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The Caterer

Financial advice for hotel buyers

26 February 2004 by
Financial advice for hotel buyers

Thinking about buying a hotel but not sure how to get the money? Our helpful guide will point you in the right direction…

I'm a first-time buyer. Will a bank lend me the money to buy my own hotel?

Banks and lending institutions will look favourably at applications from first-time buyers for funds to buy a hotel provided they meet a number of conditions.

The bank likes to see a degree of risk from the borrower. In other words, if the bank is prepared to lend 70%-75 % of the purchase price, is the first-time borrower risking their own money or property? A bank will be very uncomfortable in a situation where a buyer is borrowing beyond their means.

The bank looks for experience in a potential borrower. It will be pleased if first time-buyers have a hotel background, but even if they don't, it will still be looking for relevant experience of running a successful business, either as a senior manager or trusted employee. Banks need to feel comfortable that the person they are lending the money to is a mature, sensible person who is likely to act in a prudent and responsible manner.

What will the bank want to know about the hotel?

A bank is most likely to ask the following questions:

What percentage of the selling price do you want to borrow? If it is more that 70%, they will want to know why.

Can the hotel generate enough money on a month-by-month basis to make the loan repayments? In other words, can the hotel's existing profit cover the annual interest bill on the bank loan and more? Ideally, banks like to see these profits cover double the annual interest bill to provide a buffer-zone in case interest rates rise or the hotel's business drops off unexpectedly.

What extra cash will I need to get the business started?

Average start up costs will vary - there is no standard amount. However, people working out their funding before buying a hotel should include enough cash to enable the hotel to function in its early days.

This means that in the first year the hotel should draw up a comprehensive budget with very realistic trading targets. In addition, a month-by-month cash-flow projection should be prepared that will allow first-time buyers to calculate their initial borrowing or overdraft requirements. This is crucial. The bank will not approve if in the first three months of trading you are back looking to increase the overdraft before you have really started.

One piece of advice for first-time buyers in dealing with banks and financial institutions is "under-promise and over-deliver" - never the other way around.

What should I consider when preparing this financial plan?

First-time buyers should calculate trading expectations very carefully and budget on a prudent and cautious basis. Assume that interest rates may rise and allow for the rise in your outgoings this will cause.

Write a detailed business plan and prepare a marketing activity plan on a month-by-month basis. Many first-time buyers assume that when you open a hotel the business just walks in - it doesn't. Even if there is strong trade straight away, you have to make sure that you are doing enough to keep those customers coming back again and again.

Also, make sure the sort of hotel you are offering is what the customers want. Many first-time buyers make the mistake of designing and running a hotel to suit their own tastes. This is a huge mistake. If the local market you are operating in will not pay more than £45-a-night for bed and breakfast, there is no point in putting Egyptian cotton sheets on the beds and expensive china in the dining room. Don't serve haute cuisine in the restaurant if what the customers want is fish and chips. By all means serve the best fish and chips for five counties and do it well - but do not assume you know what the customers want.

What kind of return can I expect on my investment?

It is difficult to gauge how much can be made from owning a hotel. However, there are many examples of canny hotel owners who buy a hotel, build up a good trade and double their money in three to five years.

Any final advice?

Remember a few simple rules:

It's hard work, but if you buy sensibly and give customers what they want, you can make the business worth considerably more than when you bought it.

Develop an excellent relationship with your bank manager - he or she should be kept involved in any developments.

Build up a relationship with your local property agents. They are a good source of information on the market and will probably give you an informal opinion on what the hotel is currently worth.

Produced by CatererSearch in association withChristie First

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