- June 23, 2016
- Posted by: Ben Edwards
- Category: Blog, Resources
I’ve often said, the only constant in the vacation rental business is change. It is clear that the vacation rental industry has seen its fair share of change this year, as much or more than any other year. With the myriad of changes currently facing the industry, Vacation Rental Managers (VRM) can expect to see operating profits materially decrease over the near term. As VRM’s survey their operations, we, at Weatherby Consulting, find that that many VRM’s are at a cross roads, with two separate paths ahead. The first being to tighten up the operations, reorganize and embrace these changes facing the industry or secondly, change gears, focus on financial management, prepare the business for sale and execute your exit strategy. As you determine which direction to drive your vacation rental business, we’ll explore the attributes of each route and how to get there.
How to sustain profit margins in a changing industry.
Currently, profit margins are under attack in the vacation rental industry. Numerous external changes to distribution, technology and the lack of progressive management are decreasing earnings. It is also apparent that many VRM’s have operated their businesses in a sub-par manner. That is not to say that most businesses are unprofitable, but rather, the operation has not been managed at an optimum level to maximize profit.
In order to sustain or improve upon prior year profit in today’s environment, VRM’s must strategically review their operations and make well-informed decisions when allocating capital and resources within the business. As with most vacation rental businesses, payroll is generally the largest expense on an annualized basis. In reviewing numerous companies across the nation, we find that many VRM’s do not manage payroll in a well-organized or effective manner. Over the years, it has been easier to hire additional staff, than to properly manage current team members. Conversely, training is non-existent in many operations, setting team members up for failure. The lack of management and process within a business takes a materially adverse toll on the business from an expense standpoint and prevents the business from operating at peak performance. Each team member in the business should have a clear outline of expectations. This outline will help measure the performance of each team member and will ensure that each team member is operating in-line with management expectations. For example, as it relates to reservations, a company should monitor the performance of each agent to ensure proper reservations conversion and revenue production goals are met. The easiest way to perform this analysis is to assimilate that to number of qualified reservations calls or inquiries received by each agent and compare that to reservations made by agent each week. We prefer to produce these reports weekly, so as to have more immediate visibility into reservation agent performance. After a short amount of time, the business will have enough data to determine what an acceptable conversion rate for the department should be. Those reservationists that are operating below the agreed upon threshold should be coached up, counseled or further trained to achieve the desired conversion level. If a reservationist is not meeting expectations after a period of time and further training, it is time to transition that person out of the business or to another area of the operation that may better align with their skill set. This example is one of many where performance management of team members will produce better returns for the business. And while this seems rather straightforward, many companies are not managing the performance of their team members to ensure company expectations are being met. Continual management of performance will ensure that the operation produces more revenue and increases overall profit.
Generating more revenue is one component of increasing the profit of the business. The alternative method is to decrease expenses, but a VRM can only cut expenses so much before service levels are affected. The key is to find the right balance to ensure profit goals are met. An additional opportunity to generate more revenue is to consider acquiring another vacation rental business. Numerous synergies are created when two vacation rental businesses are combined, allowing the combined business operations to become much more profitable as a result. The fastest way to increase inventory is through acquisition and with proper planning can be one of best investments in your company. In short, acquiring a vacation rental company presents a very low risk opportunity to create a more sustainable business, providing much higher returns than various other alternatives.
The second largest expense in most vacation rental business is generally marketing. VRM’s are navigating numerous changes to the current marketing environment, as general marketing expenses, distribution fees and technology costs are on the rise. The same performance metrics from our payroll example will apply to further managing marketing initiatives. Using revenue production by source code and the expense associated with advertising, a VRM can determine the expense per booking for a particular marketing partner. It is paramount to have a well-balanced marketing plan, as too many VRM’s are relying on a single source of online distribution for revenue. This is not a best practice approach to marketing available properties for rent and should be addressed immediately should your business rely too heavily on one particular channel. By not understanding the expense and return on investment for each initiative, the business will be beholden to certain marketing partners and see significant increases in expense as several distribution providers modify their business model and additional distribution fees are implemented across the industry. In an effort to operate more progressively, VRM’s should get back to basics by developing a broad-based marketing program and focus on more direct sources of business. While I understand these marketing plan revisions will not produce immediate results, the sooner a more comprehensive plan is developed, the faster your business will obtain its marketing independence.
