- November 17, 2015
- Posted by: Ben Edwards
- Category: Blog, Resources
Why Now Could Be The Time to Sell Your Vacation Rental Business
It has been an exciting few years in the Vacation Rental Management Industry and the next few years look to hold as much, if not substantially more, prospects for growth and success. An overall improved economy, low interest rates and an increased awareness in the Vacation Rental Management space has led to many significant acquisition transactions.
The industry, and more importantly, well-managed companies within the industry are clearly recognized as stable and profitable ventures. At the same time Vacation Rental Management Companies face new and increasing challenges that are applying significantly more pressure to their ability to run a successful and increasingly profitable operation.
Does this environment of acquisition activity and increased challenges for independent Vacation Rental Management Companies mean it is time to consider selling? The simple answer might be YES, but are you prepared to maximize your net proceeds and exit the business successfully? The answer to this question is as much about the current industry environment, the business you have built and, just as importantly, the process you leverage in considering an acquisition. Let’s dig deeper into all three…
Clearly an improved economy has benefited the travel industry as a whole. Occupied nights are up significantly and average rental rates continue to improve and increase on an annual basis. Visibility and recognition for the Vacation Rental Industry, as a whole, also continues to grow which has led to new found popularity among companies looking to invest or increase their holdings in the industry. As mentioned, Vacation Rental operations are increasingly seen as a stable and profitable venture when reasonably managed.
These economic and industry specific factors have led to a significant increase in acquisition activity and will continue to drive substantial buyer interest for profitable and well run independent Vacation Rental Management Companies. The increase in demand makes now an excellent time to capitalize on a sale and secure a successful exit strategy.
Running a successful Vacation Rental Management Company can be as challenging as ever. Business owners are felling these pressures in the form of new technologies, new business models, additional regulatory scrutiny, increased operational costs and increased marketing expenses.
At the same time the challenge to acquire and retain rental owners is more competitive then ever. As expenses continue to increase, certain revenues are not increasing at a commensurate rate, creating a need to financially manage at a more granular level.
Of course technology is playing a larger and larger role in the day-to-day operation of Vacation Rental Management Companies. Never before have there been so many solutions to enhance revenue, mine data and market to past and potential guests. New products and integrated solutions for property management software, customer relationship management and responsive web technologies give Rental Managers the power to operate on the cutting edge, but at a cost.
“Many VRM’s are behind the curve relative to new technology. Incurring the capital expense to purchase and incorporate the often necessary upgrades can be daunting. In some situations, this may drive an acquisition transaction where the buyer has already implemented newer technology and can onboard additional inventory into their platform fairly seamlessly.” – Ben Edwards
In addition to new technologies that drive and improve the overall business there is an increased necessity to be in compliance with enhanced security measures. Of course you need to accept on-line bookings, but are you fully PCI compliant and prepared for a cyber-attack on your data? The days of tape charts and hand written registration cards have been gone for years, but in our new cloud based reality what does it cost to protect you, your owners and your guests?
New Business Models
As always the internet is both the best thing and the worst thing at the same time. As stated previously, Vacation Rental Management Companies have more internet based technologies available to them than ever before, but on the downside cutting edge internet based solutions and new stripped down business models allow easy entrance into the market place.
Owners that turn to self management often apply downward pressure on rate integrity while forcing traditional full service Vacation Rental Management Companies to be more competitive on commission rates.
Rash of Regulations
For years typical Vacation Rental Management Companies have been the stewards of following the rules while new entrants and entirely new business models have flown under the radar. In an effort to ensure the full collection of sales, lodging and other applicable taxes local, regional and state authorities have become more aggressive when it comes to short-term rentals. In addition, local officials are feeling the pressure from primary home owners to ‘control’ situations such as excessive occupancy, parking, trash collection and other issues.
“I’ve noticed an increase in regulations, and the costs associated with those increases, throughout the industry. Whether it is restricting rentals to a minimum of monthly stays in parts of California to reducing the availability of parking in beach markets of Florida these additional regulations can hurt revenue while increasing costs.” – Ben Edwards
Increase Operational Costs
Everyone has felt the pinch over the last number of years and we all know the drill… Costs are rising. As the unemployment rate drops operators are forced to increase wages to attract and keep good employees. The cost of supplies and services provided by vendors are also on the rise. At the same time commissions continue to remain static, or worse, may even drop in certain competitive landscapes.
