Selling a property management company in Canada

A property management company earns steady monthly fees from owners and strata corporations who trust it with their buildings and their money. Buyers will want to see that the fees are real, that clients will stay, and that the licence, trust accounts, deposits and records can move to a new owner cleanly. Here is what to expect and how to prepare.

What buyers look at first

Most buyers of a property management company ask the same questions early. Have clear answers ready before you list:

• Doors under management. The number of rental units and strata lots you manage, by building and by owner, and how that count has changed over two or three years.
• Management fee revenue. Monthly fees by client, how each fee is set (a percentage of rent, a flat fee per door or a flat monthly strata fee), and when fees last went up.
• Contract terms. How long each service agreement runs, how either side can end it, the notice needed, and whether it can be assigned to a new owner.
• Owner churn. How many owners and strata corporations left each year, why they left, and how many new clients came in.
• Strata and rental mix. How much revenue comes from rental management and how much from strata management, because the rules and the risks differ.
• Other fees. Leasing or tenant placement fees, lease renewal fees, inspection fees, maintenance coordination fees and any markups, and how much of your income they make up.
• Concentration. Whether a few large owners or buildings make up much of your revenue.
• Trust and compliance. Monthly trust reconciliations, your annual accountant's reports and any BCFSA reviews or complaints.

Buyers will check these during due diligence, so it helps to gather them now. Our list of documents needed to sell a business is a good start.

Proving the numbers

Valuation guides for this industry say buyers care less about the raw door count than about recurring management fee revenue and how long it lasts. A long list of doors means little if owners can leave on short notice and many do. Show a door count that matches your fee billing, your trust ledgers and your tax returns, and a simple table of clients gained and lost each year with the reasons.

Separate recurring management fees from one time fees such as leasing fees, because buyers often treat them differently. If you charge owners for maintenance coordination or receive any rebate or benefit from contractors, section 58 of the Real Estate Services Rules requires the licensee to disclose the nature and extent of that benefit to the client before accepting it. Have those disclosures on file. Show your own wage and any personal costs run through the business as add backs with proof.

Keeping staff

Owners and strata councils often stay because of the property manager they know. Gather each employment agreement and each contract with licensed staff, check notice periods and any non solicitation terms, and think about when to tell your team. A buyer may ask key managers to sign new agreements before closing, or tie part of the price to clients staying through an earn out or a holdback. Many buyers also ask the seller to stay for a period to introduce clients. See the handover after selling.

In British Columbia, section 97 of the Employment Standards Act says that when a business is sold, the employment of an employee is deemed continuous with the new owner. That matters for staff with long service. Licensed managers are also licensed in relation to a single brokerage under the Real Estate Services Act, so if they move to the buyer's brokerage, their licence must move too. Read what to tell employees when selling before you share the news.

Licensing in British Columbia

In BC, rental property management and strata management are real estate services under the Real Estate Services Act, regulated by the BC Financial Services Authority (BCFSA). Section 3 of the Act says a person must not provide real estate services to or on behalf of another for pay unless licensed or exempt. Licensed rental property managers and strata managers provide their services through a licensed brokerage.

Section 6 of the Act says a brokerage must have one or more managing brokers, and may only provide the services permitted by its managing broker's licence. BCFSA says every brokerage must have a managing broker licensed in the same service categories as the brokerage, in place at all times, actively engaged in managing it, supervising licensed and unlicensed staff and making sure trust accounts and records are kept properly. To qualify as a managing broker, BCFSA's guidelines require the broker licensing course and exam and, generally, at least two of the past five years licensed as a representative in BC. If you are the managing broker and plan to leave after the sale, the buyer needs a qualified replacement ready.

What happens on a sale depends on how it is structured:

• Asset sale. The buyer's own licensed brokerage takes over the clients. If the buyer is not yet licensed, it must apply to BCFSA for a brokerage licence, with a managing broker, financial statements and director information, before it can provide the services. Allow time for this.
• Share sale of a corporate brokerage. The company and its licence stay in place. Section 24 of the Real Estate Services Rules says the brokerage must promptly notify the superintendent in writing of any change in its directors or officers, any fundamental change such as an amalgamation, any managing broker or licensee who stops being engaged, and any change in the savings institutions where it keeps accounts. For each new director or officer, it must submit the required information within 30 days.
• Partnership. Section 15 of the Rules says a partnership's brokerage licence is cancelled 14 days after a change in partners, or a longer period the superintendent allows, so a new licence application is needed.

The Rules do not list a change in share ownership by itself as a notice item, and a BCFSA project report on the role of managing brokers noted that the framework did not then provide for a suitability review when ownership changes during a licence cycle and discussed changing that. Rules can change, so check with BCFSA Licensing and your lawyer what is required for your deal before you set a closing date.

If your brokerage stops carrying on business after an asset sale, section 93 of the Rules says it must immediately surrender its licences, promptly file a winding up report, and arrange for its records to be kept for the required period by another brokerage, an accountant, a lawyer or notary, or another person BCFSA accepts. Other provinces regulate property management differently, so if you operate outside BC, check with your provincial regulator.

Trust accounts and deposits

Rents, security deposits, pet damage deposits and strata funds held in trust belong to your clients and their tenants, not to your company. They are not part of the price. The buyer pays for the business, and the trust money moves separately, with a clear record of whose money it is.