One common theme that is apparent with progressive management companies throughout the industry is low overhead and properly managed expenses. With new technology on the rise, VRM’s should be utilizing more efficient ways to deliver the same results. Fortunately, we are blessed with numerous vendors that provide invaluable services throughout the vacation rental industry. Many of these vendors serve as integral contractors and are frankly, not used enough in vacation rental operations. An overriding factor in the quest to achieve higher profits and lower expense is the use of contractors. Contractors can be hired on a project basis or ongoing basis, often times at a fraction of the expense associated with internal staff. Many vacation rental supplier companies offer services such as automatic lead responders, marketing services, reservation services, business consulting, human resource management and financial reporting services. At Weatherby Accounting, our team prepares and manages the financial accounting process for a number of vacation rental companies throughout the United States and Caribbean. With the rise of web-based reservation systems and accounting programs, we have the ability to produce financial reporting packages for vacation rental companies that were previously not available due to their inability to hire high level accounting staff in resort areas. In today’s environment, a smaller company can receive the same professional financial statements and visibility into the business as some of the most professional companies in the industry at a fraction of the cost, allowing VRM’s the opportunity to operate more effectively and gain insight into the business that was not previously available.
The aforementioned areas signify one option or direction to take amidst the changing vacation rental environment. In order to successfully navigate these changes, a VRM must be diligent and adhere to shrewd business management, operating more progressively to achieve profit goals. It is clear that the business is becoming more difficult to operate and while that present opportunities for numerous VRM’s, it is cause for others to reassess and decide if now is the time to execute an exit strategy.
Are you considering a sale of the business?
At Weatherby Consulting, we’ve worked with hundreds of companies over the years and have been involved in buy/sell transactions of all sizes throughout the country. Many VRM’s are considering a change of pace due to a number of external factors in the vacation rental industry. Clearly, the business is more difficult to operate than in years past. These changes are forcing vacation rental managers to consider their long-term strategy. On one end of the spectrum VRM’s are being forced to change reservation software, restructure business models and become more progressive and skilled operators. On the other end, VRM’s are being required to determine if an additional investment of time and money in the business will pay off in the long run. As you consider which direction to take your business and if selling the company is the right direction for you, we’ll discuss a number of items to consider before making that decision.
Running a progressive vacation rental company and preparing your business for sale are nearly the same. By having a sound financial management process, clear policies and positive trends in the business will make you business very attractive to prospective buyers. If you have determined that selling the business is the right path for you, you may want to engage the services of a transaction advisor to manage the process. In most cases, transaction advisors will generate a higher value for the business and ensure the agreed upon terms are within market standards. As you move forward through the process, please consider the following points to ensure your operation is protect and your transaction is a success:
- Choosing to sell your business is an important decision and should be handled with the utmost confidentiality. Before entertaining any discussions, a Non-disclosure Agreement is imperative to ensure all conversations remain confidential.
- A summary level Confidential Offering Memorandum (COM) should be created to provide more information about your business. The purpose of a COM is simply to illicit an offer.
- Once a formal offer is received, outside counsel should be consulted. Finding attorneys with prior vacation rental experience is preferred.
- Adhere to a formal due diligence process to ensure the transaction proceeds in a professional manner.
- Utilize the service of a skilled attorney with prior vacation rental experience in preparation and negotiation of a Purchase Agreement.
Finally, the use of a transaction advisor to help manage the process, deliver access to qualified buyers, provide access to market rate terms and ensure a the closing happens in a timely manner.