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Mackinac Partners Matt Beresh and Nathan Klepacki on the challenges of Vacation Ownership M&A in the latest edition of ARDA Developments Magazine

October 1, 2019

Why Vacation Ownership M&A is More Difficult

By Matt Beresh, Senior Managing Director and Nathan Klepacki, Director – Mackinac Partners

ARDA Developments Magazine, October 1, 2019

Acquisitions are never easy. Whether you are an automobile manufacturer acquiring a supplier, a retail chain acquiring a competitor, or a casual dining restaurant brand acquiring a fine dining brand — acquisitions require significant time, effort, focus, and capital, as well as an experienced point person to manage all the moving pieces including (importantly!) the post-acquisition integration.

However, acquisitions in the vacation ownership industry — with such unique complexities as those outlined below — are among the most difficult of all to execute successfully. Despite these inherent complexities, the vacation ownership industry has undergone a flurry of acquisition activity over the past decade.

If you are one of those vacation ownership companies that has grown through an acquisition, whether driven by owner preferences, as an attractive alternative to new developments, or an opportunistic chance to grow the bottom line, you deserve a well-earned pat on the back.

Unique Vacation Ownership M&A Complexities

The challenges facing acquirers of vacation ownership companies can be divided into three primary areas: legal, financial, and operational.

Legal Matters

  • The legal structure of vacation ownership inventory has evolved over time — from deeded weeks to floating weeks to points based systems. Almost every company has something unique in its structure, and acquisition targets often have a different form of inventory than the acquirer. Conversion is a near impossibility (or at least tremendously slow), so operating the multiple forms of inventory is a necessity.
  • Regulatory matters must be considered. Many targets operate in numerous states and/or countries; if the acquisition rationale includes geographic expansion, these may be new jurisdictions with varying regulations upon which the acquirer must quickly be educated. Furthermore, the industry’s heavy use of trusts increases regulatory oversight and limits flexibility.
  • Corporate entity structures are often convoluted, with separate legal entities for the real estate developer, resort management company, sales and marketing company, and/or financing company. These complexities are even greater for networks with multiple locations. Furthermore, homeowners’ associations are usually independent legal entities that often have a voice in the transaction.
  • Fortunately, there is a tremendous amount of legal knowledge, both inside vacation ownership companies and from law firms specializing in supporting the industry, that can help identify and resolve these issues.

Financial Considerations

No industry in the world suffers from, or is aided by, as much “cause and effect” as the vacation ownership industry. Many vacation ownership companies have several core competencies: contract sales, receivables financing, management companies, amenity operators, and more. Furthermore, all these businesses are necessarily integrated so that when you pull a lever in one business unit, there is a ripple effect in some or all the other business units. Typically, the effect lags the cause, making correlation difficult. Understanding the effects an acquisition will have on an existing network takes specific industry knowledge.

  • The vacation ownership industry’s complicated business model makes determining the financial and accounting implications and developing a credible financial forecast related to an acquisition extremely difficult.
  • There are many different types of financing required to support the industry. From receivable hypothecation, to development loans, to working capital lending, to acquisition financing, each type of borrowing carries a different level of risk and necessitates a different return. Further, most vacation ownership companies have several different financing sources; the era of the “one-stop-shop” for financing ended with the Great Recession. Due in part to this complexity, many financial institutions do not provide adequate support to the industry.
  • Fortunately, there is a relatively small pool of sophisticated lenders with deep industry knowledge, and financial advisors who can provide management with the financial analyses and M&A skills necessary to develop credible financial forecasts and help secure the funding necessary to close deals.

Operational Aspects

While certain operational aspects of an acquisition in the vacation ownership space are not dissimilar to acquisitions in any other industry, there is no shortage of challenges in HR, IT, branding, customer service, and other functional areas.

  • Realizing the savings of projected back office synergies, which in many cases are material components of a deal thesis, requires continued diligence for months following the closing of a transaction. Many acquirors want to breathe a sigh of relief once an acquisition has closed, but this is actually the time when the real work often begins. Note to the wise: pre-closing integration planning throughout the diligence process will even further enhance the chances of success.
  • One key constituent, which often has significant influence on the success of an acquisition, is the acquired ownership base. With large, diverse owner bases, it is inevitable that implementing the system-wide product changes that often result from an acquisition will frustrate some selection of owners. Unlike acquisitions in many other industries, where a disgruntled customer can decide to “shop elsewhere,” customers in this industry can feel as though they are “dragged along” in an acquisition.
  • Deftly addressing the ownership base is one more key success factor that is unique to acquisitions in the vacation ownership industry. Fortunately, savvy developers and their advisors have figured out ways to cohesively blend the existing ownership base and its historical products with the new ownership base, unlocking tremendous value within acquisitions.

Consolidation is not over in the vacation ownership industry — all the underlying dynamics of aging legacy owners, increased desire for flexibility by new owners, and economies of scale in operating large networks remain in existence. As owner preferences continue to evolve, and especially as millennials continue to influence the industry, the complexity of balancing legal, financial, and operational challenges is likely to increase. Fortunately, there are diligent legal and financial advisors who are well-versed in industry-wide developments and will continue to offer the expertise required to close deals and strengthen businesses.

About the Authors

Matt Beresh has over 20 years of experience providing financial and operational advisory services to healthy and distressed companies. He has been active in the vacation ownership industry for over 15 years, representing many notable developers, lenders and investors. His career in the vacation ownership industry includes $400 million of acquisitions and integrations, $100 million of carveouts and divestitures, and numerous performance improvement and profit enhancement initiatives.

Nathan Klepacki has over 10 years of financial advisory experience, assisting clients with financial modeling, M&A, and strategic initiatives. His vacation ownership industry experience includes strategic planning and financial modeling in support of transactions, buy and sell-side advisory work, and utilizing data analytics to improve clients’ financial performance.