- November 4, 2018
- Posted by: Ben Edwards
- Category: Blog
When you have an offer on the table for your vacation rental management company, the price tag jumps off the page. It is especially distracting if the price is higher than you had hoped. Your hard work has paid off, and you want to close the deal as quickly as possible.
However, the dollars signs can be misleading. There are many situations where the highest offer is not necessarily the best offer.
There are numerous factors involved when determining which offer is best. Typically, the time value of money, if financing is involved, deal structure and future tax liabilities consistently require the most review during this process.
If you get distracted by the offer price, the power shifts to the buyer and you can potentially lose negotiating power as you struggle to defend the original offer price. Due diligence about the buyer and the offer is extremely important before accepting an offer. Here are some considerations to add to your pre-acceptance checklist.
- Do the net offer proceeds meet your financial exit goals?
At first, the offer price for your vacation rental management company can appear more than sufficient to meet your retirement goals. However, you will find it useful to determine what your net proceeds will be once expenses (accounting, taxes, debts, etc.) have been paid.The sales price and your retirement present to interesting discussion points, as the sales price is generally a function of earnings, while retirement needs represent a forecast of expenses needed to sustain your quality of life. Understanding the net amount of your sale on the front end will pay dividends subsequent to closing helping you to more accurately prepare for retirement.Note that the initial offer you receive is generally the highest possible price that you will receive from that buyer. During due diligence, the buyer will be looking for reasons to reduce the price. Build in enough room for adjustment and consider your net revenue when assessing the price.
- Consider the structure of the transaction.Your transaction’s structure can materially affect the amount of taxes you will have to pay, the cash you will realize at closing and the timing of your transition from the business. If you are looking to exit the company at the closing with enough cash to retire, you may not want to enter into an earnout transaction (what is another term for what happened to Heather?), which would pay you over time while requiring you to work under the new owner for a period.I receive this question often…Preferably, cash or cash equivalents at closing are the most prudent way to structure a closing settlement from a seller’s perspective. Financing is advisable in certain circumstance where a Class A buyer is participating in the transaction. Generally speaking, any portion of the purchase price paid out of future profits in not advisable or only under specific circumstances since the risk of the purchase price is contingent on future production. If the seller is susceptible to financing risk, he or she should keep the company and pass on the offer under most, if not all, scenarios.Transaction structures can be complex, but do not be intimidated. A transaction advisor with vacation rental industry experience can answer your questions so you are comfortable with the proposed structure before you select a buyer.
- Understand the buyer’s valuation.
Having a transaction advisor is key to helping facilitate the diligence and answer any questions relative to confirming the company’s value.In a vacation rental transaction, the buyer will be looking to confirm that the information you provided is accurate during the due diligence phase and will articulate concerns about your company’s performance that lead to reductions in the offer.Take time to investigate the buyer’s valuation assumptions so that you can preempt any potential adjustments. Then, if you believe there will be substantial reductions in the price during due diligence, you might view this buyer’s offer very differently.
- Assess the buyer’s ability to close the transaction.You can avoid wasting your time in due diligence by determining whether or not the buyer is able to close on the sale. In today’s marketplace, financing for business purchases isn’t easily obtained.With the interest in the vacation rental market, financing requires tremendous diligence by the seller, as well as, strong guarantees form the prospective buyer.Here are two ways to secure your position:
- If the buyer is financing, get a commitment letter from the lending institution
- Investigate the buyer’s history of acquisition both inside and outside of the vacation rental industry.
- Are you ready to let go?Before you choose a buyer and move into due diligence, look inward. Are you truly prepared to give up your business? Can you visualize your life in its next phase?Knowing whether you want to sell is paramount before moving forward with the sale of the company.It isn’t uncommon to see sellers jump at the highest offer, and later regret the decision.In many cases, the highest offer doesn’t lead to the best outcome, and spending large amounts of time and energy in due diligence only to walk away with a defunct sale can be disappointing. By taking a closer look at the buyer’s assumptions, motivations and history, as well as an honest look at your own, will increase the likelihood of a successful transaction.