The expansion and acquisition of new clients seems to be on everyone’s radars these days, and rightfully so. With the vacation rental industry growing at a rapid pace and vacation rental managers competing to establish themselves as the preferred option for guests and owners alike, fast and scalable growth is not only ideal for vacation rental management companies of all sizes, it is necessary for survival.
But how should vacation rental managers pursue growth in today’s climate? Is the answer organic growth? New business models? Acquisitions? For many managers, the answer will be “yes” to all three.
The Current Market
The vacation rental market is booming and now is the perfect time to expand. Market researchers predict that the vacation rental market will reach $169.7 billion by 2019. As accommodation demands change, the sharing economy grows exponentially and vacation homes become more affordable for more people, the industry is consolidating, converging and growing increasingly sophisticated.
And it’s not just the vacation rental industry that’s consolidating. Consider Expedia’s $3.9 billion acquisition of HomeAway, Hyatt’s reputed $40 million investment in onefinestay, Airbnb’s acceptance of hotel reservations, the $12.2 billion Marriott/Starwood merger and the $2.9 billion Accor/Fairmont/Raffles/Swissotel merger. Indeed, the lines between the different “types” of accommodation are becoming increasingly blurred, and the big players are only getting bigger.
More than 14 reported mergers and acquisitions took place in 2015, according to VRM Intel, the largest being Pacifica Companies buying Sterling Resorts’ 1,000 units in January 2015, Wyndham Vacation Rentals’ acquisition of ResortQuest Whistler’s 600 units in July 2015, and Wyndham’s acquisition of Vacation Palm Springs’ 450 units in June 2015. Of course these were only some of Wyndham’s acquisitions, and with Vacasa also acquiring many companies within a year (four companies in 2015), the bigger players are not only growing in their markets, they’re expanding across geographies.
Between the consolidation of the industry, an increase in the sophistication of relevant (and often expensive) technology, the growth of the sharing economy and the professionalization of the industry, companies must grow in 2016 to stay competitive and relevant.
Now is the time to get ahead.
Know your odds.
On the surface, acquiring a company appears to be the fastest, easiest and cheapest path to accelerating growth. Dig deeper, however, and it’s not so simple. Rather than being a surefire route to success, mergers and acquisitions are actually more likely to fail than succeed. A recent Harvard Business Review report found that an astonishing 70 to 90 percent of merger and acquisition deals fail. With companies nearly nine times as likely to fail at acquisitions as they are to succeed, buying a vacation rental company is clearly a risky proposition.
Think Slowly, But Surely
What happens to the 10 to 30 percent of mergers and acquisitions that succeed? Was M&A the right choice for those companies? Again, the answer is not always clear-cut. Between identifying a target, convincing the target company to sell, negotiating a fair deal, potentially having to outbid competitors in the process, closing the deal and then integrating the company, buying a vacation rental company may not be the quick solution many companies are hoping for.
It Might Not Be Easy
Are acquisitions easier than the alternatives? Again, it depends. Maybe the company being acquired not only uses the same owner agreement as you, but also has the same company culture. Integrating homeowners into your program is a dream and every employee you just gained through the acquisition fits seamlessly into your day-to-day work environment. Great! That was easy. But how often do you think either of those things is true, much less both at the same time?
It Could Cost You
Finally, there is the cost. M&A obviously costs the premium a company pays to get the owner to sell. More than that, though, you must consider the associated legal and broker fees and the opportunity cost of the time and attention that goes into constructing a deal and integrating a new company. In fact, just on the first metric alone (purchase price paid), it is not uncommon for acquirers to pay anywhere from $4,000 to $10,000 per home acquired.
Remember, there are other options that can be both cheaper and less time consuming in the onboarding process. Organic growth for many can be significantly cheaper, and utilizing marketplaces that connect managers and owners can result in the acquisition of new inventory at rates that are a fifth of the acquisition costs per property.
That said, successfully growing a business through M&A is certainly possible, and in some circumstances might even be the best course of action for some vacation rental management companies. But how do you succeed?
Tips for Success
Do you have the capacity?
Make sure you set aside time to focus solely on the acquisition. A good rule of thumb is to allow at least a month or two for every 10 percent the acquisition is growing your business. So, if you are doubling your size through M&A, expect the integration to take a year or more if you want to do it properly.
Remember, you may not be able to do this on your own, and the right support is critical to your success. Consider working with a broker to help negotiate deals, prescreen businesses for you, help you pinpoint your areas of interest and assist with the paperwork. Your banker, accountant and attorney will also be invaluable assets during the M&A process. If you’re looking for companies already contemplating selling, look at what’s available through MergerNetwork and compare prices to see how similar companies are being valued.
Start with Culture
Don’t just look at the size of the acquisition or the number of homes. Also consider if the company is truly a fit or if you could integrate it into your company. Consider the homeowners and employees you are acquiring and see how they fit with the company culture. Also consider the company’s reputation. In such a customer-facing industry, reputation is vital. No matter how nice the price, it will not be worth it if there is no way to get the companies to actually ”merge.” Also consider what you can learn from the acquired company. Is your company struggling with marketing? Make sure there is synergy and seek to acquire complementary strengths.
How does it align with your company’s strategy?
Acquiring a company should not be your company’s entire strategy. Instead, make sure it is part of your greater strategy. Are you just being opportunistic, or is this company and this acquisition at this particular moment part of a broader plan? The more you can keep everything aligned to a coherent vision and purpose, and the more you can clearly and repeatedly articulate the same to your employees, the better your chances of success.
Get Down to the Numbers
Do not overpay and always negotiate. Once knee-deep in the process, businesses and their managers too often get caught up in the moment. Bidding wars arise and the ultimate ”winner” can sometimes be the one who loses the most. Be very clear on the front end what the company is worth, why it is worth that and the absolute maximum you are willing to pay. No matter where you are in the deal, if the price exceeds that, walk away.
How do you know what a company is worth and what else should you consider? There are many factors to consider: What is the company’s growth potential, cash flow, capitalized earnings, excess earnings? How much are the company’s tangible assets worth? Intangible assets?
Obtain copies of all financial statements for the last five years and evaluate them in comparison to the company’s tax returns. Also look at the company’s sales records and specifically check the company’s numbers for their largest accounts. It’s imperative to evaluate sales patterns and avoid potential dangers like customer dependence.
What are My Alternatives?
M&A is not your only path to growth. Investigate the potential on a deal-by-deal basis, but do so while also assessing your other options. Oftentimes you will find there are avenues open to you that are faster, easier and less costly. M&A should always be treated as just one arrow in your quiver. Make sure you have others handy as well.
Regardless of which avenue or avenues you choose to pursue, 2016 is your opportunity to grow in order to stay competitive. Just make sure that whatever route you decide on, you go in with eyes wide open. Develop your game plan ahead of time and stick to it.