The M&A Process: Short-Term Rentals
The M&A process for vacation rental management companies can be both exciting and overwhelming. In this article, we’ll guide you from the initial valuation all the way to the post-sale transition.
Market Your Vacation Rental Business
M&A advisors initiate the process by strategically marketing your business. This process begins with an internal valuation of your company based on current industry methods, multiples, and structures. Secondly, your advisor creates marketing materials, including a Confidential Information Memorandum (CIM), Data Room, and Teaser. Next, they facilitate corresponding with potential qualified buyers. This process includes executing non-disclosure agreements (NDA’s), sharing the marketing materials, and setting up initial meetings.
Review Offers
Depending on buyer interest and the size of your company, you can expect to receive offers anywhere between 24 hours to 3 weeks. These offers typically come in the form of a Letter of Intent (LOI). An LOI is a non-binding document that spells out high-level terms of the deal.
While this document is non-binding, it’s a very important reference for later in the process. These agreed-upon terms will follow the deal until the final agreement is signed. The primary negotiated item is the Consideration, which involves details like the total purchase price, cash-at-close, earn-outs/seller-notes, and more. Other items include Exclusivity, Key Employees’ roles, Seller Transition Periods, Non-Competes, Working Capital, and other components specific to your company.
Due Diligence
So, you’ve found a buyer you like and have executed the LOI. Now the fun begins! Depending on the buyer, this process can range from quite simple to extremely tedious. Recently private equity, family offices, and sophisticated buyers have entered the market, and their due diligence process is robust. This is the buyer’s opportunity to make sure the vacation rental business that they’re purchasing has all of their t’s crossed and i’s dotted.
The buyer will provide an extensive list of questions and requests, categorized by Financials, Insurance, Legal/Contracts, Operations, etc. The buyer will then have internal and outsourced firms perform deep dives into the major aspects of your short-term rental company. If you have properly prepared your business and have a strong M&A advisor, this process won’t be too difficult. However, if your company is in disarray and there are skeletons in the closet, it may not be the right time to sell. The due diligence process will typically last from LOI signing until the day of closing (45-90 days).
» Learn more about crucial aspects of selling your vacation rental business
Definitive Documents
In the latter half of the Due Diligence process, the buyer’s legal counsel will start drafting the closing documents, which include the Purchase Agreement and ancillary documents. The most negotiated document will be the Purchase Agreement, either Asset Purchase or Stock Purchase. Usually between 30 and 60 pages, this document will spell out the business terms from the LOI and all the legal language surrounding them. Your M&A advisor and transactional attorney will work with you on the Purchase Agreement to minimize your total risks & liabilities and maximize any consideration post-close.
The Purchase Agreement will include seller representations and warranties. Essentially, these are legal statements that you are representing to be true about your company and yourself. The agreement also contains schedules for you to disclose any exceptions to the reps & warranties or business items that are requested – such as advanced reservations, homeowner/unit list, lawsuits, etc. To put it bluntly, the disclosure schedules are not exciting, but with the help of your advisors, they can be completed expeditiously.
There will be ancillary documents other than the Purchase Agreement, which include post-closing transition services agreement (TSA), key employment agreements, escrow agreements, rollover equity, purchase price allocation, office leases, closing certificate, bill of sale, loan payoff letters, etc.
» Read more about desired language in management contracts
Closing
On closing day, the buyer and seller sign the definitive documents and funds are wired. The funds flow is an interesting nuance that will need to be discussed several weeks before closing. With sellers sometimes holding millions of dollars of advanced deposits in their trust account, you want to make sure all parties understand how that will be dispersed on closing day. Depending on whether it is an asset or stock sale, some groups prefer to wire a net amount, others prefer multiple wires, and still some take over the trust accounts. Generally at closing, you will deliver the business on a cash-free/debt-free basis, with a normalized level of working-capital.
Post-Closing Transition
The post-close transition period commonly lasts 6-12 months but can vary extensively depending on the seller’s current/future role at the company. Buyers are learning that it is critical to not “rock the boat” immediately after closing. Homeowners and employees can be fickle and resistant to change, so it’s vital to move carefully to ensure a smooth transition. Typical transition items include administrative duties, introduction & orientation for employees, transferring any licenses, closing out accounts, notifying homeowners (if applicable), transferring assets, software migration, and providing ongoing support.
The first 6 months of transition is the most important, so it is paramount to work through a collaborative communication strategy with the buyer that leads to a successful deal for both parties.
>To learn more, read out blog about how to successfully sell your vacation rental management business
That’s all
You’ve done it! Congratulations, you sold your business. The average M&A process for a well-prepared STR business takes 4-6 months. It may seem like a lot… because it is. That’s why it is imperative to be proactive and have an organized company with the right team on your side. An experienced M&A advisor, transactional attorney, and CPA will help guide the process into a smooth and ultimately, rewarding experience.
To learn more about the mergers and acquisitions process for you short-term rental business, contact us today
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