Do you want to invest or buy an existing RV park business? If YES, here is a detailed 8-step guide on how to value and buy an RV park business successfully.
A recreational vehicle park (RV park) or caravan park as it is called in England and other European countries is a place where people with recreational vehicles can stay overnight, or longer, in allotted spaces known as “sites” or “campsites”. They are also referred to as campgrounds, though a true campground also provides facilities for tent camping.
An RV park requires a facility that is large enough to contain not just the tracks for the recreational vehicles and other fun – filled outdoor games for children, but also a restaurant, a place where parents/guardians can hangout while the kids have fun and of course enough parking space, washroom and related facilities. Hence it is both expensive and tedious to buy one.
In this article, we will give you a step by step guide on how to value and buy an RV Park in the united states of America.
A Detailed Guide on How to Value and Buy an RV Park
STEP ONE: Determine the Value or Price of the RV Park
The first step that you are expected to take when buying an RV park is to get the exact market value of the location. Determining the value of an RV Park can be straightforward especially if you are already familiar with the business, and you have sound knowledge of happenings in the industry.
In case you are not experienced in this regard, it will pay you to recruit a specialist such as an appraiser, accountant, investment banker, or other valuation specialists to assist you. After you have succeeded in determining the value of the RV park, you will be in a better position to determine the amount you would like to offer the seller.
If you work with professionals, you will be advised to offer the seller a combination of cash, debt, equity, assets, and the risk involved et al. As matter of fact, these are some of the key factors that are used in determining the true value of an RV Park or any business that is put up for sale.
STEP TWO: Sign a Letter of Intent
After you have succeeded in placing a value on the RV Park, you have done your due diligence and you have determined the purchase price and the transaction structure for your acquisition. You are now expected to enter into what is called a letter of intent (LOI) with the seller of the RV Park. The letter of intent is a relatively short, non-binding letter of agreement signed by both parties that details the basic deal points for the transaction.
The letter of intent (LOI) should include the purchase price, a description of the deal structure, due diligence requirements, the parties’ expectations with respect to the purchase agreement, the anticipated timing for the closing, and any other material details agreed upon by the parties.
The letter of intent (LOI) is non-binding in that neither party will be able to sue the other if the final transaction structure ends up not precisely mirroring what is outlined in the letter of intent, or if the deal fails to close altogether. The letter of intent also keeps the seller from talking to or negotiating with other potential buyers during this time. The letter then allows the buyer to do a more thorough evaluation of the business and for negotiations to continue.
STEP THREE: Conduct Due Diligence
If you have succeeded in drawing up a rough estimate of the value of the RV park and you are cool with it, then the next step to take is to conduct due diligence and preliminary investigation on the business. No experienced businessman or woman will put an initial offer to buy a business without first conducting due diligence or asking the right questions.
There are 7 questions you need to ask yourself before proceeding with the process of buying a business. Usually, due diligence is performed by the buyer, his or her accountant and attorney after the intent to purchase has been signed but before the formal purchase agreement.
The essence of conducting due diligence before an RV Park is purchased is to allow you to thoroughly examine the RV Park so you can make an informed decision before purchasing. It will give you a clearer picture of the kind of business you want to invest your money in.
Your accountant will help you examine the books and records especially the financial statements and tax returns for the past four to five years. When conducting due diligence on the RV Park you intend buying, in order not to miss out on anything, you should make sure you;
- Spend time, perhaps few working days in the RV Park and make sure you ask questions from staff and customers.
- Observe the competition and their positions.
- Look at potential future repairs / modifications in and around the Park.
- Look at documents showing liens or judgments that must be paid.
- Check OSHA and ADA requirements for the facility.
- Make sure there is enough cash flow to support you personally.
- Go through all legal contracts entered into by the current business, including lease arrangements and vendor purchase agreements.
- Analyze the bad debts of the practice, the accounts receivable aging, and the present collection policy.
- Take a look at monthly gross income for at least three years. Check tax returns for the business for three years or more; cross-check all information against something else.
- Go through overhead (fixed expenses) against national averages (% of gross sales).
