The hotel acquisition process (Part 1)

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.

Namely

  • 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

A broker

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.

Resort asset management and rooms revenue management

For most mid and smaller sized independent resorts one does not have to invest in a revenue manager to reap the rewards of applying some simple rooms revenue management  tactics to your asset management program to improve your bottom line.

This role is a key daily component of the Manager and whoever is overseeing front office operations.

It can be a bit over the top when you get involved with revenue management experts who seems hell-bent on making this process sound more complicated than it need be.

Simply put revenue management is a process of anticipating hotel occupancy and market demand and to determine how it will affect your hotel, once you can anticipate your market demand then you can correctly positioning your rates.

Firstly put your occupancy and average room rate to one side and think of your hotels revenue income per available room, this is called Rev Par. You can calculate this taking your occupancy (70%) and multiplying it by your average room rate (S$ 100), therefore the result is 0.7*100 equals $70.

Most of us know that in general terms improving ones average room rate generates more profit than just increasing ones occupancy. The added revenue generated is not subjected to operating costs associated with improving occupancy. So we need to focus on both in tandem. This is a bit is a waste of time if ones occupancy is always so low that one never has those peak and high demand periods, but lets assume you like most hotels you have some.

Please note here that lowering ones rates in general across the board to drive occupancy tends to be a fools game, only rarely will this result in improved bottom line profit. Say you increase your rev par to $72.25 by dropping your rates from $100 to US$ 85 and by some miracle that stimulates sales to 85% occupancy. A 15% drop in price has some how generated a 21% increase in rooms demand.  Not very likely. Then you take the associated operational costs, and that includes maintenance and replacements applicable for those  additional rooms sold, and guess what, you are worse off. Then you have to figure out how to get the rates back to where they where.

Revenue management simply takes advantage of increased demand periods.Take that competitors study you have just competed which will detail all your competitors pricing and ask yourself:  are my rates correctly positioned for my market, do we offer value, are we truly competitive. With that knowledge the revenue management process you apply is simply having complete knowledge of the market demand for hotel rooms for your local area and ascertaining how that will affect you property, and with that knowing what rate strategies you can apply to improve your rev par through room rate pricing. Maximizing your yield potential. The process is to create a “base” of business through a range of rates to appeal to a wide range of potential clients.

Once this base business is booked, by whatever market mix, lower rates can then be closed for sale and higher yielding rates can apply The key to successful revenue or yield management is to review advance reservations and make rate close-out decisions as often as might be necessary; generally, three times per week.

Hotels practicing revenue management gain an insight into the ebb and flow of business, knowledge of reservations booking pace, and a true understanding of factors which impact occupancy and average rate. Nothing complicated, and although there are many different strategies one can use it just boils down to good old common sense that need not be over complicated by those experts.

Larger more complicated resort hotels have far more complex revenue management  models, where some expert asset management advice will go a long way to reap better financial returns.

Contact us for assistance in creating your resort asset management plan incorporating winning revenue management strategies that will cost you far less than the financial reward you will reap.

Questions to ask your resort hotel management company

One of the most important questions an owner should ask his resort hotel management company is how does the food and beverage department perform compared to the competitive set; not that well most likely.

Are you a frustrated resort hotel owner, not sure which way to turn? Then rejoice, help is at hand!

Fenced in by bland corporate food and beverage management teams, branded or chained, who can not think out side of the box?! Tied into a corporate management culture of so-called “service delivery excellence” and those “ brand standard manuals” of meaningless trivia created by creative dead souls who haven’t lived out of the corporate environment  franchise belt?!

Does your 3% and 6% management company ( only 6% you may say) think that ensuring your 29% budget food costs are in line is more important a measure of management performance than ensuring the food offering is what the customer want at a competitive price to what your clients can get up the road? Measuring as a priority $ banked, not % margins?!!

Do you pay fees over a hundred thousand to stifle individuality, having to accept food and beverage concepts driven by the need to meet group franchise standards?

Attend that quarterly owner’s and management business review meeting to hear the  same old story. Cash flow not met, REVPAR below competitive set, food and beverage staff costs over 40% due to poor product demand?

