Mr. Handelsman

Finance & Investment

Three Hotel Acquisition Tips

By Mike Handelsman, Group General Manager, BizBuySell.com

Buying a hotel can be a complicated process, even with previous experience owning and running an establishment. The business-for-sale marketplace is very dynamic - and each hotel is so unique - that both pros and novices alike must do extensive research and preparation before diving into a deal.

How do buyers avoid getting burned and make sure they enter into an acquisition that offers them financial and emotional peace of mind? They have the greatest chance for success by being proactive and well-versed during every step of the purchase process. With the following three tips as starting points, buyers can be sure to find out what they need to know to get well on their way to owning the hotel of their dreams.

1. Understand Your Parameters

One of the biggest mistakes people make when purchasing a business is not having a solid grasp on how it will affect their lives. It's not uncommon for hotel buyers to get so excited by the prospect of owning a new business that they rush into it without asking themselves some very important questions, such as:

Will owning this business lead to a lifestyle that makes me happy? It's no secret that owning a hotel can be a lot of work, but still, many buyers aren't aware of just how life-changing and time-consuming it can be. First-time buyers might have an unrealistic view of what a hotel owner needs to put into the business, believing the staff will be able to do most of what it takes to keep things running smoothly and profitably. Then, when they find themselves doing tasks they never thought they'd have to do, they might become disillusioned and overwhelmed, jeopardizing their health and the health of the business.

Even experienced or repeat buyers can fall into this trap, thinking that since they've already learned the ropes with one purchase, they'll be able to handle another with no problems. This is dangerous thinking, as every business is different and presents unique challenges.

In order to get an adequate sense of what they're getting into, both experienced and first-time hotel buyers should do their homework before proceeding with a purchase by asking for in-depth information from the current owner on what it's like to run the business, reaching out for advice from other hotel owners and seriously considering what type of lifestyle they're looking for.

Do the financials make sense? Even after doing proper research and believing that everything about owning the hotel they are looking to purchase would make them happy, there's one part of the equation that buyers can't focus on enough: financials.

For one, buyers need to make sure they'll be able to secure a loan to buy the hotel, and that they are confident the cash flow from the purchase will be able to cover the loan payments. One essential consideration is whether or not the seller of the hotel is willing to finance part of the sale. If not, it can be extremely difficult to obtain a sufficient loan, and learning about this issue later rather than sooner will just lead to unnecessary headaches.

Even if a buyer determines that accessing a loan won't be a problem, there's still the issue of whether or not cash flow from the business will be adequate to support the type of lifestyle desired. This is why it's so important to make sure to get accurate, detailed financial reports from the seller, and to come up with a solid estimate of how much money is required each month to live a secure, satisfying life. In addition to basic financials, buyers should be sure to check fundamental business metrics such as the occupancy rate of the hotel, as well as room rates. To put the business fundamentals in better perspective, potential buyers should investigate the room rates at nearby hotels for comparison. If possible, interested buyers should also stay at the hotel as a guest for a few days before approaching the seller to get a first-hand look at hotel operations, customer satisfaction, and occupancy rates. All of this takes a lot of time, but it's essential. Buyers are much better off putting the effort in before taking the plunge into a purchase than after they are already tied to the business.

2. Get Familiar with the Market

It's more likely that a hotel purchase can go wrong if a buyer doesn't have a thorough understanding of the market both locally and nationally, including a list of all possible properties that meet buying criteria and knowledge of business-for-sale trends and cash flow and revenue multiples.

The first step a hotel buyer should take is to gather a list of all relevant businesses on the market. It's not uncommon for buyers to come across one hotel for sale and try to proceed with a transaction without exploring any other opportunities. No matter how great the business seems, that's never the right thing to do. With that approach, an even better opportunity could exist and the buyer would never know it. To cover all bases, buyers can use BizBuySell.com's Valuation Report to search for hotels for sale in their area and price range, then narrow results down to the few that seem most appropriate for the their desired lifestyle. This way they can ensure they've found the hotel that best meets their needs.

When beginning any search to purchase a hotel, it is also helpful to get an overall sense of what is going on in the small business economy. At BizBuySell.com, every quarter we release data detailing local and national trends in the small-business-for-sale marketplace to give both business sellers and business buyers insight into whether or not it is an ideal time to buy or sell. The most recent data, from the fourth quarter of 2008, showed a national year-over-year decline in both revenue multiples and cash flow multiples on reported closed transactions. These multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow, and the declining numbers suggest that business buyers are now able to offer less money for businesses and get access to a greater amount of seller financing because of unstable economic conditions.

This information can have a genuine impact on how buyers approach a business purchase. Are conditions in the area such that buyers can offer a lower price and expect sellers to offer seller financing? Or do market conditions look up, meaning they'll likely have less leverage when negotiating? All of this information can help buyers determine how they should approach a potential business purchase for the best result.

3. Negotiate with Patience

Negotiation is an essential part of any business-for-sale transaction, but one that is too often underutilized by business buyers.

Once a buyer finds the ideal hotel, has had extensive exchange with the seller and decides to proceed with a purchase, it is crucial to resist the urge to get the transaction done as soon as possible. The prospect of owning the hotel is exciting, but at this point in the transaction buyers must focus on working with the seller to achieve the best possible scenario once they are at the helm of the business.

Businesses typically sell for 10-20% less than a seller's initial asking price, so there is no need for a buyer to be shy when it comes to asking for a lower price - especially in a down economy. It's likely the seller won't jump at the initial offer, so in this case patience is key. Buyers shouldn't budge significantly on their offers, but at the same time they should not be rigid to the point of forcing sellers to turn elsewhere. In addition, buyers need to ensure the seller will allow them to retain key employees and supplier relationships once they take over, and confirm precisely what level of training, advice and oversight the previous owner will provide after the transition. As such, the negotiation process can take a while, but it typically pays off in the end.

During the negotiation process, though, sometimes deals fall through. It's bound to happen. For this reason, buyers should avoid becoming too attached to a single hotel. If they do, they'll likely be devastated when a transaction doesn't work out, and be left without a "plan B." Instead, they should keep a running list of "key properties" that they frequently revisit throughout the process and can turn to if their top choice deal fails to pan out.

The process of buying a hotel, even when buyers have done it before, will always be a learning experience, but when entering into it fully prepared there will be fewer bumps in the road. By starting with these three tips, buyers will be well on their way to a smooth transaction and a new, successful hotel.

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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