17 Apr 2019
Words Alex Cook Informer Issue 93
Syndication Makes Sense Strength In Numbers For Top Shelf Management Rights
The concept of a ‘partnership’ or ‘syndicate’, whereby a group of investors pool their financial resources to leverage their purchasing power to acquire an asset, is by no means a new one. Such arrangements have been prevalent in the commercial property and freehold hotel/motel market for decades.
Less common, however, are partnerships formed to purchase going concern businesses. However, a rare (and ever-growing) exception is the purchase of large-scale, high netting management rights businesses.
For those in the know, much of what follows may not be news. However, as the syndication is increasingly pursued, we decided it was high time Informer provided readers with a high-level synopsis of this popular model.
So, what are the key components of a management rights syndicate? What do they offer to their partners? And what advantages do they hold over other operational/investment models?
As the name suggests, partnerships are established by uniting a group of like-minded investors. The number of investors may range anywhere from two upwards. There is no perfect formula here, but there is an argument that either too few or too many partners may have impact on the ability to align group objectives moving forward.
Roughly five or six partners seems to be a bit of a sweet spot for many syndicates, but this can certainly vary depending on the opportunity.
In most syndicates, one of the investors will take the role of operating the business on a day-to-day basis (usually referred to as the ‘managing’ or ‘active’ partner). The remaining investors will generally have little or no involvement in the operation of the business (referred to as ‘silent’ partners), and will simply derive a passive income.
The managing partner (typically a ‘husband and wife’ team) will receive a salary package, usually a combination of cash and accommodation, as well asa profit distribution from the business. Note, it is important not to confuse the two. The silent partners each receive their profit distribution.
‘Profit’ is based on the return of the business after outgoings have been deducted (eg. the managing partner’s wages, interest costs, relief management, BC levies etc). Each partner’s profit distribution will obviously be in line with their equity stake in the business (so if a partner owns 17% of the MR, they will receive a 17% share of profit after outgoings).
From the perspective of brokers who have worked on numerous syndicate deals over the years, the single most important key to a successful partnership is to find the right managing partners.
At the end of the day, they are the ones on the ground, typically living on-site, managing the day-to-day operation. They are the ones building relationships with committee members, owner-occupiers and investor owners. They are the ones looking to protect the security of the business and to grow its bottom line (ie. topping up agreements, building the letting pool, identifying new income streams, working with the BC on refurbishments).
Like any business, without a good manager, risk profile increases and growth/return potential diminishes.
For this reason, it is a very common requirement of a syndicate that the managing partner has solid experience and proven success in the management rights industry. Most frequently, managing partners are couples who have owned and operated smaller rights successfully, have perhaps recently sold and are looking to take the next step up the ladder.
Having said that, some partnerships will consider impressive prospective managers with demonstrable transferable skills and generally high aptitudes. This is certainly worth considering if one of the silent partners has management rights experience (as is very often the case) and is willing to act as a mentor to the managing partners, perhaps working the equivalent of 1 – 2 days a week to oversee and support.
The appeal to a hard-working, professional couple of joining a syndicate and becoming its managing partner is clear. Like many things in life, it revolves largely around financial capacity, but also around career progression.
As we know, most management rights businesses come with a manager’s unit. If a young couple, for example, has limited financial capacity and can only spend up to $800,000, it’s likely they will be using a considerable proportion of their equity on the unit component (which provides no return).
As such, their income potential is intrinsically limited. By managing a larger property on behalf of a syndicate, it is likely that a far higher proportion of their investment will be put towards the management rights component, increasing the return they can derive from their equity.
When combined with the fact that the managing partners also receive a salary package off the topof the overall net profit (ie. before profit distributions), it is almost always the case that the managing partner of a large MR would be receiving a considerably higher return on their investment (in other words, a much higher income), than if they were operating a small business on their own.
As well as the increased earning potential, by joining forces with other investors, managing partners have the opportunity to operate properties they could never otherwise have dreamed of running on their own.
Instead of a small ‘mum and dad’ business in the suburbs, they may be able to operate a high-end, blue-chip asset in a prime corporate or tourism location. Not only does this constitute excellent experience and career progression, for many, it makes it a lot more exciting to get out of bed in the morning!
The puzzle obviously can’t be completed without silent investors looking to become part of management rights syndicates. Fortunately, just as there are experienced managers chasing their next career step, there are plenty of investors looking for somewhere to place their cash. Given the returns available from other asset classes (property, shares, term deposits, etc), this is hardly surprising.
Although it is beyond the remit this article to indicate what sort of returns can be achieved, I would comfortably state they are often very hard to replicate. So, if investors are able to combine a great managing couple with a great property, it can quickly become a very attractive investment channel.
For the record, there are certainly a lot more silent investors out there than there are opportunities. The difficult part of the process is often finding suitable managing partners. So, if this is new to you and sounds interesting … please get in touch.
Another interesting area on which to briefly touch is the power of professionally formed syndicates to compete against major corporate operators on the purchase of very large-scale, high-netting, and iconic properties. In other words, syndicates are a means to keep super high-end management rights in the hands of private individuals.
We have often previously discussed the increasing corporatisation of the management rights industry in Informer. Well, I can testify from recent experiences that large syndicates can certainly compete, and often prevail, against big corporate operators when it comes to tendering for significant assets.
As stated from the outset, the idea of this article is to provide a very broad overview of how partnerships work, and why people pursue them. Although it all probably sounds fairly simple at face value, a huge amount of work and expertise goes into putting together a successful syndicate, drawing on input from a range of industry professionals.
The first box to tick is often locating the right asset. RESORTBROKERS has assisted in putting several syndicates together over the years.
Once a property has been located, experienced and specialised financiers and accountants become absolutely vital, providing a range of essential services such as advice on ownership structures, providing finance and return scenarios, reviewing risk and potential opportunity, and co-ordinating investor group meetings (as well of often sourcing additional equity partners).
A specialist lawyer will also play a key role in managing the transaction and a partnership agreement. So, to give yourself the best chance of a successful outcome, you must surround yourself with the best professionals.