The growing popularity of the vacation rental industry has many management company owners wondering how these changes have affected the value of their business.
Regardless of whether or not you’re considering a sale, it’s likely that this question has crossed your mind. For any type of business owner, it’s important to know the general value of your company and track its changes over time.
Fortunately, determining the value of your company doesn’t have to be a complex endeavor involving consultants, CPAs, and business brokers. We’ve provided some tips below on how you can estimate the value of your rental company for yourself.
The Market Comparison Approach
The valuation method used most often for the vacation rental industry is the market approach, which aims to determine the fair market value of a company. Like with real estate, the market approach establishes value by comparing recent historical sales of similar companies in the same industry.
This is especially helpful in the vacation rental industry, where companies have intangible assets. Looking at the sale price of similar companies is a great starting point in pricing your own business. Each industry then has unique valuation metrics used to determine more specific value, which are usually related to the revenue and profits of the business.
To compare value across companies of different sizes, a range of multiples is used. The multiples you consider for your company can depend on details such as age, historical profits, occupancy levels, growth, seasonality, and the competition you face in the market.
Determining Your EBITDA
For the vacation rental industry, the most common valuation metric is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Calculating your EBITDA can be as simple as taking your bottom-line profit and loss profitability and adding back any expenses related to interest, taxes, depreciation, and amortization.
Many businesses also have expenses unique to the individual owner that would not be the same for a potential buyer. So the next step would be to adjust your EBITDA to make it more accurate.
These adjustments might include owner salary and benefits (if you are not involved in the day-to-day operation), additional owner perks like a company car, or charitable contributions that would be discretionary for a new owner. You can add these items back to your EBITDA to come up with an adjusted value.
Once you know your adjusted EBITDA, it should then be subjected to a range of multiples. The sale value of a short-term vacation rental management company typically ranges between three to five times a company’s adjusted EBITDA.
Well-established companies in high occupancy markets with consistent historical profits, proven growth, minimal seasonality change, and little direct competition will likely be valued at the higher end of the range. On the other hand, a younger company that has experienced decline or inconsistent company size in a seasonal (or competitive) market would likely sell for a price in the lower end of the range.
If you’re considering selling your vacation rental management company, there are several other factors that can determine the value and timing of when to make a sale. We’ve got some tips on when the best time to sell is depending on the seasonality of your location.