January 12, 2016

4 Things to Know Before Acquiring a Vacation Rental Company

Looking to grow in 2016? If so, the big question then becomes “How?” Will it be through organic growth? Acquisitions? For many a rental manager the answer is both, but given the high attendance at the sessions this past year at the Annual VRMA Conference in New Orleans, M&A is on companies’ radars more now than ever before. Should it be?

Here are four things to consider before buying a vacation rental company.

1. Know your odds.

On the surface, acquiring a company appears to be your fastest, easiest, and cheapest path to accelerating your growth. Dig deeper, however, and the truth is murkier. Rather than being a surefire route to success, it turns out M&As are more likely to fail than succeed. That’s right, a recent Harvard Business Review report found that an astonishing 70-90% of M&A deals fail. You are nearly nine times as likely to fail on your acquisition as you are to succeed on it. If so, why do so many companies continue down this tried and true path to failure?

The simplest answer is psychological, and it’s called “illusory superiority.” It is the same reason the vast majority of people think they are better than average drivers, when by definition half of all drivers must be below average. “Sure,” people think, “90% of deals like this are failures, but I will be in that other 10%.” And you know what? 10% of the time they are right. I am not in anyway saying I am immune to such thinking. After all, I looked at the rate of failures of startups (again, 90%), and thought: “Of course I’ll be in the other 10%!” No one is safe; it’s human nature.

2. It’s not always a quick solution.

How about for those 10% that “succeed.” Is M&A the right path for them? Again, the answer is not clear cut. Is an acquisition really faster than the alternative? Between identifying a target, convincing that target to sell to you (potentially having to outbid competitors in the process), closing the deal, and then integrating the company, how much time does it actually take for this “quick” solution?

3. It might not be easy.

Is it “easier” than your alternatives? Again, it depends. Maybe the company you are acquiring not only uses your exact same owner agreement, but has the exact same culture as you as well. Integrating homeowners into your program is a dream, and every employee you just added through the acquisition fits seamlessly into your day-to-day work environment. Great! That was easy. But how often do you think either of those things are true, much less both at the same time?

4. It could cost you.

And finally there is the cost. After factoring in the premium you had to pay to get the owner to sell, the legal fees, and the opportunity cost of the time and attention you put to the deal that could have been put to other uses, is acquisition really the most cost efficient path to growth? On the first metric alone, the purchase price paid, I consistently hear of acquirers paying anywhere from $4,000 to $10,000 per home acquired. I have less personal insight into the cost of rental managers’ normal organic channels, but I can say that managers using Rented.com on average pay closer to $2,000 for each home they add through us, and the opportunity cost is typically much less since our time to on-boarding the property is half or less what it normally takes them to add homes.

This is not all meant to be a pitch for Rented.com. There are times when we might be the right answer. There are other times that a manager’s own organic sales channels are the right answer. And there may be other times when M&A is the right answer. All I am advocating is that more people look at the alternatives, and the total cost of each, before assuming any one of these channels is automatically the best one.

Have you considered buying another vacation rental company? Let us know in the comments below!

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