How to Value a Vacation Rental Business
You’ve worked hard to build a successful vacation rental business and now you’re ready to take the leap and sell. But in order to do so, you need to determine the value of your business.
Guides on how to go about this can be complicated and may leave you with more questions than you started out with. But we’re here to make valuing your vacation rental business a simple task.
With the information we’ve compiled, you’ll be able to successfully navigate your way through this process. In this guide, we’ll shed light on:
- Which methods to use to value your vacation rental business
- How to prepare your business for valuation
- Ways to increase your valuation
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Methods of valuation
When it comes time to sell your investment property, there are several valuation methods short-term rental business owners can use:
- The times-revenue method
- The Multiple of EBITDA/EV method
- The valuation per property method
Also known as the multiples of revenue method, the times-revenue method is used to determine a business’s maximum value based on its current revenue. For this method, simply divide the selling price of your company by your revenue from the previous twelve months.
Once you have this figure, you’ll assign a multiple to determine the value of your business. There are many factors that can affect the value of this multiple, such as industry conditions, the general economic environment, and more.
The times-revenue method is good for new short-term rental businesses with little or unpredictable earnings, as well as a business that has grown fast.
Multiple of EBITDA/EV method
You can also use the multiple of EBITDA/EV method to measure your company’s ROI. In the EBITDA/EV method, EBITDA stands for your earnings before interest, taxes, depreciation, and amortization, while EV (enterprise value) is a measure of the economic value of your company.
When you divide your EBITDA by your EV, you get a multiple that demonstrates the general health of your company. A higher value means a company with healthy cash flow, while a lower value may indicate some issues.
Valuation per property method
Third on our list is the valuation per property method. Unlike the two methods we explained above, this method is specific to the real estate and vacation rental industries, and it simply measures the value of your business based on the number and value of properties your company owns.
For example, if you have 15 properties, each of which has a value of $200,000 “per door,” you’re looking at an overall value of $3,000,000.
How to prepare for a valuation
Now we’re going to look at a few ways to gather data and documents as you begin preparing to value your company for potential buyers. The material you gather at this stage will establish the foundation for your sales price and deal structure.
Audit your tangible and intangible assets
Begin by compiling an inventory of all of your assets or everything that provides value to your property management company. Divide your assets between tangibles and intangibles. Tangible assets are physical resources your company owns. Meanwhile, intangible assets are non-physical resources your company owns but which still have economic value.
Examples of tangible assets include:
- Guest supplies
- Office spaces
Examples of intangible assets could be:
- Advance deposits
- Owner reserve funds
- Intellectual property
Wrap it up by completing a full systems audit of tools and workflows used to run your business. List all of this in a clear and organized spreadsheet.
Generate a report on your sales history
Compile a comprehensive report of all of your business’s revenue activity from the past two years. Create this report in a spreadsheet and include items like the commission structures for each property, property IDs, and rental charges.
Finally, create a report of the booking data for each vacation rental property. This report should contain dates of guest bookings, first and last nights of each stay, and owner holds. A professional bookkeeper can help prepare this report for you.
Generate a report on your contracts and fees
Next it’s time to create a report that presents your base rental income and fees over the past 12 months. This report should include booking fees, property taxes, and cleaning fees. If there are any special services you’ve provided for your homeowners, such as maintenance tasks, list them as well.
Create profit and loss statements
Lastly, create your profit and loss statement. YourP&L statement, or your income statement, is a financial report that summarizes your business’s expenses, revenues, and profits/losses over a given period of time.
Be sure to include all of your costs, from Airbnb and Vrbo fees to cleaning supplies. Plus, ensure that your statement is clear and organized for your potential buyer.
If you use accounting software, then creating yourP&L statement can be as quick and painless as pressing a button (as long as you have been recording your income and expenses on a regular basis).
Manually creating a P&L statement is a little more time-consuming, but you can use a P&L template to help guide you once you’ve collected all of the relevant information.
Increasing your valuation with low-hanging fruit
Most rental owners would rather buy a business that’s running smoothly than one that’s in need of repair. Buyers need proof that the business they are investing in is viable. So, before you sell your vacation rental business, consider how you can increase its value.
Build a strong foundation
A robust business needs a clearly defined business plan and structure—you should be able to define each employee’s position and how it fits within the overall organization. If you haven’t done so, consider illustrating your organizational structure in an org chart or diagram.
And of course, having high occupancy rates and a healthy number of vacation home rentals in attractive locations is important as well.
Automate as much as possible
Property management can quickly become overwhelming, as there are so many variables involved. Investing in vacation rental automation tools will give you the time and space you need in order to focus on the bigger-picture elements of your business, and can play a key role in making your company attractive to potential buyers.
For example, if you have automated processes for organizing bookings, managing guest messaging, and overseeing day-to-day operations, potential buyers will see that they’re walking into a smooth-run operation that won’t require putting out fires on arrival.
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Build your digital assets
There are many digital assets you should consider implementing to strengthen your selling potential.
For example, building out a clean, functional website for your guests, as well as having a strong social media presence, can help make you a more attractive proposition for an investor.
Also, consider creating digital guidebooks for your guests to engage them in their stay, reduce questions, and minimize cancellations. They’re also a fantastic way for buyers to see what kind of guest experience they’ll be investing in.
Finally, use a guest communication platform for efficient text messaging with your guests and property owners.
Build upsell opportunities/increase revenue
There’s so much more that goes into a great hospitality experience than simply providing a nice room to sleep in. You can delight your guests while increasing your profits with upsell opportunities.
Upselling will not only increase your business’s revenue, but also improve the likelihood of your guests returning in the future. Plus, when you automate your upsells, you can earn more without doing any extra work.
Offering extended guest stays is an example of a revenue enhancement technique that can be automated. RueBaRue, for example, automatically looks at your calendar for open nights and offers your guests early or late access to their unit at a discounted price.
With RueBaRue, it’s easy to fill in gaps in your calendar by automatically offering guests the opportunity to extend their stay. Book a demo
Get great guest reviews
Don’t underestimate the power of great reviews in attracting potential guests to your short-term rental properties and increasing revenue. When you exceed your guests’ expectations, you’ll get better reviews.
Setting the right expectations begins with how you present your properties online. The information you provide should be up-to-date, and all of your images and descriptions should be an honest representation of your offering.
And to give your guests a stellar experience, you need to display stellar communication. Be proactive and send your guests all the information they need, like directions and arrival instructions, before they check in. And throughout the duration of their stay, prioritize quick response rates and a seamless way for them to communicate with you should issues arise.
Finally, make it easier on you and your guests when it comes time to writing reviews with review automation. With RueBaRue, for example, you can send automated review requests an hour after checkout and make it easy for guests to leave their opinion or feedback.
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Think like your potential buyer
Every investor wants a business that can show proof of viability, which is why you need to use the right approach to valuing your business. And considering the fierce competition in the vacation rental market, you should be looking for ways to increase the value of your business so you can maximize your profits come time to sell.
Focus on building a strong organization, and invest in automation software solutions like RueBaRue that can help you enhance your digital assets and streamline guest communication. Doing so will make your life easier and your business stronger.
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Frequently asked questions about how to value a vacation rental business
How many multiples of EBITDA is a business worth?
Typically, the range of multiples of EBITDA is between four and six. However, this figure can vary depending on the industry.
How many times revenue is a business worth?
Generally, a business is worth about two times the sales revenue it generates. However, this question depends on the economic climate and market trends.
What are common mistakes when valuing a business?
Common mistakes when valuing a business include using flawed valuation models, having an exaggerated opinion of the value of a business, and not considering the buyer’s needs.