Selling Your Short-Term Rental Business: The Ultimate Guide

The short-term rental industry has witnessed a surge in innovation and a steadfast commitment to enhancing accommodation experiences. As the landscape of short-term rentals evolves, it has undergone a significant transformation fueled by technological advancements and global travel trends. In this new era of short-term rentals, the focus on cutting-edge technology and sustainable hosting practices has never been more important.

If you’re considering selling your short-term rental business, Raincatcher is your reliable partner. Recognized as a leader in short-term rental business transactions, we’ve earned a reputation as the top business broker, according to Inc. magazine. Like any substantial endeavor, transferring ownership of a short-term rental business demands careful attention and effort to attract suitable buyers. While there isn’t a universal blueprint for the sales process within the short-term rental industry, our approach is customized to ensure the best possible outcome for your business. This article outlines the steps involved in selling your short-term rental business, from compiling essential documentation to finalizing the deal.

Process of Selling a Short-Term Rental Business (at a glance)

If you have decided to sell all (or part) of your short term rental company, here is a glimpse at what the process will entail over the coming year:

  • Build a strong deal team: Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing short-term rental companies. Find a proven M&A attorney (we can introduce you to several groups we’ve succeeded with) and a tax attorney.
  • Compile your materials: Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and property management contracts, employment agreements, etc.
  • Market the deal: We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
  • Receive IOIs: Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings before receiving an LOI.
  • Management Meetings: Should it fit your business, your broker will join you in hosting investors for a week to share additional information about your manufacturing company.
  • Receive LOIs: ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
  • Sign an Exclusive LOI: After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
  • Due Diligence: The buyer and their advisors kick off another 60-90 days of thorough investigation, leaving no stone unturned in examining every aspect of your company.
  • Close: Closing time. The deal is done, and you’ll typically get 80% – 90% of the payment for your business now.
  • Transition: After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.

Hear From Previous Clients Who Sold Businesses With Us

What Determines the Valuation of a Short-Term Rental Business?

Lower middle market short-term rental businesses (sub $1M EBITDA) typically trade at 3-5x earnings, depending on how desirable they are. Once a STR business is larger than $1M in EBITDA multiples can increase above 6x. A Short Term Rental company that trades for a high multiple (~6x+) has many of these traits:

  1. Stable or growing Occupancy Rate, ADR, RevPar: The consistent occupancy rate and the ability to increase or maintain ADR and RevPar showcases the business’s financial health and potential profitability.
  2. Location: The attractiveness and demand for the property management companies location significantly impact its value. Are you in a traditional year round destination market, a seasonal location with one peak season or an urban environment?
  3. Property Size and Features:  The make up of the portfolio under management significantly impacts value.  What market do you serve? Luxury, mid tier, economy?
  4. Team: Having a strong management team and tenured employee base and strong culture significantly increases value.
  5. Competitive Landscape: The local market competition level affects pricing strategies, occupancy rates, and, ultimately, the business’s value.
  6. Brand and Direct Bookings:  Positive reviews and ratings on popular platforms can boost customer trust, leading to higher demand and valuation. A diverse distribution strategy is important. You can not solely rely on the OTA’s. Majority of bookings coming from Direct drives increased value.
  7. Operational Efficiency: Streamlined management processes and automation can enhance profitability, positively impacting the business’s value. Adopt and implement technology within the business.
  8. Regulatory Environment: The regulatory environment for or against STR’s in the local market significantly impacts the future risk to the business and value.
  9. Clean and Accurate Financials:  Financials must be clear, precise, and accurate.  Trust accounting for advanced deposits is also critical. Businesses without these items will see a significant discount in valuation.
  10. Future Growth Potential: Factors like expansion opportunities, partnerships, and potential for diversification can influence the business’s long-term prospects and valuation.

Remember that the valuation process can be complex and subjective. The combination of these factors varies based on the unique circumstances of each short-term rental business and its specific market. But the fewer criteria your short-term rental company meets, the lower the multiple will slide. Although rare, some short-term rental companies don’t sell at all or only sell for the value of their contracts. However, these are typically small companies (less than $500k profit).

short-term rental business valuation

As noted above and illustrated in this chart, the business valuation of a short-term rental company can range greatly. Below, we’ll dig into some critical factors determining short-term rental company valuations.

More Short-Term Rental Resources

One of the most common questions we get from business owners is about valuation. We put together a short-term rental valuation multiples guide that we think you’ll find helpful.

Financial Performance

Your short-term rental business’s historical and projected financial performance is a critical determinant of its valuation. Prospective investors will require access to updated accounting records, financial statements, and documents such as tax returns. These records will be scrutinized to assess elements like revenue, profitability, cash flow, and growth patterns, all of which contribute to evaluating the financial strength and potential returns on investment of the business in the short-term rental sector.

The business’s size in the short-term rental industry often correlates with its valuation. For instance, a short-term rental company generating $500k in annual profit might command a valuation multiple lower than a similar business generating $3m in yearly revenue.

