Raising Finance to Buy a Hotel- a guide.
If you have already made the emotional leap towards starting up the hotel business and have challenged your initial motivations and underlying reasons for starting at the hotel the next step is to work out how much start-up capital you will need.-People will need to borrow money in the form of a commercial mortgage if they do not have an existing property to sell or capital of their own in savings. Most existing hotels for sale are advertised via business agents who have valued the business based on it’s current turnover, profitability and ‘goodwill’ of it’s client base. The largest proportion of the sale price is usually made up of the value of the building itself. Even smaller guesthouses and independent hotels are sold every week for hundreds of thousands of pounds. It’s therefore vital to employ a surveyor to assess the quantifiable fixed assets of any hotel for sale before discussing with the vendor the more intangible sale items.
Since the onset of the credit crunch the number of commercial mortgages on the market has dramatically fallen to prevent people from overstretching themselves and borrowing too much money. Mortgage brokers are a great place to start and will have access to whole of market products. They will also usually have a good personal network of contacts inside specialist commercial mortgage lenders. To succeed in the mortgage application process your ability to repay the mortgage based on minimum level of occupancy will be critical, as will your existing credit rating and any history of bad debts.
It is probable that you may need to raise capital against value of your own residential home or even sell it outright in order to raise the cash required to purchase your new hotel business. Many couples who decide to run the hotel will live there as their new family home. The structural problems of buying and selling properties in today’s economic conditions mean it will be probably you will need to have successfully exchanged on your own property before you offer will be accepted from commercial hotel seller. The business agent will need to be satisfied you have the cash or are eminently able to sell your property to finance purchase the hotel business. Your negotiating position will be considerably strengthened if you are a cash buyer in the same was as traditional UK residential chains (which frustrate many buyers and sellers across the UK).
Commercial mortgage lenders will normally expect to see a professional business plan outlining the financial aspects of your hotel purchase. They will need confidence you have thought things through and outlined all of the relevant start-up costs and operating expenses that you will incur. There are endless books detailing how to produce successful business plan. Many are indeed useful but virtually all of them all down boil down to advising you to put pen to paper to construct both in words and the numbers every financial aspect of the planned investment. The business plan should outline the hotels break-even point based on an assumed level of occupancy and any large start-up costs such as redecorations or refitting. Private investors and mortgage lenders should be able to clearly understand that their investment can be repaid and that you have the business acumen to construct a sensible plan that is not unrealistic and provide simple measures of success or failure.
Part of the initial budgeting process must include a sensible allocation for adequate hotel insurance to protect your investment. Many aspects of the hotel can go wrong, accidents happen and disasters occur. To rectify some of these good-quality hotel insurance is vital in ensuring your capital investment is not wasted through inadequate cover. There are a huge number of operating expenses depending upon the size and location of the hotel or guesthouse. Some of these may seem relatively small yet collectively need to be to be accurately accounted for within your business plan. It’s easy to get excited about the rental potential per week or per night based on available number of rooms. Identify which of the expenses are fixed and which variable and produce a sensible checklist ideally organised in a spreadsheet. Try and work out the best case worst-case scenario based on some realistic market research of hotels in the area you are interested in. Get an average of the room rates per night of the week as a basis for your sales revenue forecast. Contact and speak to existing bed-and-breakfast owners, colleagues or friends of friends to find out exactly the types of costs incurred and the costs you never thought about in the first place. The more time you invest in your planning and preparation process the more likely it is to be realistic and provide you with more self-confidence to take the big financial plunge
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