Dissecting the Deal...

A Guide to Buying and Selling Vacation Rental Companies

Deliverables

• Introduction & Key Terms • Thought Process

SELL SIDE• What to Know Before you Decide• Preparing Your Company• The Deal Itself

BUY SIDE• Thought Process• What to Know Before you Decide• What to Look For Specifically• Preparing Your Company

SUMMARY• Current Deal Metrics in Today’s World• Do You Need a Advisor?

Introduction

• Buying a business is a complex process, and it can be confounding because of the interplay of business, legal, and people issues.

• It can, however, be a rewarding process if you have done your diligence and researched the business thoroughly.

Key Terms

• EBITDA – Earnings Before Interest, Taxes (Income), Depreciation and

Amortization

• Motivation– Buyer - Expand into new markets– Buyer - Get into the industry– Buyer - Tuck-in opportunities– Seller - Retirement– Seller - External changes– Seller - Market/Business opportunity

• Types of Purchases– Asset Purchase (buying the stuff)– Stock Purchase (buying the LLC, Sub S…The Company)

Definitions (cont’d)• Representations (“Reps”) and Warranties

– You own the stuff you are selling

– You didn’t lie or purposely omit something

– You didn’t inadvertently omit something

– You paid your taxes

– Properly funded Advance Deposit/Trust accounts

– Business has been operated in the normal course

• Holdbacks or Indemnification Amounts– Funds held back to make sure your Reps and

Warranties are correct.

THE SELL SIDE

Thought Process

• Why do I want to Sell?• What am I going to do after? What’s next?• Do I want to stay on and work for the Buyer?• Do I REALLY want to Sell?• Am I READY to sell?• What goes away if I sell? What changes

– Health Insurance– Cell Phone– Car Payments– Memberships in Country Clubs

SELL SIDE

Getting Started• Preliminary Items

– Is my business ready to sell?• Financial statements, Income Statement, Balance Sheet

• Operational foundation

– What is my business worth?

– Consult a transaction Attorney or CPA

– Is it better to do Asset vs Stock deal

– What is the tax effect of transaction?

– What’s included?• Operating company

• The assets– Vehicles & Equipment

– Personal guarantees on merchant accounts, leases, Notes, etc

– Assignability

• Owner agreements?

• Leases?

SELL SIDE

Items to consider before Selling your business

Preparing Your Company• Data

– 3 Years Financials by Month

– 3 Years Tax Returns

– 3 Years Company Metrics (ADR, Occupancy, Unit Count, etc)

– Inventory of Main Assets

– All Agreements and Contracts fully Executed?

• Letting Your Key People Know

• Setting Up Off-Site Activities to Handle Due Diligence

SELL SIDE

The Deal Itself• 90% of the Transaction can be done electronically/offsite

– Data “War Room” in the Cloud

• 60-90 days typically

• Process

– Initial Review….the “Dance”

– Letter of Intent (LOI) – usually non-binding becoming “hard”

– Due Diligence (root canal)

– Purchase and Sale Agreement Creation (PSA, SPA, etc)

– Close – many times concurrently with PSA execution

• Ancillary Items

– Closing schedules

– Employment Agreements

– Consulting Agreements

– 2-5 years. Make it specific!

SELL SIDE

THE BUY SIDE

Thought Process

• Am I ready to grow?– Do I have infrastructure in place to manage the

growth. What about my time?

– Do I have the resources financially?• Off-season bleed?

• Will the two company cultures clash?

• Are the product and service offerings homogeneous? How much additional marketing will I need to do?

BUY SIDE

What to Know Before you Decide

• In What Structure should I Buy the company?

– Separate LLC, within the company, etc??

• 18 month to 24 month cash flow analysis.

• Is it better to tuck-in, or find a new market.

• Do I have a good attorney to draft documents?

– Not always your company attorney!

BUY SIDE

What to Look For Specifically

• Length of Time Units on the Sellers Program

• How Much the Seller Owner is Involved in the Day-to-Day– Can you live/grow without them, even if they stay on.

• Company Metrics Chart over time– Unit count (not net), ADR, Occupancy, Same Store

Revenues

• Key Staff longevity, retirement age, buy-in

• Can I acquire as a stock deal if I want to?

BUY SIDE

Preparing Your Company

• Do I have someone that will handle the transition, or handle the company while I handle the transition?

• Do I leave the Selling company name or Re-name it.– Company name equity locally

• Telling Your Key Employees• Make sure you have a Transition Plan

– Procedural (insurance, software, accounting, etc)– Human (accepting employees into new culture, etc)

BUY SIDE

Preparing Your Company (cont’d)

• Prepare for emotions.

• Software integration issues.

– Do you have bandwidth?

– Transfer or termination fees on Seller side.

• Set up a Dropbox/FTP or other Portal for your team

BUY SIDE

CURRENT DEALS

Typical Deal Metrics Today

• 3-6 Times TTM Adjusted Ebitda– Adjusted for all “Owner Expenses”– Slightly Less Multiple if Real Estate Brokerage a significant

Portion

• Varies by– Length of time owner contracts are with the Seller– Assets included– Time of Year Acquisition Takes Place (Before or After Season)– Ease of Purchase

• Assignment issues• Litigation issues• Growth potential

– Infrastructure for future growth

– How Much Seller “Has their Act Together”.

Typical Deal Metrics Today (cont’d)

• All Cash at Closing

– Used to see more Seller financing requirements

• 50% of Time the Seller Stays Around for 1-2 Years

• Key Management almost always kept around

• More than one qualified Buyer looking at any given time.

ExampleGross Revenue $1,000,000Cost of Goods Sold -$650,000

Gross Operating Profit $350,000

G&A Expenses -$75,000Interest -$12,000Owner Compensation -$50,000Depreciation -$6,500

Total Net Income $206,500

Add Back:Interest $12,000Owner Compensation $50,000Depreciation $6,500

EBITDA $275,000

x 4 Multiple 4

Purchase Price $1,100,000

Aka: Operating Expenses

Aka: Net Revenue

Assumes Owner Not Working Directly in the Company.

A Real DealAsset Deal – Eastern US

• Adjusted EBITDA = $210,000

• Purchase Price = $840,000 (4 multiple)

• Terms– All cash at closing

– Office Lease at Market Rate for 2 Years

– Seller/Owner gets 1 Year Employment Agreement w/Bonus

– Seller/Owner signs 3 Year Non-Compete

– Kept original company name “for now”

Do You Need an Advisor?

• POSITIVES– Removes the Emotions & keeps the deal on task– Makes Sure Little Things Don’t Fall through the Cracks– Provides market perspective to ensure fair practices– Keeps Buyer Confidential until later in process– If larger company involved, puts you on level playing

field– Access to Buyers/Sellers, National Market

• NEGATIVES– Costs Money (% of Deal + expenses)

Questions?Thank You

Ben Edwards

Ben@WeatherbyConsulting.com850-496-7360

Jim Olin

jolin@C2GAdvisors.com850-699-1828