The concept of value in business is tricky to define, because it comprises a range of factors, not all of which are easily quantifiable. There are the more obvious measures, such as revenue, shareholder value, employee retention, and profitability. But valuation also includes intangibles like customer satisfaction, brand recognition, and intellectual capital.
Traditional business concepts of growth and revenue are an important part of value, but they’re not the only factors to consider. It’s worth it to take a step back and think holistically about the concept of value when considering how much your company is worth.
Revenue and Growth Versus Value
Revenue and growth are familiar concepts. Revenue consists of what money a business generates from sales of its products or services. And don’t forget about the revenue that you can make from upsells. On the other hand, income calculation requires the gross profit to be adjusted by factoring in expenses, such as the cost of the upsell and the cost of servicing each guest who is staying at your rental.
Growth can show up in many ways, including profit, customer base, employees, geographic coverage, or increased market share. Typically, vacation rental companies consider acquiring more properties, property managers, or even another property management company as the main drivers for growth. Growth metrics should be prioritized according to your company’s specific and unique strategy. Is your company focused on market share growth (properties), profit margins (cost efficiency), or revenue (distribution)? There are multiple “right” answers here, and it’s important to align your business management with your strategic growth goals.
It’s not just about revenue and growth. Other intangible criteria can also have a significant impact on valuation. It could be the maturity of the business, your property mix, or your company reputation.
We asked an industry expert, Brooke Pfautz, CEO and founder of Vintory, for his thoughts about how vacation rental companies should think about valuation: “The true value of a company is the properties in your portfolio,” he said.
Vintory has taken the time to put together a calculator for you for three different methods of valuation. This will help you realize the full value of your company’s assets.
The Process of Business Valuation: It’s in the Eye of the Beholder
You’ll need to do a business valuation when you are considering any sort of transaction for your company, including distributing equity, changing management, or a merger or acquisition (just to name a few). Here, you are trying to determine the market value of your business as a whole. Let’s assume that you’re selling your company, and for the sake of this example, that you have potential buyer(s) who are also trying to determine a fair valuation for your company.
This requires a few key things:
1. Know which metrics are most important for your buyer(s).
2. Provide the metrics and backup data for those metrics.
3. Understand industry benchmarks around these metrics so that you can determine how you compare against other companies that are valued at this time and in this market. Make sure your benchmarks are current because the market is constantly changing. Some benchmarks fluctuate a lot, and some don’t. It’s your responsibility to understand what they are this month/quarter.
Knowledge is power. You don’t want to be selling your business short or pricing yourself out of the market, so you really need to be armed with the right numbers before you start negotiating. Focusing only on growth and revenue could mean those other considerations of your business’s value are left out, and leave you vulnerable to a lower-than-fair valuation.
One way to think about valuation is to split the business into two parts: the client side and the business side. The client side of the business valuation takes into consideration the size, concentration, mix, quality, and management fees of all the clients. The business side looks at the age, accounting, revenue makeup, and reputation.
Other metrics that can impact valuation include customer satisfaction, customer retention key performance indicators (KPIs), data on timelines about the achievement of particular business goals, measures on your impact on the market like market share growth, comparisons against competitors, web traffic KPIs, and revenue metrics like gross-profit margin. You might also look at where your business is at in its growth process. Placing yourself on a Maturity Model is a great place to start for this.
Ultimately, it will be your buyer who will determine the relative importance of each of these metrics for their calculation of the value of your company. That’s why it is important to deeply understand the wide range of factors so that you understand what is fair and where you should negotiate.
Why You Should Think Valuation Today
In today’s highly volatile market, considering valuation might seem like a waste of time. But in an environment where things are changing so rapidly, you’ll want to have as much optionality as possible. This means that you should always have a sense of how your company is valued and what you’re doing to increase that valuation.
Here are a few benefits of this:
- Tracking value can help reveal which aspects of your business are working well and which could be improved. You may be too focused on how quickly your customer base is growing and have lost sight of something just as important that doesn’t look so rosy. But if you’re not tracking all the metrics, this might not be obvious to you.
- If you’re looking for outside investment to fund expansion, you’ll be much better placed to attract new investors if you can demonstrate they’ll be getting value for their money. It’s important to demonstrate you have a firm grasp of where you stand in the market if you want to be taken seriously.
- For your personal plans, like funding retirement or thinking about your long-term career goals. And especially if you have business co-owners or partners, an objective valuation is essential to create alignment and make sure that you’re all focused on the same business goals.
Just as market conditions change, so will the value of your company. Tracking value regularly and consistently will help you to better understand where you are and give you a better overall view of your own business.
Knowledge Worth Having
There are experts—from within the vacation rental industry and outside of it—who will be able to provide perspective on a valuation for your company. But these should be considered with caution. An outside consultant will not be able to know the ins and outs of your data and market trends as well as you can. On top of that, a valuation specialist is likely to cost you thousands of dollars and a lot of time and energy to produce a less accurate result.
When you’re armed with your key value drivers and a thorough analysis of your data, your own assessment can be directionally correct. Is it good enough? It is certainly enough to start potential conversations about any sort of change to your ownership whether it be for outside investment, merger, or acquisition.
Margot Schmorak is the CEO and co-founder of Hostfully.