Historically, hotel restaurants have fallen short of quality, creativity, service experience, they still do in general although major efforts have been made to improve this in top line brands and chains.

Fear not though, help is at hand!!

As a hotel business adviser we are not tied in to day-to-day operations, are more qualified and specialist than General Manager’s and most corporate reports, can stand apart from brand standard operators and the corporate protocol. We have a unique stand alone advantageous position in which to see opportunities to unlock value and introduce change, positive creative change, as the third-party support for hotel owner’s.

Sample questions to ask.

Operationally, do the outlets really work? 100%? Or is your hotel restaurant dead and antiquated in product offering, value, quality, ambiance, or all four?

Do the management know the competitive offerings and associated quality and pricing? When was the last competitive market review done?

Does your compete with the high street, those near by, or try to follow it? Market leader or  follower?

What’s more important, department profit or cost margins?

Menu with too many choices, not one thing or the other, trying to be all things to everyone and not something to someone? Tasty fresh food, value pricing, reflects your location?

12 month food and beverage marketing program, leveraged, in sales efforts, daily?

What’s redundant in the market, what’s offered in the extreme in the local market? Where does your fit?

Guest feedback on hand, lease opportunities defined, guest delivery issues sorted?

Capital plan with ROI in place for future use of available capital?

Hotel management stuck in a rut?

Plus “more and more”

For answers to these, the “more and more”, and assistance in unlocking value to your food and beverage operations, be it within boutique resorts or whatever, and for creative cost-effective solutions that question the status-quo of your resort hotel management company, contact mark@turnerlodgingco.com.

Sweet dream or nightmare? Buying a small hotel in Costa Rica

What challenges are involved in buying a small resort lodge in Costs Rica? First off the mark is having to deal with Real Estate agents.

Day after day one comes across realtors in Costa Rica marketing small hotels and resorts for sale, with asking prices that are frankly criminal. I would define criminal as promoting a hotels value at a figure picked out of the air, the bare land price,  the cost to build, add some on for revenue generated, near what he bought it for down the road for last week!! No doubt ask them and they would blame the sellers for asking for such prices.

Is it the same as buying a resort vacation home? No. Is the value of the property calculated as one would a vacation home or residential property, that is on emotion? No.

The price you buy at should be based as far as you are concerned around the forward calculation of what cash flow you as an operator can generate from the business over the coming years at today $. It’s based on cash flow! and only that.

Not what $ a seller has invested in it. If a seller has invested 150K in improvements and the cash flow improvement have netted 10K in cash flow, then that’s 10K towards the valuation, not 150K plus “on potential”.

It’s present valuation based on what actual net cash flow from operations the property is achieving to date. The yield % to calculate this valuation based on the quality standard of the buildings and its location.

Let’s use a most simplistic calculation, ignoring numerous aspects of how a calculation of a commercial hotel business should be done.

Take a 10 bedroom lodge with a average occupancy of 60%, that’s 85% for 7 months and 25% for 5 during the wet and low seasons, way above average for small hotel operators in Costa Rica by the way, at an average rate of $60. That’s generating about 131K in revenue.

Costs of marketing, utilities, your sales efforts and affiliations, transport related,  maintenance, cleaning, laundry, linen, communications, grounds upkeep, insurances, local taxes, taxes, add some salaries to help you clean 6 rooms a day, supplies, you will be very lucky to generate a 65%  operating profit before a management salary.

For 365 days a year of pure graft and effort to manage the business, deduct a modest 40K for your efforts, which leaves about 45K cash flow. 10% yield on the net cash flow generated values this property at 450K, if a buyer is happy with a 40K salary! That’s before a capital plan for replacements of major building items, and achieving a 65% OP is questionable.

At 60% occupancy. Scary. Unless you like working for nothing that is.

Yes, on the market for $1m++ no doubt. !!!! Do the math, 500K down, 500K at 8% with 40K interest only payments, 5K to spare. Or 500K yielding 6% and you sit on the beach with your 30K.

40K to go gradually broke, forced to sell out at a loss, with health issues, or 30K for being a beach bum!

For advice on purchasing your commercial hotel business, do your homework and contact mark@turnerlodgingco.com.