Reducing Risk in the Sale of Your Vacation Rental Business

In many cases, the sale of your vacation rental business will be the largest and most important transaction in your career. Needless to say, it is a material transaction and one that requires patience, knowledge and diligence. Having your eyes wide open is a phrase that is often used when conducting business and nothing could be more true when selling your business. If you are considering an exit, success is determined by a number of factors. Obtaining the maximum purchase price is obviously a primary consideration, but almost equally as important is reducing your risk subsequent to closing. When the business is sold, having contingent risk, or opening yourself up to personal liability is also a strong consideration when choosing the right buyer.

Risk can manifest itself in a number of different ways. Currently, the most common risk component in the vacation rental industry is having a material portion of the purchase price tied to future unit count. As you enter the transaction, careful consideration should be paid to material issues that could arise post-closing and if a large portion of your purchase price payout is tied to the number of contracts on the program six months to a year down the road, then that may be too much risk to incur. If you are considering a reduction in future purchase price payout for properties that terminate from the rental program, understanding the buyer’s business model and transition program is crucial. The following items are just a few points to review and understand before moving forward:

  1. Does your business model and that of the buyer’s align? If your business is high touch, high service or luxury in nature, both business models should be carefully reviewed if you’re considering a sale with a buyer that operates remotely, regionally or nationally. Out of state call centers or operations, over reliance on technology, as opposed to people, are just a couple of areas where the businesses may not match up. If your owners are used to dealing with a specific person or place their trust in key staff, they may not survive the employee turnover that often times takes place subsequent to closing.
  2. Is the buyer willing to charge the same management commission? In a number of cases, buyers will change the management commission of properties under management post-closing. Many owners will have significant issues with contract changes, especially changes in management commission.
  3. Is your future purchase price payment properly secured? Many sellers engage in some sort of owner financing. Ensuring that you have a valid promissory note and guarantee is imperative. In many cases, buyers have a clever response as to why they cannot provide a note or guarantee to ensure the purchase price is paid in full. When constructing a promissory note, special consideration should be paid to external parties that may have a first mortgage on the buyer’s business. In the event of a default, other lienholders, partners or lenders may be legally ahead of your note position. This will reduce the seller’s eventual recourse in the event of a default. If you decide to engage in any seller financing, it is important to ensure that your promissory note is in first position in the event of default. Secondly, ensuring that you are receiving a guarantee from an entity with assets and has an operating business is equally as important. We’ve seen buyers willing to offer a corporate guarantee on to find out that an LLC was set up weeks earlier to limit any recourse or shield liability from the buyers operating business.

In any case, if the risk seems too great to proceed in the sale of your business, its best to keep the business. It’s better not to do a deal than to do a bad one. Selling a vacation rental business is a material event and one that should be thoughtfully considered before moving forward. Prior preparation, along with a focus on certain key areas in the business will help ensure the business is poised for maximum value. If you’d like more information about selling your business, please feel free to give Ben Edwards with Weatherby Consulting a call today. We routinely provide valuations at no cost to business owners that may be interested in pursuing a business sale.