has gone on to sell with varying amounts of capital gain due to the multiplier slowly increasing. In the mid 1990s properties were purchased with a 25% return on the value of the business including the managers unit, while two years ago properties were selling showing a return of 20% on the business alone with the manager’s apartment an additional cost with no return. Lancaster Group has heard of properties being sold to syndicates showing a return of only 14% on the business. However we are now in a buyer’s market and the low returns are a thing of the past.
The beauty of this business is that for every extra dollar of net profit a management rights owner can produce, it is worth up to 5 times in capital gain when the business is sold.