When you buy an established business what you see is what you get and many people like the relative certainty that comes from buying an established complex. This goes for both the business and the building.

Existing buildings have gone through the "teething problems" that people talk about with new buildings. All the building defects have been attended to. Of course, the building might be at that point where it needs some money spent on it and you will be the one who will need to convince owners to put their hands in their pockets. Communication and education about the benefits of refurbishment are the keys to getting unit owners to spend money.

Another advantage to buying Management Rights in existing buildings is that many owners of new units in brand new complexes have very high expectations of the financial performance of their investment. Sometimes these expectations are too high and your owners might still have the stardust in their eyes sprinkled by the selling agents. As time passes these expectations become more realistic.

Existing businesses are capable of easy verification of income and expenses. Its all there to see. You do not have to rely on projections and guess work.

Purchasing Management Rights "off the plan" allows you to use your skills to develop the business from its very beginning.  However, it is important to be aware of the differences between purchasing a new business and an established one and we share with you the experience of our professionals.

From a Purchaser’s Perspective - Property Pacific:

"Buying brand new means buying off the developer's plan - buying before the complex is finished. Sometimes buying before the complex has even started.
Here are some tips:

1. Know your builder.
2. Inspect other completed developments.
3. Talk to the managers of these complexes about the builder's product.
4. Have your contract checked to see if it includes looking after things like paths, driveways, fences, cupboards. These "extras" could cost a lot of money.
5. Developers may fail to make adequate provision for storage for managers, so remember to ask about storage.
6. Don't assume your needs will be understood by the developer.
7. If you want to change anything in the contract, get in early. If unit sales have already been made before you buy the Management Rights, then the developer may not agree to the changes because it might jeopardise the sales. Developers are required to fully disclosure of the terms on which they are selling units and these terms include the terms of the management rights. If you want to change any of these terms, the developer might be required by law to give all the previous purchasers an opportunity to withdraw from the contract if they feel they are being materially prejudiced by the changes. Developers are of course very reluctant to do this.
8. Beware of marketing that will oversell the expected returns for the investor owner. You might be the only one left to pick up the pieces of shattered expectations. Ask what the salespeople are saying to purchasers and take a look at the marketing material then form your own opinion as to whether or not you will be able to live up to the expectations that have been set by the marketers.”

From an Accountant’s Perspective - Crosbie Warren Sinclair:

“When acquiring an established Management Rights business the accountant is directed by way of paragraphs in the contract of sale as to what profit and salary are to be verified and the period to which that profitability relates. When purchasing "off the plan" those safeguards (the verification paragraphs) will not be included and the accountant is required to confirm a figure represented to the purchaser by the developer.

How does the accountant do that? From the outset it is important to realise that the conclusion figure is going to be hypothetical and the report is going to include a disclaimer by the person/firm conducting the feasibility study.

The investigating accountant is going to require detail concerning the location of the complex, the number of units in the complex, the size and configuration of the units, the developer’s marketing intentions, whether the units are furnished or not, the proposed remuneration in terms of the management agreement, and whether there is any proposed rent free periods for tenants or rent guarantee periods for unit owners. The latter may depend on whether it is a residential or holiday style complex.

Armed with this information the accountant should inspect the site location and similar complexes in adjacent areas to ascertain competition and also sources from which to obtain data concerning a realistic expectation of number of units in the rental pool, occupancy percentages and tariffs. Detail concerning occupancy percentages and tariffs and associated income sources such as cleaning, linen hire and PABX fees are probably available from the accountant’s own records as well as Government and other professional groups.

This additional information will enable the accountant to prepare a calculation of expected income taking into account further variables such as high, low and shoulder seasons and the associated tariffs. Drawing from the accountant’s own records and experiences, expected operating expenditures associated with the income items will be calculated. If the developer has negotiated sales on the basis of a guaranteed return to investors these associated rentals should be ignored and all calculations assume current market rentals, otherwise the end result could be a highly inflated profit to the manager.

If the accountant is experienced in this business sector, and has records and sources from which to obtain the necessary information, his final figure will be accurate, but the report will still be hypothetical and be qualified.

Remember that your gross income, and therefore your net income, will be dependent on the amount of income received per unit, the number of units in the letting pool, and the occupancy percentages achieved. For example:

The above are all unknown variables at the time of buying off the plan and even though some can be estimated reliably, it is evident that the revenue can vary significantly depending on the final result achieved. Another matter that should be considered when buying off the plan is the additional working capital requirements to fund the initial marketing plan, capital items (PABX, computer and office equipment etc) and even general living expenses while the letting pool is being established.”

From a Lawyer’s Perspective - MBA-Lawyers: