I hope everyone is enjoying the extended weekend. I'm curious how you all approach OpCo acquisitions. How do you model these differently than individual property or portfolio acquisitions?
The reason I ask is because I'm in second round interviews with a firm that does OpCo and individual property investments.
Any help will be greatly appreciated. Thanks!
I don’t get as excited about short term NOI bumps (ie trailing 6 months NOI) as that can fluctuate wildly; I do look at growth and whether there is a great team and comparative advantages. I look at the stability of revenue. OPEX, I dissect and look at the staffing. Sometimes I value on revenue multiple, or other times on NPV. I would think about who would buy this company upon exit. I also think about how much capital investment is needed to help OpCo continue to scale. Also, how the nature of cash flows by being OpCo can translate to more potentially defensible positions in current and future JV and leasehold contracts, so that cash flow stability can be viewed as longer term. ROFOs and “in the money” purchase options, a plus.
If the purpose of acquiring the OpCo is mainly to get the underlying RE portfolio, then it's just a matter of deciding how much "premium" for the OpCo buyout is worthy. This presumes you find little value in the OpCo itself, but the owners is making it the only effective way to get the portfolio. Such portfolio trades, with OpCos included, have been common. If there is real value in the OpCo beyond the RE assets, then a real business valuation would be needed.
Bus val isn't that different from RE valuation conceptually, but it a different animal for sure. The key is figuring out the true operating net incomes of business and then applying a reasonable multiple. While that sounds straight forward, like in valuing a cash flowing property, it's often trickier and calls on a lot more subjective judgement.
Are salaries fair, expenses legit, and will the revenue really survive ownership transfer are all the sorts of questions that get asked and analyzed. Finding or applying relevant valuation multiples is a whole other story, they are generally not as readily available as cap rates in CoStar or RCA.
The biggest variable is usually size of revenues and/or net profits. A firm with $5 mil in annual revenue gets valued very differently from one with $50 mil than $500 mil. While not always the case, the bigger the enterprise the bigger the multiple.
You should try and research some recent OpCo acquisitions the firm has closed and see if you can figure out how they valued it and what the strategic rationale for the purchase was. If you sound like you understand the strategy they employ, you can hopefully impress in the interview. The details of valuation are not as interesting in most cases. Good luck!
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