It’s time to revisit the management rights assignment process

Contributed by Frank Higginson, HYNES LEGAL – 12 August 2019

It’s time to revisit the management rights assignment process

No – we don’t have a Federal election around the corner, but thanks to Gough Whitlam and John Singleton for part of the headline to this newsletter.

It is time for the management rights industry to look at revisiting the management rights assignment process.

Everyone needs to start treating the assignment process with a bit more respect.

The days are long gone where the assignment was simply tick-a-box and move on. If you go back to the 90's barely an assignment meeting was held. Real estate licences for management rights purposes were obtained through a multiple-choice format. The interweb didn’t exist. Access to information was largely word of mouth. Real estate wasn’t anywhere near as expensive and banks were relatively easy to deal with.

Cast forward to today and we have a completely different world.

Management rights brokers

Brokers don’t get paid unless a deal settles, so why put a deal together where the buyer simply won’t stack up?

Brokers know quality buyers. What they have to start doing is filtering the less quality ones, or at least direct them to the last section of this newsletter, so their buyer skills-up. If brokers want deals to settle without pain they need to get a lot more involved in helping the buyer to present in the best possible light.

Yes, brokers have a fiduciary obligation to act in their client’s interest. This is usually interpreted as simply getting the highest price. But if the buyer with the highest price is not going to get approved at committee level, then putting them to contract is not acting in the seller’s interest.

It is fair to say that there have been some less than ideal buyers come into the management rights industry, who have ended up owning businesses they are not capable of running. This was helped by some looser lending standards, which we think the banking Royal Commission has largely flushed out.

Unsuitable buyers are going to be refused a lot more often than approved from now on.

Committees

Committee members are more informed than ever before – but that is not saying that they know everything. We’re seeing more bush lawyers than ever because they find something on Google and that’s obviously the answer. We are starting to counter this with our own FAQ. Have a look and tell us what we have missed!

As a simple example of the information that is now publicly available, our guide for committees consenting to management rights assignments is online and free. That type of information wasn’t available even five years ago.

Committees are more empowered via their advisors too. The advent of the assignment consultant – to assess the buyer’s competency – is a recent arrival to the management rights industry but is no doubt here to stay. Committee members are usually unqualified volunteers. How do they know whether a buyer is right to do the job? They are entitled to get a third party view and more and more of them are doing it.

What sellers and buyers of management rights need to do is be ready to address this ‘new normal’.

Sellers of management rights businesses

One of our most experienced management rights clients simply would not sign a contract to sell a management rights business unless he had all of the buyer’s material in front of him.

He knew his committee and would put himself in their shoes. If he didn’t think the buyer would be approved he might not proceed with that buyer. He might proceed, too – but that would then be a considered commercial call to take that risk.

What he wouldn’t do was just look at who offered the most and then blindly sign a contract without knowing who the buyer was.

We know price is important. But the price is meaningless if you don’t get the buyer approved. If consent is refused, all you have is financial and emotional cost. At that stage, you have spent your own legal fees, you are more than likely going to wear the body corporate’s legal fees and are probably at least three months away from where you wanted to be (in terms of having settled the sale of your business) by having to go back to the market.

On top of that, everyone’s feathers have been ruffled and emotions have run high because a refusal will usually offend everyone. The committee looks at the seller and says, ‘You seriously thought this buyer was a good idea?’ And the seller looks at the committee and says, ‘Why on earth didn’t you just say yes?’

The other consistent theme is that if you (as seller) have a difficult relationship with your body corporate then an assignment is more than likely going to be a tougher process. You might think that your committee might be happy to see you go but we tend to find two things:

· The body corporate doesn’t want to be stuck with another ongoing set of performance issues so they tend to scrutinise the buyer a lot more heavily;

· It might be ‘get square’ time – so while a body corporate has to do certain things at law, it doesn’t mean that the committee cannot be difficult or bloody-minded about how they go about it.

That’s human nature and we simply cannot legislate against that.

If you are one of these sellers, just be ready and make sure you use the right lawyers (like us) who can navigate that maze and get you there. To be honest, these assignments tend to frustrate buyers more as they feel the pain of a difficult assignment without actually doing anything wrong. They tend to become the meat in the sandwich.

Buyers of management rights businesses

Do you buy a car before you have a licence? Or after?

Most people would say the latter – and from a buyer’s perspective, a management rights business could be considered no different.

We suggest our buyer clients do as much as they can training-wise before they even come to signing a contract. A management rights investment is a relatively large one for most people, so it makes sense to do as much learning about them as you can before you put your foot on one.

What we tend to find is that clients who do the training beforehand come into the purchasing process a lot more informed. They learn stuff from other people who are further into the process than they are. Learning from other people’s experiences (or mistakes) is far more cost-effective and painless than making them yourself.

Doing the work before purchase also means you may decide that the industry is not for you – and if that is the case it could be the best money you have ever spent. Conversely, if it just supports the idea that it is for you, then having as much as you can on your resume will make the assignment process easier.

The other thing buyers need to do is treat the assignment interview like a job interview where the committee has choices. Why not make the best first impression you can? Simple things like:

· Complete all of the assignment material professionally – don’t answer the questions in pencil scribbled on the bonnet of your car

· Provide written references – and referees if you choose

· Get police checks done

· Dress professionally

· Go in with a formal training program lined up if you think your actual on-the-ground experience is a bit light

We support additional training in the right context. This is especially the case with inexperienced sellers or sellers in dispute with their body corporate. If the committee thinks the seller cannot do the job, why would it rely on the seller to train a buyer?

If you have owned other management rights businesses, hand over references from your previous committee and body corporate manager. If you don’t do this, expect lots of questions about why you haven’t.

One of the things we do when acting for buyers is to give you a lot of this material and information very early in your purchase process so you are the best prepared you can be for the interview.

None of this is to discount experience. You might not need the additional training we refer to above if you are an industry veteran with great references. But if you are new to the industry we think it is a good idea.

When do you arrange the committee meeting?

Maybe it is not the last thing in the transaction. Maybe it is the first thing!

There are no hard-and-fast rules to this and you will need to rely on your broker and your lawyer to help you assess why you might do this, but if you have an active or strong-willed committee (or maybe even a prior refusal to consent to an assignment), then maybe the best thing is for the buyer to meet the committee first.

If that is not the case, then maybe it is just a quiet chat with your chairperson. What we do tend to find is that bringing the committee into your confidence early (and perhaps even before you sell but when you list) can be quite a good thing if handled appropriately.

In summary

Henry Ford allegedly said, ‘If I had asked people what they wanted, they would have said faster horses.’

In the same vein, calls for bodies corporate to not exercise the rights more and more of them are exercising is not the way to go. Get organised, get professional and the whole process will be a lot easier.

Other things you may be interested in

· Our guide to buying a management rights business

· Our guide to selling a management rights business