Buying any kind of business can be a very stressful process, but buying a hotel is a special kind of stress. There are no guarantees for success, but carefully considering these points will help you make a smoother purchase, and buy the hotel of your dreams.
Location Vs Value
Unlike a lot of other businesses, a hotel is generally valued via the profits method, underpinned by the underlying value of the actual building. Hotels for sale that have a similar turnover and profitability can have very different asking prices even if they aren’t very far apart.
A hotel for sale that has a good roadside location in a town popular with tourists will usually sell for a higher price than a similar hotel in a town without the tourist traffic.
Think carefully whether this premium is worth it, or if potentially profitability is the more important factor to you.
You need to do some proper research into every aspect of the hotel you’re considering. When purchasing a new commercial property it’s important to get an electrical safety inspection, for example, and all this research must be done as part of your plan to buy.
Cash Is King
Most lenders are looking for experienced operators who have substantial cash funds. The best value hotels are often distressed sales, with either limited poor accounts or no accounts at all. Usually, a minimum of 30% of the purchase price is required. It’s a good idea to speak to a financial advisor who has experience in the hotel property market at a very early stage of your purchase. They can ensure that the properties you’re considering are in your price range.
Freehold Vs Leasehold
Many private buyers don’t even think about leasehold hotels as an opportunity but purchasing a freehold hotel can be a huge drain on capital that could more effectively be invested back into your business. This means that a leasehold hotel shouldn’t be automatically discounted.
You may be able to come to a flexible arrangement to meet the vendor’s and your expectations to prevent a deal from falling through. You might be able to smooth the way with a deferred payment, where you pay the bulk upfront and then pay the remainder once you’re trading. Another option is to buy the leasehold with the option to buy the freehold later on.
Limited Service and Full Service Hotels
Most independent hotel operators used to always offer a full breakfast, and a larger hotel offer a full service with a fully licensed bar, restaurant, function facilities and more. However, over more recent years, this style of operation has begun to change, thanks to branded hotel operators and budget hotel groups shaking things up. Aparthotels and options like Airbnb have also introduced more competition.
Online travel agents have also started to dictate room pricing and potential profitability. Wage costs are also under pressure.
If you’re buying a hotel, you must carefully think about how you will manage these issues and how you will compete against them. The profitability of a hotel is tied into the value, and any business plan that you create should take these factors into account.
When buying a hotel, find a specialist hotel advisor with a proven track record of involvement with hotel sales to give you some sound advice. Engage with professionals, valuers, accountants, solicitors, and financiers who have experience in the hotel sector.
If you’re going to run a hotel, this will require a very committed, dedicated approach. Even a hotel with a limited-service must be managed well, and so you must be willing to work long and often unsociable hours.
Some hotels only have very limited or very small private accommodation. If you were intending to live on-site after you purchased the hotel, this can create more work and family pressure can put a real strain on your relationships. Be prepared for this.
Many hotel purchasers think carefully about all or most of the points in this article, but often then don’t think about their long-term aspirations when it comes to selling the hotel again later on. Any hotel purchaser should carefully consider this. To sell, you ideally want three years of certified accounts that show consistent profitability. This maximises the chance of selling the hotel for the best price.
For example, if you intend to run the hotel for five years, and then sell, then all your investment needs to happen in the first two or three years. If you have a more long-term plan, then you can upgrade different parts of the hotel on a year by year basis.
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