Buying and running a hotel or guesthouse

 

The uncertain economic climate of the past few years has led many people to look for alternative ways of making a living. Redundancy or early retirement has been a catalyst for people to sell their homes and put the proceeds towards the purchase of a lifestyle business. Some of these prospective business owners look into the possibility of buying and running a hotel or guesthouse.

 

The UK hotel industry has been significantly affected by the recessionary conditions seen in recent years. Reduced consumer confidence has affected occupancy levels and profitability, which in turn have contributed to a fall in the capital value of hotel properties. Whilst initially this might appear to be good news for the prospective hotel acquirer, funding a hotel purchase through bank finance is considerably more difficult now than it was four or five years ago, and the historically low bank interest rates over the last few years have given a boost to many established hotel owners who rather than looking to sell their businesses have tried to ride out the fall in property prices. As a result there is a shortage of quality hotel businesses on the market, with many of those that are for sale at the current time being hotels which have previously failed and been placed into administration (although sometimes these may give the prospective purchaser the opportunity to buy good assets at reasonable prices).

 

Hotels with poor historic turnover and profits are difficult to finance in the current banking climate and without significant improvement to either the property or to the business model (or both) they may not be in future able to comfortably repay any borrowing used to fund the acquisition. The prospective hotel purchaser needs to do their homework carefully before they buy. Moore and Smalley can assist those looking to acquire a hotel or guesthouse business to effectively manage the financial risks of the hotel purchase by carrying out a Pre Purchase Review.

 

The Pre Purchase Review is targeted at the prospective buyer of a small hotel or guesthouse which might typically be operated as a sole trader or partnership. The review consists of a desktop appraisal of available financial and other information (including for example, the last three years trading accounts and historic occupancy records). The aim is to identify the key issues, financial and commercial, relating to the proposed hotel purchase in order to highlight any questions that should be raised by the prospective buyer with the seller prior to completion of the transaction.

 

In addition, we have also developed a Hotel Financial Model. This spread sheet model allows the prospective hotel buyer to investigate the sensitivity of the target hotel’s net profit to changes in tariff, occupancy level or gross profit margin. In addition, the model is also able to assist with identifying the required level of funding needed both to finance the costs of purchase and to provide on-going working capital for the hotel business.

 

Our Hotel Financial Model can be sold as a tool which will allow the user to enter the key variable data or alternatively can be used by Moore and Smalley to advise on the above factors (for example as part of a Pre Purchase Review). Whilst this model is not intended for use in raising finance from banks or other investors we are able to produce a bespoke financial model for this specific purpose if required.

 

Those who do pursue their dream of owning and running a small hotel or guesthouse will need to work hard to be successful in what is a very competitive market. However, with hotel property values unlikely to fall further from their current level, those who manage to acquire a carefully chosen hotel business now should be well placed to benefit from future growth.