- March 24, 2018
- Posted by: Ben Edwards
- Category: Blog
The purchase and sale of vacation rental companies continues to be the most effective way to increase inventory and grow the value of an existing operation. As vacation rental managers consider purchasing or selling an existing operation, we’ve found several areas that are important to consider during this time-consuming and difficult process. Fundamentally, the purchase and sale of vacation rentals companies require a process that involves careful planning, preparation, professional financial reporting, proper understanding of market rate terms and negotiation expertise. Company Owners and Senior Management personnel that are unfamiliar with the purchase and sale process can make common mistakes that result in less favorable deal terms, purchase price value or an unsuccessful transaction altogether.
- Not having a professional Non-Disclosure Agreement or one at all. Often, Company owners engage in conversations or simply entertain a discussion to sell their business without a Non-Disclosure Agreement. Do Not Engage in any conversation without utilizing a professional Non-Disclosure Agreement. If asked about the prospect of selling, it is reasonable to mandate the use of a Non-Disclosure Agreement before moving forward. Professional Non-Disclosure Agreement’s include a term, non-solicitation provision and clear legal terms surrounding confidentiality to help protect all parties involved.
- Not having professional financial reporting. Financial reporting continues to be the Achilles heel of most vacation rental operations. Not having an accurate or consistent property management system and/or financial accounting reports depicts an unorganized business and will often lead to a lower purchase price or value of the operation. In many cases, a purchase price dramatically decreases if the business is not clearly articulated through the financial reporting process. Use of well-constructed, clear and correct reporting underscores the worth of an operation and helps to ensure the maximum purchase price is realized.
- Not hiring a transaction consultant. If you’re relying on the buyer to provide fair a price and deal terms, expect to be disappointed. In numerous cases, a transaction consultant with vacation rental specific experience can generate tremendous value. A qualified vacation rental transaction consultant can drive the deal process, have access to market rate terms and can help ensure deal points are fair and reasonable. Transaction consultants will provide the following:
- Prepare a confidential offering memorandum that conveys the qualitative and quantitative attributes of the business and serves as a foundation for value.
- Present the opportunity to qualified buyers and have a keen understanding of prospective buyers that have the wherewithal to close a transaction.
- Showcase a wealth of knowledge, hold expansive industry contacts, and assist in negotiations.
- Present comfort for buyers that would otherwise be concerned about pursuing the purchase of an unknown entity.
- Hiring the wrong legal counsel. A general business attorney is not typically familiar with the nuances of a vacation rental company. Further, the vacation rental industry is unique as a buyer does not typically purchase assets. Legal counsel should understand the legal terms associated with these types of transaction or hold experience with earned revenue, advance deposits and business operations. Lack of expertise in these areas creates significant issues when negotiating a successful transaction. Lastly, having a well drafted Purchase Agreement reduces risk and ensures expectations are met on both sides of the transaction.
- Not having patience. In certain cases, buyers or sellers get emotional during the transaction process. Emotional outbursts, heavy handed dealing or the incessant need to over negotiate every deal term increases the likelihood that a transaction will be unsuccessful. Buyers and sellers are used to calling the shots in their day to day operation and it’s tough to trust the process. Patience is the key, but diligence and focus are paramount for transaction success.
There are numbers of pitfalls and mistakes to be made throughout a transaction, however, these five issues seem to be more prevalent as of late. In any transaction, fair, reasonable and professional dealing can overcome insurmountable hurdles. If you or your business have questions about the purchase and sale process, please feel free to contact Ben Edwards with Weatherby Consulting to learn how to make your next transaction a successful one.