Mr. Handelsman

Finance & Investment

Tips for Buying a Hotel Online

By Mike Handelsman, Group General Manager, BizBuySell.com

Whether you are buying a hotel for the first time or an experienced owner looking to invest in a new business, the process can be intimidating. Although it is usually not easy, entering the buying process fully prepared can save a great deal of time and frustration, making it easier to close a deal on a hotel that is perfect for you.

According to a recent Yahoo Inc. poll, two-thirds of Americans have entrepreneurial aspirations, and in addition to other popular types of businesses such as restaurants and auto repair shops, many entrepreneurs purchase hotels.

For would-be hotel owners, there are plenty of businesses to buy, either independently or with the help of a business broker. Going into business for yourself or buying a new hotel will undoubtedly require large amounts of commitment and drive to overcome fear of the unknown, but keeping four critical factors in mind can help ensure success when investing time and money into a new business.

1. Use online resources to shop for opportunities

The easiest way to learn about your buying options is to research the hotels available via an online business marketplace. Newspaper classifieds include only a small portion of the businesses for sale in one area, while an online marketplace is more expansive.

This kind of site offers a database full of available hotels in any area, which means that you can search locally or anywhere in the country if you are considering a change in location.

Online marketplaces also offer a number of tools buyers can use to find the perfect hotel. A comparables report can provide estimates of fair selling and buying prices for a hotel based on similar businesses and chosen geographic area, gross income and cash flow ranges.

Knowing the average sale price for the type of business you are interested in should be your first step as you begin the buying process.

Last year, according to data for businesses sold on BizBuySell, hotels in the U.S. sold for an average of $1,111,000.

The price-to-revenues multiple averaged 1.6 and the price-to-cash-flow multiple averaged 5.4.

In other words, a hotel with annual revenues of $700,000 would likely cost you $1,120,000. An alternative valuation might be arrived at using the company's cash flow information. For example, if the business had an annual cash flow of $300,000, the valuation would be $1,620,000.

Most buyers are more interested in cash flow numbers, rather than revenue numbers. After all, cash flow pays the bills, and ultimately it is cash flow, not revenues, that rewards an owner for all their hard work.

In addition, most online business-for-sale sites offer helpful buyer advice sections full of documents with useful tips to make sure buyers perform all the right steps throughout the purchasing process.

2. Be savvy in dealing with sellers

Once you have located a hotel that interests you, contact the business owner or the representing broker - whoever placed the ad.

Make sure the ad has answered your biggest questions about the hotel, such as initial asking price, number of employees and past performance.

When asking about price, it is most important to focus on how much cash the seller requires for a down payment. You will naturally be curious about the asking price and how much money you can potentially make - which is certainly important - but determining the down payment amount first is the key in knowing whether or not you want to continue the buying process.

Make a list of any questions not answered, and be sure to get all the information you need from the seller. For example, it is a good idea to ask the reason why the hotel is being sold. If the seller is reluctant to provide this information, it is a good indication that there are major issues with the hotel and that the buyer should beware.

Also, be sure to ask the seller to provide documentation for any numbers provided.

If the hotel seems like a good fit after receiving the answers to your questions, ask to view it firsthand. If possible, visit the hotel without identifying yourself as a potential buyer to make sure you are satisfied with its appearance and location.

Do not be afraid to negotiate. Businesses generally sell for less than the seller's initial asking price, so there is no need to settle for numbers presented to you at the start without question. For example, 2006 BizBuySell data shows that on average, hotels for sale on the site sold for 94 percent of sellers' original asking prices.

3. Following through with due diligence

Once you have thoroughly communicated with a seller and all the information checks out, it can be tempting to want to speed up the process and sign a contract as quickly as possible. While the prospect of finally owning a new hotel is exciting, there is still a need to work out contingencies. This process is known as "due diligence."

Although the numbers might sound good to you, it is a good idea to bring in outside professionals to validate them. A lawyer can assist with all the necessary paperwork and notice any discrepancies in the information that you might have overlooked. An accountant can review the figures the seller has provided and make sure they make sense.

Do not be alarmed by any minor discrepancies - they can usually be resolved. Some outside professionals may advise you to shy away from the deal unless everything seems perfect. Advising you to buy a business puts a great deal of responsibility on them, so many advisors offer conservative advice. As long as you get them to check out the numbers and paperwork and everything still feels right, it is probably safe to go ahead with the deal.

Before signing, though, it is wise to have the seller agree to advise you at no charge for a certain amount of time (30 days in person and perhaps another 30 days over the phone is a fair amount). This will ensure that the previous owner will teach you what you need to know to run the hotel. If you require additional consultation, you might need to offer the seller a fee for his or her time and advice.

4. Embrace lifestyle change

Now that you have got the hotel, how do you make it work?

First-time owners will likely find the job unlike anything they have ever done. Running a hotel is rarely - if ever - a nine-to-five commitment. Responsibilities are likely to extend to nights and weekends.

At the same time, hotel owners often discover a new sense of freedom and purpose. They will not have to deal with a boss anymore, and their schedules - while less predictable - can be more flexible. Most importantly, a great sense of pride can come from seeing the business through to greatness.

Before you buy a hotel, it is important to anticipate the lifestyle change that will be required. Understanding and preparing for the changes, perks and challenges that buying a business will present is the best way to ensure that you will have the maximum chance of success in your new hotel.

It's impossible to be prepared for everything, but going into a venture having adequately thought out the process - including making use of valuable online tools and being proactive in dealing with sellers - can be the key in turning your new hotel into a dream come true.

Mike Handelsman is Group General Manager for BizBuySell.com and BizQuest.com, the Internet's two largest and most heavily trafficked business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses and include two of the industry's leading franchise directories. Since 1995, BizBuySell and BizQuest have offered tools that make it easy for business owners and brokers to sell a business and for potential buyers to find the perfect business. Together, BizBuySell and BizQuest list more than 75,000 businesses for sale at any time and have over 850,000 monthly visits. Mr. Handelsman can be contacted at 415-284-4390 or mhandelsman@BizBuySell.com Extended Bio...

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