How to buy a hotel

19th April 2007, 12:17pm

By Jeremy Hill, director of Christie + Co

Getting into the hotel industry is relatively simple. In some areas buying a hotel or guesthouse may not be much more costly than buying a family home. The market for private hotels is closely linked to the domestic housing market in two ways.

Firstly, as the value of domestic houses rises or falls, so does the amount of equity available to someone selling their house in order to buy a hotel. Secondly, a proportion of the value of a hotel is underpinned by the value of the "bricks and mortar".

The price of a hotel, however, is also related to its profits and to its geographical location. This means that, given relatively predictable hotel prices, there are great opportunities for those who are planning to sell a house in an expensive residential area to buy a larger hotel in another, less expensive area.

Guidelines on buying a hotel:

• It is important that your first research should be on yourself. Are you prepared to work long, unsocial hours and to be available to your guests morning, noon and night? You should build up a sense of what this industry is like, what drives its profits and what causes its losses.
  
• The hospitality business is one of the easiest to enter without formal qualifications. However, formal qualifications are available through colleges and local training courses. Many of these can be acquired and worked for while running the business.
  
• Consider how you will fund the purchase and know your budget before beginning your search. Your business agent can put you in touch with a business mortgage broker who can arrange finance according to your circumstances.
  
• Decide in advance what level of commitment you are prepared to make. If you are a husband-and-wife team, will one of you keep your job or will you both work in the business? Do you want to have a bar? Do you want to provide bed-and-breakfast facilities only or will you also serve dinner? Will you need to take on staff and if so, do you intend to invest in training?
• There are various ways of classifying hotels and types of hotel business. One is the Star-rating, which is determined by the type and extent of facilities on offer. Another is by the market segmentation of the hotel, as follows: deluxe hotels, city hotels, country house hotels, corporate/conference hotels, budget/lodge hotels, townhouse/boutique hotels, small proprietor-run hotels.
  
• Many factors can affect the hotels market. These might include the weather, business cycles (i.e. interest rates, global currency movements and local consumer borrowing - for example a strong pound discouraging overseas visitors), inflation, business rates, unforeseen and unpredictable events such as environmental crises (for example the foot-and-mouth outbreak and terrorist attacks in 2001.)
  
• Background reading of the trade press and contacts with business agents will give you valuable information about the market, both nationally and regionally. Historical market information is important because you need to know how much prices might fluctuate and how much profits might vary given a variety of market conditions. These include high or low interest rates, high or low commodity and raw materials prices, and high or low inflation. Decide how much money you can put into the business and, based on professional estimates, how much money you can expect to get out of it.
  
• From business agents' lists, business property pages, web sites and other forms of advertising, you can draw up a shortlist of hotels that you want to look at. There are three fixed elements to any hotel or guesthouse: the location, the buildings and the tenure (freehold or leasehold).
  
• Consider the kind of location carefully. Do you want to be on the coast, where hotels are likely to rely on tourist trade and therefore be seasonal businesses; or in a town or city which is likely to attract both business and tourist trade all year round?
  
• When you have refined your search and chosen a hotel to buy, before you make an offer you should have a full survey and valuation undertaken. In particular, you should take an interest in the lease terms or freehold conditions. A survey will assess the physical condition of the accommodation.
  
• It is useful to be able to see three years' accounts. Look carefully at the current cash flow, examine the accounts and, if necessary, brief your valuer to make checks on the hotel's viability. From the Profit and Loss Accounts and Balance Sheets you will be able to project the likely level of profit you will be able to achieve from the business.
  
• Once you have seen the business several times at different times of day and looked over the accounts, ask more detailed questions about the way the present owners run the business and why they are selling.
  
• Local knowledge is a vital part of your research. The seller's agent should be able to help you. If the hotel has a bar or restaurant, remember that your competitors are not necessarily just other hotels, but also pubs, bars, cafés, restaurants and tourist centres. Know who your customers are and why and when they come to your hotel.
  
• Look objectively at the facilities already in the hotel and those you might want to add - a garden area, conservatory, or function room, for example - and then see if your competitors are offering anything similar. Try to offer something that no one else has.
  
• Once you have identified what you have to offer, publicise and market the business by getting into directories and listings and establishing contact with your local tourist board. Finally, you cannot ignore the Internet. It is a great medium for publicising your hotel and its facilities and the potential for business in the future is substantial.

In conclusion, as demand for hotels is currently exceeding supply, confidence in the sector remains high and hotel values remain robust. If, as we believe will be the case, the UK economy remains benign with continuing low interest rates, inflation and unemployment, positive GDP growth and still rising, albeit slowing, residential house prices, we predict that this growth in value will continue.

About the author: Jeremy Hill is a director of Christie + Co, the leading international hotel agents, Tel: 020 7227 0700.

For reference: This article is based on How to Buy a Business by Andrew St George, published by Christie + Co. Price £15.45 including p&p. To order a copy, visit www.christie.com