How to attract the investment to turn around a hotel chain

When funding is required to turn around a business's fortunes, attracting investment isn't always easy. Ed Fazakerley describes the route you need to take to rebuild a hotel chain.

The recession continues to affect the hospitality sector, with the result that many hotel chain owners are now in the challenging position of seeking funding to turn around their fortunes. But while attracting investment of any sort can seem a daunting task, with the right leadership structure and a clear strategy, those businesses with the potential to succeed can make a number of changes to make their hotels more attractive.

There are some aspects that will mean certain hotels will always struggle to secure private-equity investment. If a hotel is in a poor location, then the likelihood is that no investor will want to touch it.

For others, however, there are aspects that can be altered to make a real difference to a hotel's fortunes - and central to this will be the calibre of people leading the transformation. The key to a successful turnaround is having the right management team - otherwise, even the hotel with the most potential will fail to get funding. The team needs to have experience of taking on struggling businesses and making the changes that can bring them back to profit.

It is often the basics that can leave a hotel in financial difficulties and in need of a director who can understand the issues from the moment they walk through the door. In our experience, the problem can often be the result of a very poor sales function, that either does not address all the available market segments, or that does not focus enough on those that will bring in the most guests. A good hotel operator will break down the hotel's target audiences into business, leisure, weddings, functions and so on, and develop a different strategy for each of these market segments.

An excellent operational management team will go on to look at occupancy and key costs percentages, including food and drink margins and wages. By breaking these down, the management team will be able to identify where inefficiencies lie in the business. In our experience, overstaffing tends to be a real problem and links directly to the level of revenue achievable.

In many cases, the whole sales strategy has to go back to basics. To attract investment, something as simple as a website can make a world of difference to the level of interest. Given the rise in online booking, hotels need to have a strong, high-functioning web offering, preferably with transactional functionality. The hotel should also be appropriately placed on the UK's plethora of booking sites to maximise occupancy.

Another clear issue with many hotels will be standards at every level. In today's highly competitive market, when new hotel stock is constantly entering the market, a consistently good quality of furnishings and customer service must be apparent from the minute a guest enters the premises. Otherwise, a hotel risks ruining its reputation - not only will that guest never return, but the social media revolution means that he now has the ability to spread his bad review around the world at the touch of a button.

Everything relates back to a strong, experienced management team - with a demonstrable track record of turning around hotels and the references to back this up - a suitable location and a thorough and strategic assessment of the local market. Without these, a struggling hotel simply will not get finance. Funding is still very scarce and, with many banks and private-equity houses still sitting on stressed hotels, they are unlikely to rush back in while the economy remains fragile.

Private equity will not be right for every hotel business, and a potential investor will need to examine carefully the management team you have built before making an investment decision. In most cases, management will be left to run the day-to-day operations of the business, while the private-equity house is involved on a more strategic level.

Financial performance is another aspect of the business that will come under a great deal of scrutiny, both before and during the due diligence process. Robust financial systems and controls will make a big difference when it comes to the investment process, and thorough preparation for investment or sale can have a significant impact on the final value received.

In preparing a business for sale or investment, a hotel's management will be well served by a number of advisers, starting with an experienced corporate finance adviser to help to guide them through the process. A skilled corporate finance adviser will also know which potential investors to speak to, who the likely acquirers will be and what kind of value can be expected. Other advisers are also likely to be needed to deal with tax and legal issues.

In the case of a potential private-equity investment, management will be required to present their strategy to the potential investors in the hope that a deal can be negotiated and agreed. If all parties are comfortable with the respective offers, they will talk through the deal and agree a suitable price and structure to support the strategy of the business.

Funding will always be required from a bank or syndicate of banks to support the equity investment. However, in the context of the financial crisis, there is considerably less bank debt available, which could mean that private equity and/or management may have to invest more equity or find alternative deal structures.

Funding will always be available for the right opportunities in the hotel sector, where investors are willing to take on the risk of a turnaround. Ultimately, it is vital for any struggling business seeking investment to seek the right advice and explore all of the options available to them.

Ed Fazakerley is a partner at Zeus Private Equity

FIVE EXPERT TIPS

• Build an experienced and skilled management team to develop your strategy.
• Ensure consistent standards throughout the hotel.
• Develop a separate sales strategy for each target market.
• Make sure your finances are in order and your projections realistic when seeking funding.
• Get the right advice from professionals you trust.