Investment groups place great importance on maintaining a margin surpassing 20%. Short-term rental companies with healthy profit margins signify that the business possesses a competitive advantage and stands apart from its peers within the industry. This differentiation indicates a strong position and unique qualities that set the short-term rental company apart from competitors.

Industry Segment and Market Conditions

The industry and market conditions in which the short-term rental business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the business’s perceived value.

Generally speaking, the more niche a short-term rental segment is, its total addressable market is smaller. However, there are likely fewer competitors in that niche, and they can have more repeat business and more durable earnings. Investors will have different views on niche markets, with most buyers liking them and others disliking them for their limited growth prospects.

Growth Prospects

Buyers evaluate the growth potential of a short-term rental business to ascertain its worth. Aspects such as property portfolio diversification, avenues for expansion, market reach improvement, innovation capacities, and client base all play a pivotal role in gauging the business’s future growth possibilities and subsequent influence on its valuation.

Even within the short-term rental sector, the more specialized business could exhibit promising growth potential by identifying related rental domains and services they can provide.

Assets and Intellectual Property

The tangible and intangible assets of the healthcare business can also impact the company’s valuation. This includes properties, furniture and fixtures, property improvements, brand and reputation, customer database, online presence, software and technology. Well-maintained assets and valuable intellectual property can enhance the business’s value.

Generally, companies with renovated and updated properties will trade at higher multiples than those with more commoditized properties.

Additionally, companies with strong teams are seen as more desirable and able to transfer leadership to a new owner. While this asset isn’t on the balance sheet, employees are critical to the business.

Customer Base

The customer base is paramount when selling a short-term rental property business, as it ensures a stable revenue stream from repeat bookings, reduces marketing costs, enhances business valuation, showcases proven demand, fosters a trustworthy reputation, enables upselling opportunities, provides valuable data insights, facilitates a smooth ownership transition, and establishes a competitive advantage by solidifying brand loyalty and deterring new competitors.

What is the Process of Selling a Short-Term Rental Business?

While it may not be a fit for all clients, most entrepreneurs we work with who run short-term rental companies will see the most competitive price and terms for their business coming from a well-run auction process.

Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality of earnings analysis before we start the auction process. In our experience, this cost and time are justified and can manifest in 5% – 15% hire exit values.

We’ll go into each of the steps of an auction process at a high level below:

How we Maximize Exit Proceeds for our Short-Term Rental Clients with our Auction Process

Sell-side due diligence

Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market. 

Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.

 

Specially designed brokerage or M&A auction process

Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation. 

Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.

Short-listing finalists

It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.

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Negotiate LOI terms and facilitate diligence

Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.

It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.

Talk to the experts

Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.

Understanding Market Demand: Factors Influencing the Short-Term Rental Industry's Growth and Popularity

Potential investors meticulously weigh multiple critical factors when considering acquiring a short-term rental company. Location emerges as a vital consideration, with properties in coveted tourist or business destinations holding higher appeal due to their proximity to attractions and amenities. Financial performance assessment follows suit, where historical revenue data, occupancy rates, and profit margins help gauge the investment’s profitability.

Navigating the regulatory landscape also influences investor interest, as clarity on local regulations and zoning laws is essential to ensure legal operations. Evaluating competition and property quality further shape their decision-making, while operational efficiency and technological integration underscore a company’s viability. The potential for scalability and growth potential, alongside a keen understanding of market trends, adds depth to investors’ evaluation. A comprehensive analysis of these factors ultimately equips investors to make informed choices that align with the dynamic short-term rental industry.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our short-term rental business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

What Role Does Technology Play in Investors Analysis of the Short-Term Rental Industry?

Technology plays a pivotal role in how investors approach their analysis of the short-term rental industry, significantly influencing their evaluation of potential investment opportunities. In this dynamic landscape, where operational efficiency, guest satisfaction, and overall excellence are paramount, technology emerges as a powerful lens through which investors assess the industry’s potential for growth and stability.

Investors typically approach their analysis through two distinct strategies: 

  1. Invest in companies that can grow significantly.
  2. Acquire highly differentiated companies and therefore have a very stable, predictable client base and cash flow.

 

With the first, technology’s role in operational efficiency and market reach is paramount. Investors scrutinize how advanced software solutions streamline processes like property management, guest communication, and booking distribution. This efficiency drives down operational costs and sets the stage for seamless guest experiences, driving positive reviews and high occupancy rates. Additionally, technology-driven data analytics provide insights into market trends and property performance, aiding informed decisions and optimized revenue generation during peak periods.

The second approach centers on acquiring highly differentiated companies, ensuring a stable and predictable client base and cash flow. Technology’s role in enhancing guest experiences and safeguarding security takes precedence in this context. Investors focus on technology that facilitates personalized online bookings, mobile check-ins, and robust cybersecurity measures for guest data protection. Such differentiated and technology-driven guest experiences contribute to loyalty, positive reviews, and recommendations, creating a foundation for a predictable revenue stream.

By harnessing technology’s potential, investors align their analyses with the evolving dynamics of the short-term rental industry, positioning themselves to capitalize on growth and stability opportunities.

Request a Consultation

At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.

Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.

request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.