Even in the face of political uncertainty, many sectors of the UK economy, including hospitality, are continuing to pick up to pre-recession levels again. 2016 may, therefore, be an opportune time to enter the hotel sector. Consumer spending levels are up across the board, and the biggest growth sectors over the last few years have been in hotels, restaurants and bars. British consumers want to spend their money on leisure and experiences.
Here, we’ll be examining what first-time buyers will need to look out for if they decide to take the plunge in this potentially lucrative sector. We’ll also provide a few useful tips for those looking at buying a hotel business in the near future, as well as several key considerations and opportunities for more seasoned buyers who are looking to expand their hotel businesses.
Hey, big spender
In 2015, there was a particularly large uptick in the amount of money UK consumers were spending at hotels, restaurants and bars, as well as associated leisure activities. As unemployment continued to fall, real wages grew and a period of deflation around late spring meant that people’s money went that much further than before.
These factors were combined with highly attractive merchant discounts (especially in the hotel sector) and increased confidence in the wider macro-economic environment as a whole. In May 2015, for example, consumer spending levels within the hotels, restaurants and bars sectors grew by an astonishing 10.3 per cent compared to the same period in 2014. In fact, this figure marked the greatest growth in consumer spending in the UK for more than seven years.
And all this good news for both those in the hotel business and those looking to get in on the action is only predicted to get better through the rest of 2016. A recent TripAdvisor study found that the main reasons given for UK consumers increasing their leisure spend had little to do with money — instead, they were concerned with spending quality time away with family and friends, as well as investing in their personal health and wellbeing.
Furthermore, around three-quarters of hoteliers surveyed by TripAdvisor were optimistic about profitability this year — with the high growth areas expected to be in local events and conferences. An increasing amount of other leisure activities in a hotel’s area was also seen as an important factor. So, new tourist attractions, for example, as well as more shops and restaurants in the local area, were considered key to expanding their own businesses and filling their hotels on a regular basis.
One of the key trends in the hotelier business is that UK customers now expect more for less money, which could make margins tight if a hotel is not close to being full night after night. The same TripAdvisor survey found that 63 per cent of travellers refused to stay in a hotel that didn’t offer air conditioning, while 46 per cent would balk at staying anywhere that didn’t offer free wi-fi.
To accommodate these changes, around half of UK hoteliers have said that they intend to increase their prices across the board in 2016. Some of these rises were to cover expensive renovation or expansion projects, but more encouragingly, some 35 per cent of those surveyed said that it was due to increased demand — the ideal time for any business to raise its prices.
So, with all this in mind, what are the key things you should be looking out for when buying a hotel? Before even starting to look at the financials, answer some more fundamental questions first. Is the hotel in an area that already attracts a lot of tourists, and do these travellers come to the area year-round, or only for the summer season? And assuming that the area does attract enough tourists or business travellers to justify running a hotel business in the area, is the market already saturated or is there a lot of competition from apartments advertised on Airbnb? Always investigate the hidden online accommodation landscape. There’s no harm in entering a competitive marketplace such as this, so long as your particular business is going to offer something unique.
To get a better picture of the above, potential buyers should investigate the local market thoroughly. What room rates are nearby competitors offering, for example? Is it possible to find out the room occupancy rates throughout the year? You will of course have this information for the business you are evaluating, but it would help to find out how the competition compares in this regard.
At this point you should have enough information to project what your likely revenues will be, what your costs will total and therefore also an estimated return on investment (ROI) at the asking price.
Even if the ROI looks acceptable at the asking price, it is your responsibility to bargain down as far as you can. Most businesses for sale eventually go for between 10-20 per cent less than their asking price if and when they do sell. If the ROI does not look acceptable, use the facts and figures you have uncovered to persuade the owner that their asking price is unrealistic and above the market rate.
If you are using lending money to purchase the hotel, you will need to take into account that we are on historically low interest rates right now. What will happen if rates go up by three per cent over the next five years? This is entirely possible. Your loan of £2 million that was once at five per cent, costing £100,000 a year in interest payments, now costs £160,000 to cover, not including capital repayments. That’s a 60 per cent increase. What will happen if there is a simultaneous drop in occupancy over the period of 10 per cent? Will the business survive?
Another important factor to consider is whether the hotel will allow the new owner to retain the key staff and the relationships built up with laundry companies, wholesale food retailers and other vital suppliers. You may well be thinking of bringing in your own staff or suppliers, but asking questions like this is fundamental for ensuring a smooth transition after taking over a hotel.
Is running a hotel really for you? It’s a lifestyle that some entrepreneurs crave, but it’s certainly not something for those not willing to get stuck in. Many smaller hotel businesses require hands-on ownership, and the managers must complete a wide range of tasks to keep things running smoothly. Can you handle doing tax returns one minute, and perhaps helping out in the kitchen the next? Ask yourself if you are willing to put in long hours, because there’s certainly no going home at 5:30pm. And can you see yourself smiling at guests every single day, even if they are being particularly difficult or hard to please?
Having said all this, it is entirely possible to use a senior management team to run the hotel on your behalf. If the hotel you buy is still trading at the time of the purchase and the staff are happy to stay on, you may want to consider letting them continue to run the business, as they will have a good knowledge of the day-to-day business and the types of clientele that the hotel attracts.
Alternatively, you may want to bring in your own team to guide the hotel business in a new and more lucrative direction. They can still come to you whenever there is a critical decision to be made, but by hiring the right people with the right experience, a lot of the stress can be taken off your plate, enabling you to spend more time guiding the strategic direction of the business.
Of course, with digital technology increasingly making inroads into the hotel sector, it is now entirely possible to run a single hotel or a chain remotely, assuming there is capable management on the ground. Advanced management software systems enable hotel owners to have a continuous overview of what is happening in a hotel at any given moment. Hotel management systems (HMS) are often hosted in the cloud, so that they can be accessed from computers or mobile devices from anywhere in the world.
To sum up, we would advise entrepreneurs to consider how buying a hotel can often be a huge lifestyle change (something that some owners crave), but as we’ve seen it is entirely possible to own a hotel remotely if a buyer primarily views the venture as an investment opportunity, so long as the right systems and management are in place.
The other key considerations are the financials, the location (and local competition) and the retention of key staff if the hotel is still trading at the time of purchase. Nowadays hotel guests expect more for their money, so ensure that essentials such as discounts during quiet times (you should have a yield management plan in place), air conditioning/heating in all the rooms and free wi-fi are all accounted for in your business plan.
However, this is a perfect time to enter the hotel sector or to expand a hotel business to increase profitability. Hoteliers up and down the country are increasing their prices because of the growth in demand. Interest rates are at record lows. And consumer leisure spends are up across the board, with many people earmarking their real wage increases for travelling and getting away from it all on a regular basis. In short, the outlook for the leisure industry looks very positive for the rest of 2016 and beyond.
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