Begin with the End in Mind: Valuation, Benchmarking, and Exit Strategies for Short-Term Rentals

Jacobie Olin
11/6/2024

This article was originally published on C2G Advisors’ website.

Are you a short-term rental owner looking to build long-term success? Whether you’re managing a growing portfolio or preparing for a lucrative sale, the key is to begin with the end in mind. Planning your exit strategy early on will help you stay focused, maximize profits, and streamline your operations. Below are the top strategies for vacation rental owners—focusing on valuation, benchmarking, and preparing for the future.

1. Valuation Methodologies: How to Know What Your Business Is Worth

To sell your short-term rental business for the best price, you first need to understand its true value. Two common methods are used to calculate this:

• Multiple of Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  • For businesses with EBITDA of $250,000 to $1,000,000: Expect multiples ranging from 3x to 5x of Adjusted EBITDA.
  • For businesses with $1,000,000+ EBITDA: Larger businesses can command multiples of 5x or higher, depending on profitability and stability.
• Price Per Unit
  • Best for smaller, unprofitable businesses with fewer than 50 properties.
  • Valuations typically fall between 1.25x to 1.75x of annual commissions.

Time frame: Most valuations look at your EBITDA or commissions from the Last Twelve Months (LTM) or Trailing Twelve Months (TTM).

Identifying which valuation method applies to your business is essential to ensure you get the best deal when selling.

2. Structuring Your Deal: The Balance Between Cash and Terms

When selling your business, how the deal is structured can make a big difference. Typically, deals are divided into two parts:

• 50%-75% cash at close
• 25%-50% contingency paid over 1-3 years, depending on post-sale performance (measured by KPIs such as EBITDA, unit count, or revenue).

Some buyers may also offer rollover opportunities, allowing you to keep some equity and profit from the business after the sale.

Pro Tip: Make sure the deal structure aligns with your financial goals, balancing immediate cash with potential future payouts.

3. Benchmarking Key Performance Indicators (KPIs)

Tracking KPIs not only helps you measure your success but also makes your business more attractive to potential buyers. Here are some of the most important metrics to track:

• EBITDA Margin: The standard for short-term rentals is 20%-25%. The higher your margin, the more profitable your business.
• Payroll Margin: Measures payroll costs as a percentage of revenue. The industry standard is 20%-25%, with lower margins indicating greater operational efficiency.
• Churn Rate: This measures the rate at which you lose properties. A high churn rate can signal issues with service or market conditions. The average churn rate for the industry is 8%-10%. Keeping this low helps build trust with homeowners and makes your business more appealing to buyers.
• Take Rate: Your commission and ancillary fees (cleaning, booking fees, etc.) as a percentage of gross bookings. Aim for a 35%-45% rate, which is the industry standard.

Tracking and improving these KPIs will make your business more valuable when the time comes to sell.

4. Maximizing Your Sale: Clean Financials and a Strong Brand

Before putting your business on the market, ensure you have clean financial records. Buyers will want to see organized, professional profit and loss statements (P&L), balance sheets, and monthly/quarterly financial reviews. This makes your business appear more stable and trustworthy.

Additionally, invest in your brand. A well-established brand not only attracts more guests but also increases your business’s overall value. Consider delegating key roles such as an operations manager or homeowner liaison, to further strengthen your company’s appeal.

Pro Tip: A strong brand can be measured by guest reviews, direct bookings, and churn rates.

5. Legal and Technology Considerations

When selling, legal clarity is crucial. Ensure that your homeowner agreements are standardized and offer long-term security. Buyers want to know that your contracts with homeowners are transferable and enforceable. Also, review your potential exposure if one homeowner accounts for a material amount of your total homes under management

On the tech side, having a modern technology stack (e.g., property management systems, revenue management, and accounting tools) will make your business more efficient and appealing to potential buyers.

6. Exit Strategy: Plan Today for Tomorrow’s Success

Every successful business owner needs an exit strategy. Whether you plan to sell within five years or hold onto your company for decades, knowing your long-term plan is critical. Regularly assess your business’s market value and adjust your strategy accordingly.

By beginning with the end in mind, short-term rental owners can make smarter decisions that lead to better outcomes. From valuation methodologies and structuring deals to benchmarking KPIs and preparing for an exit, focusing on the big picture ensures you build a business that not only thrives now but also has a lucrative future.

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