As simply as possible, the hotel acquisition process
The complex relationship between a business and real estate makes the process of buying into a hotel as complicated as one wants to make it, or as simple as a buyer wishes it to be.
Without question it is those buyers who are better informed who get the best deals.
An informed buyer needs to go through a process that will maximize the amount of information and relay the cost/benefit ratio.
As with the procurement of any business there is an acquisition process, a step by step approach.
- Ascertaining the acquisition criteria
- Sourcing the product
- The initial assessment and the decision to proceed with seriousness
- Ascertaining the price while compiling a business plan
In part 2 we will cover
- Negotiation of the deal to a LOI to buy
- The due diligence process
- Closing the transaction
First up, ascertaining the acquisition criteria
A prospective owner will look at any purchase in many different ways, be it with an active or non active role, is it a short or long term play, is yield and cash return the key.
What ever the decision-making process is motivated by certain criteria stand out for consideration.
- The properties type and its location
- The size and potential cost per room
- The risks involved with new competition entering the market
- Is the management structure changeable, is the franchise affiliation changeable, is a management brand or franchise required.
- The presently achieved cash flow and its potential cash flow and yield
- The risk analysis to cash flow stability and growth.
- Where is the upside potential, be it in management related areas, in repositioning through renovation,
- The potential appreciation or depreciation in asset value
Each buyer will have their own answers to these, in conjunction each buyer needs to have clarity and a strategy within a defined decision-making program as they enter into the hotel buying process.
Sourcing the product
Your acquisition group
An appraiser who understands your market
An accountant who has hotel clients who can determine the correct net operating profit and if the revenue achieved is all from that business and that costs and controls are adequate, he can also helping the compilation of a business plan.
A market consultant, your asset manager, this is our role, where we help you find out how this property may perform or improve its performance and what strategies could be applied to achieve your financial goals, this is where we can help you put the business plan together.
Your legal adviser, who understands the hotel industry. Critical they do.
Possible an architect and or an Interior designer. If renovations and upgrades are required down the road and with the engineer they can review all the physical components of the building. Electrical, plumbing etc.
The initial assessment and the decision to proceed with seriousness
Obviously many hotels will not pass the initial screening process for numerous reasons.
The most common is an asking price that bears no resemblance what so ever to a sensible yield % based on the net operating profit being achieved.
This is mainly due to realtors accepting to list properties, and in many cases encouraging them to do so, at valuations they somehow dream up all based on what they perceive is a real estate value. Hotels are businesses and their value is mostly reflective in what net income they generate. Obviously some buyers over the years have not caught on to this hence the numerous stream of crazy priced hotels and resorts on the market here in Costa Rica. Same applies to Panama.
Once you find one that may be a possibility a site and property analysis begins and at this stage a possible go or not a go decision needs to be made.
Ascertaining the price while compiling a business plan
Based on an initial property and market analysis the aim is to come to a suitable bid price.
This bid price evolves around ascertaining what potential earnings can be achieved by your management team from the property, obviously an analysis of the present trading results by your experts and an analysis of what future market conditions will be like and the potential properties performance within that market need accessing. A preliminary business plan is then drawn up, key questions are how can we unlock value, by your team and management.
Firstly it is important to understand the market. Simply put this involves ascertaining the present and the ever-changing dynamics of demand.
An assessment is made on how these market dynamics balance with the hotels concept, its mix of rooms and facilities, the quality of the building of both hard and softs, if applicable franchise or brand affiliation and associated revenues directly generated, the management and options for other organizations suitability to the property, and the capital structure and its future capital investment requirements. The hotels trading history and the projected market performance are complied with assumptions as to future market performance, a base line business plan for the property, with net cash flow projections over 5 to 10 years.
With this information, and your exist strategy with the potential disposition price taking into account your finance costs a professional will work with you to define the discounted value at today’s pricing, giving you the maximum price you are prepared to pay.
Then you have a solid foundation for the next decision as to how to proceed.
Is this an opportunity for a turnaround with good upside potential, or has the property reached its peak in earnings taking into account future capital investment requirements?
Obviously your appraiser will advise on the general market conditions and the weakness or strength of the local market to assist this process of defining the bid price and making that bid offer.