Selling a vacation rental business is one of the largest transactions of one’s career. Vacation rental purchase and sale transactions are now a mainstream exit strategy for vacation rental company owners. Owning, managing and maintaining a vacation rental business is a difficult endeavor. Operating a business requires diligence and focus to successfully propel the business. As vacation rental company owners consider selling their business, the same diligence and focus should be applied to understand the true cost of selling your business.
Of course, attorneys, advisors and accountants are an expense associated with selling your business and sellers should be mindful of the expenses incurred by engaging these parties. However, the largest costs associated with selling your business are the hidden costs and not as easily identified during the transaction process. Many vacation rental company owners are not aware of certain process points or market rate deal terms that significantly outweigh any transaction costs realized in the sale of a vacation rental business.
Taking a wrong turn in the sale of your vacation rental business could critically impair its success. More recently, we’ve seen a number of hidden pitfalls, that deserve more discussion and sunlight in the transaction process. Please find a few of these hidden costs outlined below:
- If you, as vacation rental company owner, are relying on a buyer to communicate or guide you as a seller through the process, expect to be disappointed. Many prospective buyers are not even financially able to purchase your business. Not understanding market rate deal terms and choosing a buyer with financial closing power will precipitate untold costs to you as a seller. The length of purchase price pay outs, guarantees or promissory notes associated with owner financing and set off provisions are just a few deal terms that can sink a transaction. Unfortunately, many vacation rental owners learn about these terms subsequent to closing, which is too late to effectuate any change.
- Understanding the value of your vacation rental business is paramount in increasing the sales price of your vacation rental operation. Properly adjusting a business’ income, coupled with a market rate multiple of earnings, clearly determines the sales price of a business for all parties involved. The process is clear and has been widely used for more than 20 years. As you decide to prepare your business for sale, knowing the value of your business and how to increase its value will help ensure the sale of your business is a success. Additionally, it confirms that it does not cost you, as a seller, the ability to obtain maximum value in the sale of your business.
- As you prepare your business for sale, qualitative and quantitative attributes of your business should be highlighted and conveyed to prospective buyers. We’ve discussed accentuating the quantitative results of a business because the sale of a vacation rental business is truly the sale of a revenue stream derived from your contractual relationship with property owners. The financial results are extremely important, but equally as important are the qualitative results of the business. The fundamental attributes that create the quality, goodwill and reputation of the business are not generally articulated in an manner necessary to increase the enterprise value of the business. These qualitative points can significantly increase the value of your business. Not doing so can cost the seller valuable dollars by reducing the multiple of earnings when calculating the sales price of the business.
From Arrival Issue 1, 2020
Understanding the true cost of selling your business will help ensure the sale of your vacation rental operation will be a success. If you have questions about preparing your business for sale or are curious about the value of your vacation rental operation, please do not hesitate to contact Ben Edwards with Weatherby Consulting to learn how to ensure the sale of your vacation rental business is a success.