Given the fragmentation of the short–term rental industry, there is a lot of room for M&A activity, especially for short–term rental operators. Having worked as a financial consultant advising more than 100 clients in various industries allows us to identify some challenges that short–term rental operators are facing when they are preparing for an exit.
Most short–term rental operators will most probably go through an exit process once in their life. This process is something completely unfamiliar to them. Obviously, everyone has some sort of knowledge and expectation but reality hits differently when the process begins. Let’s elaborate on some of the challenges that arise during an exit preparation process below
Firstly, M&A process is a highly numbers–driven process, and it requires the experience to be able to speak that financial language, meaning that interested buyers, the seller and advisors can speak the same language. In the short–term rental market, most property management companies, especially relatively smaller ones, do not have a finance team. The CEOs or the business owners are great operators, but they are not finance people. Therefore, it becomes complicated to understand the requests from the buyers in relation to necessary preparation.
In these situations, operators might find the buyer‘s requests meaningless, unnecessary, and making it difficult to run their daily business. However, we need to accept that no business will invest millions in our company without a clear visibility for the numbers and operations.
The necessity to provide that visibility requires the seller to deliver monthly financial statements dating back 3–4 years depending on the situation, detailed business plans which outline all the key inputs that feed the financials and the ability to identify non–business–related activities to adjust the earnings. This leads to the second key point which is financial hygiene.
Working with many different clients globally, we observe that an exit preparation process is a great learning process for many business operators. Having gone through that process, they realize that they have much better visibility and control of their financials which leads them to rely on the right data for their strategic decisions. However, during the initial part of the process, we see that most companies struggle to comply with major data requests such as monthly financial statements and business plans. Not having that required level of financial hygiene, then, results in additional weeks and even months of work. Usually, the demanding M&A process, the time pressure and the day–to–day business running on the side makes it extremely challenging for the sellers to deliver on these requests.
Furthermore, in most cases, when they get there, they realize that their numbers are not what they thought they were, which changes the valuation of the business and results in disappointment. Therefore, we strongly believe that companies out there need to have their financial hygiene in place to avoid all these challenges and surprises in the end.
The Emotional Component
Lastly, there is the emotional component of selling your business. As already mentioned, M&A process is a purely numbers game. The value you get will depend on your company’s financial performance, growth potential etc. In the end, the level of interest you get from the market will determine the valuation of your company on top of your figures. However, for the sellers, the process works differently. They have certain valuation expectations and goals that are sometimes not aligned with how the market values their business. They tend to weigh heavily on factors that they value in relation to their business such as strong reviews, uniqueness of their offering and the brand they have created over the years which are highly important factors.
Nevertheless, the numbers which provide the reality about the financial performance of your company should not be forgotten. We believe that with the right preparation, the role of the emotional component will be less on the exit process.
Finally, we strongly suggest that the business operators should look into the tax implications of selling their business. While there is a target valuation to be achieved through the sale, the taxes to be paid come as an unpleasant surprise for those that are not aware of it. Therefore, it is particularly important to consult your advisors from the beginning of the sales process to understand the accurate deductions on the company value.
In respect to all the above points, we advise the short–term rental business operators to firstly ask themselves if their company is financially and structurally ready for exit. If not, we strongly suggest working on hiring the right people to work on financial hygiene and structure to go through a satisfactory exit process when the time comes.
How can we help?
At AJL Atelier, we support companies in their exit preparation processes. We work with players from all the verticals of the short–term rental industry, including property management companies of all sizes, technology providers such as property management software, operations management solutions, pricing solutions, revenue management tools and Investors coming into the short–term rental space.
If you believe that your company has reached a stage where you can consider an exit, we are happy to talk!
(no commitments, any questions welcome!)