In the first article of this series in VRM Intel Magazine’s winter issue, we focused on your company’s financials as a way to prepare for the eventual sale. In this segment, we will cover two other essential items: your staff and management contracts.
There are a plethora of buyers in the industry, and they all have different criteria when deciding which companies they want to purchase. One commonality, however, is a shared interest in a “clean” company. Both a strong staff and updated inventory management contracts are paramount for buyers.
The majority of vacation rental companies are small- and medium-sized businesses, and the owners are intimately involved in the day-to-day operations. This is okay and expected; however, to make your company as appealing as possible, you should have employees in the following positions:
You, as the company owner, need to remove yourself from the day-to-day interactions with your homeowners. This can be achieved by hiring a homeowner relations employee or cross-training a few current employees. Because the management contracts are typically the “assets” of an acquisition, you will need another employee to handle these after you sell.
General Manager (GM)
Hiring a GM or Director of Operations prior to the sales process is important for two reasons. First, many buyers will not already have a GM in place to take over after the sale. For this reason, your transition timing might be directly tied to the hiring of a GM. Second, this will create an easier way to find your true EBITDA during negotiations.
There are two important reasons for focusing on your organizational chart prior to a sale. The first is to back up your argument for your true EBITDA. Finding a company’s true EBITDA is typically a subjective process, as the buyer and seller negotiate what expenses were allocated to the owners and whether they are to be removed from the P&L. The second is to remove or limit some of the contingencies that a buyer would need to attribute to the acquisition price based on unit churn or another metric post-sale.
Because many vacation rental management companies have been around more than ten years, they may have gone through several versions of management contracts with different commissions, ancillary fees, and verbiage. This is okay, as it is almost impossible to maintain the exact rates for every single homeowner. However, there are two clauses that you will want in every single contract:
Whether your contracts are for one, two, or three years, you will want them to auto-renew if state law allows. In this way, you won’t need to get the contracts re-signed every time the term ends. The less you can “rock the boat” with the homeowners, the better. Homeowners can be fickle and are constantly being marketed to by your competitors.
The majority of acquisitions are asset-based deals. Thus, you will be assigning the management contracts (assets) to the buyer. The largest obstacle results from the contracts having a clause that says something to the effect of, “this agreement shall not be assigned by either party without the written consent of the other.”
If your contracts say this, you will likely need to have the homeowners sign new contracts with the buyer at closing. You can proactively reach out to the homeowners now to sign new contracts that either remove or reword this clause, allowing for assignability. This can be a challenging endeavor, so you will want to complete it sooner rather than later. Every state has slightly different regulations, so you will want to consult an attorney on this matter prior to making any changes.
In the final segment of the Preparing to Sell series, C2G Advisors will discuss deal structures and other miscellaneous items while preparing your company for the eventual sale.