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Increasing the value of your business

"Letting businesses used to be valued on a multiple of turnover. Now, however, says Adam Walker, the profitability of the letting business has become a much more important factor in determining its value. So how would your business stack up? "

Adam Walker

Stacking up the costs image

A great deal of my consultancy work these days involves helping business owners to increase the value of their businesses prior to a sale in a few years’ time. Letting businesses used to be valued on a multiple of turnover so my job was to identify various ways to do this. More recently however, the profitability of the letting business has become a much more important factor in determining its value. As a consequence, I now have to consider cost control and efficiency improvements as part of my brief.

Salaries should not be more than 40% of turnover but many businesses are spending 50 or even 60% on staff.

Cost control is a subject that is often misunderstood. It is not about saving a few pounds by buying cheaper stationery, nor is it about making swingeing cuts to the staff or advertising budgets which can reduce the turnover of a business by an amount that exceeds the saving.

Most costs, such as rent, rates and utilities are fixed and most variable costs only make up a small percentage of the expenditure, so the only area in which significant savings can be made is staffing. Salaries should not be more than 40 per cent of turnover but many businesses are spending 50 or 60 per cent of turnover. One I recently visited spends 67 per cent of their turnover on salaries. This is unsustainable. Allowing for a 20 per cent profit margin, this leaves just 13 per cent of turnover to pay for rent, rates, marketing and absolutely everything else.

WHAT CAN YOU CAN DO?

The key is to help your staff to work smarter, not harder. Let me give you an example. In most letting businesses, property management is very labour-intensive. A tenant rings to say their shower tray is leaking. You call the landlord and leave a message. The following day, the tenant calls again to ask how much longer it is going to take you to deal with the problem. You call the landlord again. They ask you to get a quote. You arrange for a quote which takes 24 hours to come. In the meanwhile, the tenant in the flat downstairs calls to say that they have a damp patch on their ceiling…

Adam Walker image

Adam Walker

You ring the landlord with the quote. It is for £70. He says it’s expensive and asks for a second quote which takes 24 hours to obtain. Meanwhile, tenant and neighbour ring again to ask how much longer it is going to take. The second quote is for £60 which the landlord accepts. You call the plumber, make an appointment with the tenant, pay the plumber’s invoice, reclaim the expense from the landlord and record the repair on your property record.

This whole process involves fourteen phone calls and perhaps one and a half hours of the property manager’s time. The cost to your business of this will be £25- £30. But the landlord saves £10 on the cost of the repair so that’s okay then? Well no, actually it isn’t. In a climate where your margins are getting tighter, you cannot allow this to happen.

SOLUTIONS

The solution might be to insist that all landlords give you a £250 float and authority to spend it without their advance permission. You might insist that there will be one quote for jobs up to £1,000; two quotes for larger jobs. If the landlord wants more quotes, they can obtain them themselves.

You might forbid tenants from reporting defects by ‘phone and, instead, email. This will save your property managers a great deal of time. Furthermore, the emails will be a proper audit trail of when a defect was reported and what action was taken within what timescales – protecting you and the landlord if there is a complaint later.

Both tenants and landlords will complain but they will quickly get used to the new rules and the result will be a more efficient business. The accepted wisdom used to be that a property manager could not manage over 100 properties. Now, many property managers are managing 200-300 properties without difficulty.

This drive to automation is not just happening in the lettings industry. My local gastro pub has recently stopped taking bookings by telephone and instead makes customers book online or use its voice recognition activated booking line. It was irritating the first time but I quickly got used to it and the place is just as busy but now it operates with one less staff member.

The message is clear. In today’s market, maintaining your profit margin means reducing costs as well as increasing your revenue.

Adam Walker is a business transfer agent and management consultant who has specialised in the property sector for more than 25 years.
www.adamjwalker.co.uk

December 10, 2018

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