Over the last decade, vacation rental managers (VRM) have been directly impacted by a multitude of economic conditions including a deep recession, real estate market volatility, government regulations, a surge in rent-by-owner models, and unforeseen weather-related events. In addition, the industry has seen technology and marketing expenses escalate with ecommerce, third party distribution, and marketing automation.
However, in spite of industry changes, vacation rental managers have flourished.
Vacation rentals have prevailed as a mainstream accommodations alternative, and the vacation rental industry is experiencing high levels of growth and –consequently- investment interest and opportunities, as evidenced by Wyndham’s recent purchase of Hatteras Realty, All Star Vacation Homes’ acquisition of Southern California Vacation Rentals and Vacasa’s purchase of Utah Vacation Homes.
With numerous vacation rental management company owners also nearing retirement age, the subject of exit strategy is becoming increasingly prevalent in industry circles.
VRM Intel reached out to transaction advisor and industry veteran Ben Edwards to learn more about how to successfully navigate the sale of a vacation rental management company. Ben Edwards is president of Weatherby Consulting LLC, heads up business development for Newman-Dailey Resort Properties in Destin, FL, serves as president of the Vacation Rental Managers Association, and has directly worked on over 40 purchase and sale transactions in the vacation rental, resort and real estate industries.
Why do owners sell?
While a few transactions involve distressed companies, according to Ben Edwards, the most common reason vacation rental managers explore selling their company in today’s environment is a desire to monetize their business at the peak of the market.
“In the last couple of years, our industry has experienced a huge turnaround,” said Edwards. “While some companies were fundamentally resistant to change and experienced a decline in inventory and revenue, the majority of managers are seeing tremendous growth.”
“As you recognize the opportunities in the market, the best time to explore your options is when you are doing well,” said Edwards.
What steps can a vacation rental management company owner take to ensure top dollar for their company? In our interview with Edwards, we identified seven tangible actions a VRM can take to formulate a sound exit strategy.
7 steps to ensure success in selling a vacation rental management company:
1. Plan ahead
To maximize the selling price, Edwards advises to plan for the transaction. “While a VRM can sell at any time, in order to get top dollar, an owner would benefit greatly from planning ahead.”
Although current investment interest is strong, Edwards believes the best time to monetize a VRM business is likely over the next three to four years, which makes now the ideal time to begin articulating the exit plan.
“A VRM business has a lot of moving parts, so time is a contributing factor,” said Edwards. “The more lead time you have to work with a transaction advisor, the more you can expect to maximize the selling price.”
When you are planning for your exit, it is tempting to want to discuss it with others. Edwards warns against broadcasting your plans to the market. “Confidentiality is key,” said Edwards. “You do not want the market to know you are looking to sell. Once you get to the table, the objective is to sell and sell quickly.”
3. Get help
The experienced outside perspective of a transaction advisor is critical in a business transaction and could add as much as 20% to the selling price in the negotiation process.
“What a transaction advisor brings to the table is the experience and understanding to help prepare and articulate the key attributes of the business, ensuring maximum value is realized,” said Edwards. “For example, a nominal accounting misclassification can impact the selling price by hundreds of thousands of dollars. It doesn’t matter how healthy your business is, there are always a few tweaks that can be made in any business which can result in big gains to the selling price.”
4. Tell a compelling story
“When selling a VRM company, the goal is to tell the success story of your accomplishments,” said Edwards. “A transaction advisor/consultant is tasked with telling your story on paper, in every report. Your story is what makes a buyer compelled to pay top dollar for the company.”
5. Demonstrate the health of your company
In doing research about planning for an exit, we heard a lot of advice about how to boost profitability on paper by slashing expenses. Edwards advises against this. “No buyer wants to see where you have starved the business,” said Edwards.
“For the most part, the buyer is going to want to see a healthy percentage of revenue going straight to the bottom line depending on your business model,” said Edwards.
6. Put together a top tier financial package
“In order to get top dollar for a VRM, the owner needs to strategically invest money and manage the business in an effort to maximize sustainable profits for the long-term success of the company,” said Edwards.
A few components include:
- Comprehensive financial reporting
- Progressive revenue growth
- Solid trend of direct operating expenses in relation to revenue that depict effective management
- Strict management of general administrative expenses
- Long term rental contracts
Edwards emphasized, “A premium financial package leads to a premium selling contract.”
7. Manage expectations and avoid trying to monetize future revenues
We asked Edwards, “Is there a standard multiple or formula a VRM should be looking for in a transaction?”
“This is what everyone asks, and there really isn’t a standard,” said Edwards. “There are a myriad of purchase models for VRMs (e.g., asset purchase, stock purchase, asset purchase with unfunded liability, stock purchase with excessive operating cash, etc). In addition, there are several variables which significantly impact the transaction. For example, some managers have large offices and check in locations, while others have remote operations. There are too many variables to simply answer the question, ‘What is the multiple of earnings?’ But typically you will see multiples somewhere in the neighborhood of 3-5 times earnings. If you see a company in this market sell below 3 times earnings, typically it is a distressed company.”
In addition, Edwards recommends focusing on historic performance and not future, unrealized revenue streams. “Buyers don’t want to hear about potential future revenues,” said Edwards. “They are more interested in the historical performance and what the seller has accomplished. The goal is to tell your individual story in a compelling way.”
For VRMs who are not yet ready to start the process, it is a good idea to go through the exercise of examining the health of the business and taking a look at how the company story would be told if the VRM was selling today.
“It is like renovating and redecorating a vacation home,” said Edwards. “It is always difficult to do a full refurbishment all at once, but if you can do a little over time, it will continually protect the investment value over time and help you generate a higher rate of return.”
By Amy Hinote
In the post you mention you would expect to see multiples being used to value a VRM business at 3-5 times earnings. Can you confirm if you are referring to Gross or Net earnings when using a multiple somewhere between 3-5?
I assume you refer to Net but thought I would confirm.