The Increase in Marketing and Distribution Costs
New technologies have brought an almost endless array of paths to reach potential guests, but the costs to access these paths can be staggering for a Vacation Rental Management Company utilizing older technologies. Leveraging responsive web design is critical in delivering content across all platforms, but most importantly mobile platforms.
In May of 2015 Google officially announced what we all knew was coming – more web searches occurred on mobile devices than on desktop computers. Fully responsive websites with integrated booking engines bridge the device gap, but can come with a premium price tag.
Even with responsive tool sets the cost of Search Engine Optimization and Search Engine Marketing continues to grow. Not only have the Search Engine Marketing costs increased, in general, with an increase in market specific competition, but new forms of SEM have been added to the mix. Rebranding display ads that provide impressions and conversions throughout the relevant Google Display Network are becoming more effective and a necessary way to stay with, or ahead, of the pack.
The squeeze is also felt from the distribution side of the business. The largest and most effective channel partners continue to push for higher net rates or larger commission structures. While 10% to 15% had been common place for these distribution avenues in the past, 20% to 25% is becoming the standard. All this leads to a significant increase in the cost of acquiring a guest.
Getting & Keeping Owners
As these pressures build, it seems one of largest challenges operators face is obtaining and keeping quality rental owners and their rental properties. Not only do Vacation Rental Management Companies have more options, paths and opportunities via new technologies so do owners.
It is easier than ever for an owner to ‘jump ship’ in favor of listing based self management or a hybrid of listing services and reduced local services. This forces operators to consider reduced commission rates, or adjustments to the services they provide.
It may be one of the best times to sell, but are you ready?
Chances are you built your Vacation Rental Management Company from the ground up with ample amounts of sweat, long days and more lost weekends and holidays then you can count. Understanding why you may be interested in selling is the first step, and maybe the hardest, but if you are sure than applying a strategic plan is critical. At this point It is highly recommended to seek the help of a transaction consultant that is intimately familiar with the Vacation Rental Industry.
What’s Your Vacation Rental Management Company Worth?
Weatherby Consulting has participated in, or consulted on, over more than a hundred acquisition transactions within the Vacation Rental space. The help our vacation rental consultants can provide often is the difference between a good deal and a bad deal.
Establishing an accurate valuation and offer package involves many elements. “Having a top-tier financial package certainly makes a difference and taking the time to normalize the financials of any expenses unrelated to the direct operation of the business can result in a large increase in the purchase price.
Most Vacation Rental Management Companies have a very compelling story relating to their success. It is imperative to tell that story. It is also important to take the emotion out of the transaction and allow the consultant to secure the highest value for the business possible.”
Valuations are most often based on multiples of EBITDA making a solid presentation of normalized financials critical to obtaining the best purchase price possible.
Preparing To Sell Your Business
There certainly is a list of other critical items to address when preparing to sell your vacation rental business. But, creating a grounded and sound market valuation for the business based on past financial performance is key to a successful start to the process.
Having the proper non-disclosure agreements and a confidential offering package to articulate the value, culture and story of the business brings the best potential buyers to the table. Understanding the differences in closing options in relationship to your goals ensures the transaction will meet your needs.
The Art of The Deal
The difference between a good deal and a bad deal is often understanding your goals and the possible options. There are generally three types of Vacation Rental transactions in todays market: 1) Transactions that involve all cash at closing; 2) Transactions that involve a material down payment with guaranteed cash payments, plus interest over a set period of time; and 3) Transactions with an amount paid down and payments tied to some form of operating metric or earn-out over time.
Transactions with purchase price payment terms similar to type 1 and 2 are the best course of action for Vacation Rental Companies. When an earn-out or contingent payment is involved, all of the risk lies solely on the Seller.
Taking that amount of risk is not prudent, as it clearly favors the buyer, creating a heavy handed scenario, while leaving Vacation Rental Company owners with significantly less value.
Should I Stay Or Should I Go
Of course the most obvious factors in this decision are financial. Is the purchase price appropriate and are the closing terms favorable and acceptable? Will the offer satisfy your financial goals for the next phase of your career or retirement?
However, in considering an offer to sell you should consider all factors including non-financial factors. As an example, how will the business be managed moving forward and how will current staff be transitioned? Are you ready to move on and let go of the business? Often times aligning with a buyer that shares a similar business philosophy and vision for the business will provide the seller with the peace of mind to move on.
Indeed, it may be one of best times to consider selling a Vacation Rental Management Company and with the assistance of a trusted, experience and knowledgeable transaction consultant and a sound strategic plan, maximizing your net benefit is certainly within reach.