- Go through employment tax data (941 forms, etc.) and salaries/wages paid out for the past 3 years. Are employment taxes being paid on a timely basis?
- Verify profitability by subtracting overhead and debt from gross income (before expenses). Check against the owner’s income from the business.
STEP FOUR: Select a Transaction Structure
If you are familiar with buying of business, there are three basic transaction structures that are mostly used. They are merger, stock purchase, and asset purchase. Please note that these transaction structures come with different layers of complexity and varying tax and liability consequences.
It is advisable that before choosing any of the above listed transaction structures for the purchase of an RV Park, you should consult with your accountant, legal counsel, or tax counsel to determine which structure would best suit your tax and liability needs.
STEP FIVE: Prepare a Closing Checklist
The next step to take while purchasing an RV Park is to put together what is called a closing checklist, which is a list of every single document, instrument, or action that must be completed, signed, or delivered in connection with the closing. The closing checklist should include all consents and approvals that are required to properly close the transaction.
For example, the checklist should include any required consents from the buyer’s and seller’s landlords, customers, suppliers, stockholders, board of directors, creditors, or other third persons. In order to get a fair deal, your closing checklist should be regularly updated and shared with the seller throughout the process so that there is complete visibility as to expectations and outstanding action items.
Please note that if some important items on the closing checklist goes unchecked, it might affect a lot of things in the transaction, which is why the closing checklist is considered as the most important document in making sure that the transaction as it relates to the buying of an RV park is done in such a way that the buyer and the seller are satisfied with the whole process.
STEP SIX: Negotiate the Purchase Agreement
Usually, it is the responsibility of the buyer to draft the purchase agreement because the buyer is the one putting up the cash and has the greatest risk of loss. Preferably, you should have a contract attorney draft this document for you, particularly one with experience in mergers and acquisitions. This is very important because as a novice, you might put up a purchasing agreement that will not favor you in the long run.
STEP SEVEN: Secure all the Necessary Consents and Approvals
The next step you are expected to follow when buying an RV Park is to ensure that you secure all the necessary consents and approvals from the seller. This is why it is very important to conduct your due diligence. It will help you review of all contracts to which the seller is subject, including any provisions in those contracts that would mandate the counterparty’s consent to your transaction.
Please note that any consent that is not obtained prior to closing could theoretically result in the termination of the contract, the payment of a penalty, the nullification of the transaction altogether, or some other adverse consequence.
STEP EIGHT: Close the Deal
The last step in the processing of buying an RV Park is to close the deal. At this point, all the work has been done, and there is no more room for negotiation or changes. Basically, the closing of a business deal is the time when both parties (the buyer and the seller) and their attorneys get together to sign documents (stock certificates, documents, or instruments to legally effectuate transfer of ownership) and pay the necessary amount via check or bank transaction.
Corporate attorneys consider the closing to be the moment when consideration is exchanged and transfer of ownership occurs. Please note that the closing of the purchase of an RV Park can either be done either with both parties present or in absentia of one party, as long as all documents and instruments are completely signed and exchanged.
When closing a business deal for the purchase of an RV Park, these are the documents that is expected to be signed:
- The bill of sale, which is evidence of the ownership of assets, and is the formal document representing ownership of the RV Park and its assets
- Security agreement (lien) which is evidence that the assets are encumbered by the seller until the note is paid
- Purchase agreement, which may have already been signed as a letter of intent.
The purchase price may be payable in different parts:
- Earnest funds (already paid) are deducted
- Balance of down payment is also deducted
- Assumption of liability or paid by seller portion deducted
- Remaining balance in a promissory note
- Portions of the purchase price may also be allocated to certain payments and business assets: non-compete agreement, trade name, trademarks, and a separate consulting agreement (with the seller).
The above steps are the basic steps that you would need not just for the valuing and purchasing of an RV Park alone, but for the purchase of any business. Please note that when it comes to buying a business with your hard – earned money, especially after due diligence has been done, you should not ignore your instinct. From experience, following one’s instinct has saved loads of people from falling into unseen traps.