For strata clients, section 77 of the Rules requires at least one separate trust account in the name of each strata corporation, plus separate accounts for contingency reserve fund money and special levy money if the brokerage holds them. When a service agreement ends, the Rules say the brokerage must promptly transfer control of the client's money to the client or to the client's new brokerage, and may keep enough to pay invoices for expenses already incurred. BCFSA's guidance says the same applies to rental property management.

Section 87 of the Rules requires a rental brokerage to keep a record of the tenants at each property and the deposits each tenant paid. Under the Residential Tenancy Act, a security deposit or pet damage deposit cannot be more than half of one month's rent, and the landlord must return it with interest, or apply for dispute resolution, within 15 days after the later of the end of the tenancy and receipt of the tenant's forwarding address. A buyer will want a deposit ledger, tenant by tenant, that matches the trust bank balance on the closing date. Reconcile every trust account at closing, have both sides sign off, and get written authorization from clients before money moves. See working capital when selling.

Management agreements and owner consent

Section 43 of the Rules requires a written service agreement, signed by the client and the brokerage, before rental property management or strata management services are provided, unless the client waives it. For rental clients the agreement must say how it can be ended, the brokerage's authority to sign cheques and contracts, how deposits are handled and what records are kept. For strata clients it must say which funds the brokerage will hold.

In an asset sale, a service agreement only moves to the buyer if it allows assignment or the client agrees. Plan for each owner to give written consent or sign a new agreement with the buyer's brokerage, and decide together how and when owners will hear the news. Expect some owners to leave, and agree in the purchase agreement how that affects the price. See transferring contracts and licences and telling customers and suppliers.

Strata corporation contracts

Strata work carries a special risk. Section 39 of the Strata Property Act says a strata management contract may be cancelled without liability or penalty, despite anything in the contract, by the strata corporation on 2 months' notice if first approved by a 3/4 vote at a general meeting, or by the manager on 2 months' notice. The strata corporation may also end the contract under its terms or decline to renew it without any vote.

When a strata contract ends, section 37 of the Act says the manager must give the strata corporation its records within 4 weeks, and section 88 of the Rules says requested financial records must go to the strata corporation or its new brokerage by the later of 2 weeks after the request and 4 weeks after the services end. Many sellers meet with each strata council before closing so the council hears about the change directly.

Tenant and owner records, software and data

The Rules require brokerages to keep tenancy agreements, accounting statements, invoices, tenant lists and deposit records. Section 92 says most records must be kept for at least 7 years, and tenancy and deposit records for at least 7 years after the earlier of the end of the tenancy and the end of the management agreement. Records may be electronic if they can be printed. Agree in writing who will keep the old records after closing.

In British Columbia, section 20 of the Personal Information Protection Act allows personal information to move to a buyer as part of a sale without consent, but only what is needed, only under an agreement that limits how it is used, and after closing the people whose information was passed on must be told that the sale happened. During due diligence, share counts and summaries rather than owner and tenant names.

Most of your history lives in property management and accounting software. Check whether your subscription can be transferred or whether the buyer must open a new account and migrate the data, who owns the data under the software terms, and how online owner and tenant portals, payment processing and preauthorized rent payments will move without missed payments. Export a full copy of the ledgers and documents before closing.

Asset sale or share sale

In an asset sale, the buyer's company buys the client relationships, goodwill, name and equipment, and each service agreement and trust account moves to the buyer's brokerage with client consent. In a share sale, the buyer buys your company, so the brokerage licence, agreements, trust accounts and any liabilities stay with it, and BCFSA must be told of the director, officer and other changes. Tax results differ for you and the buyer. See asset sale vs share sale.

GST/HST and PST

The Canada Revenue Agency says management services provided by a management company in respect of real property are generally a taxable supply, whether the rental of the property itself is taxable or exempt. Long term residential rent is generally exempt, so residential owners usually cannot claim back the GST/HST they pay on your fee, while owners who make taxable supplies, such as many commercial landlords, may be able to. Leasing, inspection and other fees you charge in your own name are usually taxable too. Check how you treat each charge, and any repairs you rebill, with your accountant.

When the business itself is sold in an asset sale, the section 167 election on Form GST44 can often remove GST/HST when the buyer acquires all or substantially all of what is needed to run the business and both sides meet the registration conditions. In British Columbia, PST generally applies to taxable goods such as office equipment and furniture in an asset sale, but not to goodwill. PST Bulletin 105 explains when software is taxable. Check with your accountant whether any of your charges or assets attract PST. See taxes when selling a business.

A worked example

Questions to take to your lawyer and accountant

• Should this be an asset sale or a share sale?
• Is the buyer licensed, and who will be the managing broker on closing day?
• What must we tell BCFSA, and when, for this structure?
• Do my service agreements allow assignment, and how do we get owner and strata consent?
• How do the trust accounts and tenant deposits move, and who signs off on the closing reconciliation?
• Who keeps the records after closing, and for how long?
• Am I charging GST/HST correctly on each fee, and can we use the section 167 election?

Rules and fees change, so confirm current requirements with the BC Financial Services Authority, your lawyer and your accountant before you set dates. For more, read what your lawyer and accountant do. Running a related business? See selling a motel or small hotel, selling a bookkeeping or accounting practice or selling a cleaning business. This guide is general information, not legal or tax advice for your situation. Questions about listing with us go to hello@sellmybusinessdirect.com.