Buying a business: Hotels

What is it and who is it suited to?

Having gone through highs and lows in the last ten years, including a recession that crippled many hoteliers, hospitality is an ever-changing industry.

There are more than 55,000 hotels – from bed and breakfasts (B&Bs) to large chains – in the country. The hospitality industry employs approximately 1.5 million people, making it one of the largest employers in Britain.

“With approximately 5,000 hotels changing hands in 1999 and the number of international travellers expected to double in 15-20 years, hotel buying and profit in the industry can only increase,” says Miles Quest, from the British Hospitality Association.

There are four main types of hotel that you can choose from:

  • Resort hotelsThese are the most popular but success often depends on seasonal factors and the weather. But this is a good starting point for first-time buyers as they tend to be small enough to run with a minimum staff. Take a look also at our guide to buying a B&B
  • London hotelsThese are the most expensive to buy but can offer enormous rewards. They attract business all year round. There is good variety of hotels from large chains to B&B’s and “rooming operations” or “bed factories”, where a room for the night is all that the customer requires. These are purely for the brave.
  • Provincial town hotelsThese are the hardest for inexperienced hoteliers as many have built up good reputations based upon their restaurant. If you posses little or no catering knowledge it may be best to steer clear.
  • Country hotelsIf you are in the market for “a little place in the country”, make sure you aren’t wearing rose-tinted spectacles. The success of country hotels is built upon long-standing reputations and much of the revenue is based on food and drink. They can also be poorly located, lack the appropriate staff, run down and in need of essential repairs.

Who is it suited to?

The industry is open to people from all walks of life. Potential owners range from professionals looking to purchase a fully-fledged hotel to semi-retired couples looking to open a small guest house in a picturesque location.

“One of the most important characteristics you will need is immense and long lasting patience to deal with the daily running of a business. It is also essential to have a liking and willingness to understand and get on with people. Ask yourself whether people like meeting you,” says Miles Quest.

“Then there comes the need to work extremely long hours as you are on duty day and night. Life can be very claustrophobic, particularly when there is a family involved. But even with a family you need to be socially active and keep up appearances.”

Although you don’t need direct experience or running a hotel, general business experience will help. David Blythe, associate director at business agents Christie’s and Co in Manchester believes this to be the case: “Purchasers do not need any specific experience, however banks and lending institutions do look favourably upon those applicants who have got background or relevant experience. There is no specific requirement, however, any qualifications relating to health and safety or environmental health, for example, is an advantage.”

So while there is a lot a hotel owner has to learn and cope with – you are you own boss, you can call the premises home, can see the value appreciate by building a good reputation and, at the same time, make money.

But don’t forget that this is a business not a hobby. “Some people buy a hotel for the wrong reasons. For example, people who are thinking about retirement believe they can simply buy a country hotel and relax but they don’t consider the true consequences of the constant hard work that needs to be put in,” says Quest.

Research

A lot of careful consideration needs to be made before taking the plunge and buying a hotel. Ken Sims is a hotel negotiator for business agents Christie’s & Co in Edinburgh

“Before anything you have to decide what you want. For example, the type of hotel. Do you want one which is “wet led” – with high bar sales. One which is room-led, or a hotel which makes most of its money from its food operation, as well as its location.”

Even before you have decided on the business, you may need help. Just finding the right property and negotiating the sale can be fraught with difficulty.

“The lead-up to eventually signing on the dotted line can be a long and drawn out procedure and can take a minimum of 12 months and upwards to complete,” says Miles Quest, from the British Hospitality Association. Any less than that and you are either determined or lucky.

Rules and regulations

These are unavoidable and range from health and safety in the workplace to fire safety, food standards to displaying room and meal tariffs clearly. Here are some of the main regulations you will come across. You must:

  • Register the guestsGuests over the age of 16 will need to have their name, nationality, date of arrival and passport number registered – if the guest is a non British, Irish or Commonwealth passport holder. The register must be available for inspection.
  • Have a fire certificate on display
  • Display room pricesTariffs – and VAT – must be shown where guests or potential customers can view them. Meal prices don’t have to be displayed unless the restaurant is open to non-residents.
  • Ensure a safe working environmentTo ensure that you comply with the health and safety at work rules, you must register with the Local Authority. You will also have to guarantee standards of food safety.
  • Allow any potential customer a roomA hotel cannot turn away any guest who is willing to pay and in a fit condition but you do have the right to turn away anyone who is not sober.
  • Take responsibility for your guestsAs a hotel owner, you are liable for guests’ safety and other people who are on the premises at any time such as builders, postmen and others.
  • Ensure that your marketing is honestWhen promoting your hotel and its services you must give an accurate description.

How much does it cost?

The price of buying a hotel varies in the same way as the housing market. Prices start at round £100,000 but far exceed that in areas like London. Apart from the purchase price, there are many hidden extras you may not have thought of.

Ken Sims, hotel negotiator for business agents Christie’s & Co in Edinburgh, explains: “On top of the purchase cost I would advise the buyer – if the property is around £250,000 – to hold on to approximately £10,000 to cover startup costs. These will almost certainly include legal fees, ingoings, stamp duty, buying of stock as well as repairs, refurbishment, food and drink and general overheads such as electricity, gas and water.”

But the costs will start to accumulate even before that. Other expenses could include money for travel while finding the ideal hotel, valuation and survey fees, accountants fees as well as any bankers or brokers fee for arranging the loan. That is before you have accounted for staff expenses and wages, advertising, stationery and guest supplies. Many of these costs are variable. For example, bed linen. If your business does well and attracts more guests, that means more washing and higher costs.

Budgeting is essential. Make sure you calculate the hotel’s projected income and expenditure for the first year. But don’t forget to take into account poor months when you are estimating occupancy levels and revenue.

How much can I earn?

Turnover varies greatly, but this can be a lucrative business offering higher rewards than businesses in other service sectors.

David Blythe, associate director at business agents Christe’s & Co in Manchester, explains: “Generally speaking profit margins within the hotel industry are higher than, for instance, the retail sector. A hotel will be producing a gross profit of between 65-75 % depending on the mix of trade, whereas a newsagents will be producing a gross profit of around 20%.”

For example in the South East, an owner can expect a general turnover in excess of £50,000 to £100,000. That could mean profits of £60,000, says Simon Hughes, national hotels director at Christie’s & Co.

Small central London hotels, for example, with around ten bedrooms, can have turnovers as high as £200,000. Of that some 50% is likely to be profit. But on average between £20,000 and £40,000 is the average turnover of a small guest house of which approximately 50% is costs.

Tips for success

  • As with any business, you should do your homework beforehand. Check the accounts, get up to date figures and investigate the competition.
  • To some extent the business is dependent upon the general economy. If recession hits, as it did in the early 1990s, high interest rates will push up the cost of any loans or mortgages. So try not to overstretch yourself. Similarly, potential customers will have less money to spend. And, if you are hoping to attract an international clientele, you could find that changes in the exchange rate make it less attractive for overseas visitors.
  • Try to build a varied business that is not overly dependent on any one revenue stream. If you combine leisure interests, overseas customers, perhaps conference facilities if your hotel is large enough, you will be less exposed to a financial downturn.
  • This is a business that requires more than number crunching. So ask yourself if you will be happy running the business seven days a week and 24 hours a day. You – and your family – will be eating, sleeping and breathing the business.

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