“What is the value of my property management business?”

Mergers and acquisition activity in the short-term rental industry brings up the big questions for every property manager: “What is the value of my property management business? “

The fact that property management company valuations are based on an EBITDA (Earnings Before Interest Depreciation and Amortization) multiple has already become common knowledge in the industry. Simply, business owners know their EBITDA and they basically want to know the multiple. While it sounds simple and a range of multiples are being mentioned at conferences and industry events, the process is not that straightforward. To start, there are three important points that we should understand about the EBITDA part before we move to the multiples.

Firstly, the company must be profitable to trade with an EBITDA multiple. Otherwise, mathematically we end up with a negative valuation. In case the company is not profitable, we would be looking to value the business on its gross margin. That would basically be what the business generates in management income and ancillary revenues. The other way to look at a case of this type from the buy-side would be to consider a value per unit. In both cases, also similar to an EBITDA multiple valuation, the valuation would depend on a list of factors which I will get to shortly.

Secondly, the time period for which EBITDA for the valuation is relevant should be identified. Whether we use the last fiscal year’s number or the expected value for the upcoming year-end or the trailing twelve months (TTM) depends on the timing of the transaction and the position of the company at that time. TTM EBITDA is usually relevant if the transaction is happening around mid-fiscal year. Otherwise, we would be looking to work with the closest fiscal year’s EBITDA value. However, there are special circumstances where for instance a company might have added on a significant number of units recently, and valuing the business based on the financial figures of the past period would not be taking into account the already secured growth.

The third important point about identifying the right EBITDA value for the basis of the valuation is that we should be working with a normalized EBITDA which usually ends up being different than the official number in the financial statements. When we say normalized EBITDA, we would like to see a clean number that purely reflects the operational earnings of the business. This would mean removing any personal expenses, one of items (both revenues and expenses), and eliminating non-operational income and expenses. Furthermore, there would be more adjustments such as directors’ salaries if the owners are just working with a profit share and other adjustments which would be too specific to get into in this context. In the end, after all the addbacks and deductions, we would call this number our adjusted EBITDA.

Since we now have an understanding of the adjusted EBITDA, we can dive into the multiple. Before we get to the number itself, it is worth understanding what the buyers acquire. Depending on the target company, the buyer would be acquiring a number of things such as units/contracts, growth potential, synergies, brand, market entry, and operations. The EBITDA multiple will depend on the presence of these listed items. If we look at the bare minimum and that is usually the case for small property management companies, this will be a pure unit acquisition transaction. In this case, the multiple is likely to be at the lower end and would range between 2 and 4 depending on the geography of operations. This would apply to an owner-run company with a team of 2-5 people. It is important to note in this type of deals, buyers will be comparing the purchase price with their cost of organic unit acquisition. As the acquisition offers more in the case of larger property management businesses, the multiple will go up, and in rare cases, it can go up as high as 12x-14x. This type of target probably proposes all of the above-mentioned interests for the buyer. Obviously, on top of the above, factors such as profitability, years in business, competition, regulations, contract terms, quality of the listings, and KPIs play an important role in the valuation conversation.

In conclusion, there is no straight answer to the valuation question. While in other industries where the market is more mature, in the short-term rental industry the valuation is a technical exercise and is more of a subjective negotiation driven by the buyers’ internal return on investment analysis. The value of a company will be determined by the level of interest from potential buyers and in reality, this is limited to a number of companies. Although many players can potentially explore an acquisition or an exit, when it comes to finding the right fit as a target or a buyer, options may be limited. Therefore, the valuation of the company will depend on the driver of interest from the short list of buyers looking at the target company.

M&A processes involve getting into details of the financials and in most cases business owners learn about key trends and information on financial level that they have not been monitoring before. It is strongly advised to work with expert advisors who will guide them through this complex process. Business owners must also be prepared to invest time and internal resources to get their company into an exit-ready state which starts from having the financial hygiene and ability to provide visibility on their financials and KPIs.