In this episode of The Heads In Beds Show, we're inspired by the list from Xavier Helgesen on "what to look for when buying a business" and adapt it to the vacation rental industry.
Full list credit: via Xavier Helgesen
- Owner operated businesses are super efficient. Owner does six jobs. You will probably spend more to professionalize.
- Only buy from people who have demonstrated values of honesty and integrity throughout the process.
- Stock purchases should be at least 25 % cheaper than asset purchases. You can’t write off the acquisition price plus you assume historical liabilities.
- Adjusted EBITDA ≠ EBITDA ≠ cash flow. Look for cash flow.
- Look for rich owners.
- Look for businesses that have survived multiple economic cycles.
- Make sure you are not in a commodity business.
- Everything is negotiable. We have done 90 % seller financing three times.
- Everyone wants a raise after you take over.
- Make sure management only gets paid bonuses when they distribute cash flow to owners.
- Pay for a really good, but very efficient, lawyer.
- Pay for Quality of Earnings even on small deals.
- The best way to find a CEO for a business is to ask the seller who has asked about buying it in the past.
- Look for the smallest, weirdest niches. Less competition, greater margins.
- If you find a good enough deal, the capital will find you.
- Don’t underestimate how little you know about any given industry. Find an expert to help you.
- Businesses with real estate offer lots of creative financing opportunities.
- An owner who works “10 hours a week” is still doing five people’s jobs. They are the world expert in their business.
- Professionalizing a business with no management in place is probably too hard unless you are running it.
- Understand the working capital situation deeply and as a first order of business. The working capital adjustment can be a huge adjustment in price.
- Don’t incentivize anyone to close deals. You want them more excited to kill a deal – this means they will speak up if something feels wrong.
- Look at duration of employment of employees. Lots of turnover indicates a toxic environment.
- Don’t take single-channel risk (e.g., Meta marketing).
- Share customer concentration risk with the seller through revenue shares or forgiveable notes.
- Underwrite your downside like a lender. Could you sell the business or its assets to at least pay back the debt if you need to?
- Don’t fall too in love with the business. You’ve always got to be ready to walk away.
- Honor your word even if it costs you money. Once trust is lost with a seller, it’s over.
- Honor the owner/founder’s legacy after you close.
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