Mergers & Acquisitions: Past, Present and Predictions
So, you heard from an industry colleague that they sold their 50-unit short-term vacation rental business for a 10 multiple of their EBITDA. While technically that may be true, the buyer was likely not placing a multiple on EBITDA, instead on another financial metric, such as revenue. Over the past few years, we’ve seen a large increase in buyer demand which, in turn, has led to a more competitive M&A landscape in the short-term rental industry. We have also all been a part of a wild macroeconomic rollercoaster. From the COVID “bump” to rapid inflation to massive interest rate hikes, these many factors have played a significant role in the acquisition strategies of industry buyers.
Past: 2021 – 2022
Your colleague was paid the equivalent of $45,000 per unit for their 50-unit company. While $45K per unit is not unheard of, it’s very rare for a company of that size. During the COVID boom, buyers were valuing businesses three ways: a multiple of their Trailing 12-month EBITDA, a multiple of revenue, or a percentage of gross rents per unit. Even unprofitable companies were getting strong offers.
It was a sexy time in the industry. It was a sexy time for the economy. Congress was mailing checks to most citizens, the stock market was skyrocketing (up and to the right), interest rates were near zero (money was cheap), home values were appreciating exponentially, demand was much higher than supply, and bitcoin was…being bitcoin. Vacation rental managers were setting rates 20%, 30%, even 40% higher year-over-year and still getting bookings. Most companies’ advanced reservations were pacing significantly ahead of their prior year. Purchase price payout structures were extremely seller-friendly with little to no contingencies. In terms of M&A, we call this a “seller’s market.”
Your colleague, who received $45,000 per unit, sold at the perfect time. We are now on the backside of the mountain. The COVID craze that launched the economy into an inflated bubble is over; the stock market has fallen, interest rates are rising (money is expensive), home values are unstable, short-term rental supply is much higher, and bitcoin is…being bitcoin. Consequently, most vacation rental managers are seeing their occupancy rates drop, thus leading to lower RevPar and rents. If unit count is stagnant, then advanced pacing is lower compared to the same-time-last-year (STLY). With decreasing revenues and costs remaining high, many companies are taking a hit to the bottom line versus 2021 or 2022 profits.
The M&A market is still very active compared to pre-COVID. Although most venture capital-backed (VC) buyers are sitting on the sidelines for 2023, private equity (PE) buyers and profitable strategics are still hunting. These buyers range from small shops to large firms and are selective with their targets. They are looking at profitability, future pacing versus STLY, homeowner retention/churn, and a professional company infrastructure (e.g., staffing, accounting, contracts). Payout structures are more middle ground and include contingencies based on EBITDA, revenue, or unit count. We call this a “healthy market.”
We expect the overall market to remain choppy in 2023. While many vacation rental managers are pacing lower than 2022, rental revenue hasn’t dropped below 2019. The past few years brought a new level of exposure to the short-term vacation rental industry, and we expect that to continue.
Venture capital-backed buyers will likely need to become profitable before they start acquiring again. Small and large private equity and investor buyers will remain active for short-term rental managers. The days of being valued on a multiple of revenue are gone. Buyers will be laser focused on cash flow and highly market-driven due to regulatory environments. Some buyers will expect business owners to be less active in the daily operations, especially homeowner relations. We see purchase price multiples and structures consistent with fair market values, and largely dependent on company pacing and unit growth. Premier companies with growing EBITDA, organic supply growth, and a full management team will remain in high demand, garner elevated multiples, and better structures. We call this a “seasoned market.”
Along with the remarkable macroeconomic phenomena of 2020 & 2021, Airbnb’s IPO brought unparalleled exposure into the short-term vacation rental industry. There has been an influx of business acquirers, investment properties, guests, entrepreneurs, … and conferences! It’s now very common to book an “Airbnb” for a family vacation, a romantic getaway, a group of friends, or a solo adventure. This new benchmark for our industry is here to stay, and we’re excited and bullish for the future of short-term vacation rentals.
Looking for more information? Learn more about our mergers and acquisition services at C2G Advisors!