January 17, 2023
Hotel businesses are on the rise following the COVID-19 pandemic, and new opportunities are opening up. If you want to learn how to buy a hotel business in this climate, you’re in the right place. We’ve got a ten-step guide for you coming up, but before you do, here’s a note on what to consider before jumping in.
Before Buying a Hotel: Ask Yourself Why
Hotel businesses and their markets are dynamic blends of real estate and rentals. Essentially, they’re a group of leased products with unusually high turnover, sometimes in terms of hours, rather than days. They’re also a conglomerate of almost all of the hospitality sectors, making them one of the most versatile and fluctuating businesses around.
This volatile and productive nature of the hotel business makes it important for investors to understand why they’re getting into it in the first place, and what it will mean in terms of planning for future market conditions.
There are two ends to the spectrum of reasons for getting into the hotel business. At one, there is the economic incentive. The hotel industry grew to $341.7 billion from 2018 to 2023, at a CAGR of 7.7% through some of its most troubling years. 2023 alone is expected to see a CAGR of 17.9% and profits of 23.6% suggesting a robust and recoverable industry.
At the other end of the spectrum are the purely emotional incentives. Hospitality comes naturally to many, and being able to home and entertain guests can be a rewarding endeavor. In reality, the need to buy a hotel is motivated by a combination of factors somewhere along this spectrum.
Understanding where your motives lie will help you make a more informed decision when it comes to location, property type, and innumerable other factors to get you the hotel you want. For a brief summary, here are some of the most common business types in the hotel industry.
Types of Hotel
Hotels – This might seem a bit obvious, but the bare-bones hotel is still the most common type of accommodation in the industry. These are aimed at tourists or travelers and have rooms, typically for short-term stays, as well as sometimes meals and extra services.
B&Bs – These are typically smaller places, often with a much more personal touch. They can be house conversions and the owner may or may not live in the same building. As with classic hotels, there are both low-cost and luxury versions of this model. Our Airbnb cash flow calculator can help you forecast your potential profits.
Motels – For long-distance travelers, motels offer generally low-cost accommodation aimed at motorists. Their location is entirely different from the previous two options as is their style; motels will usually have fewer amenities and services and are generally aimed at people looking for a single night.
Inns – An inn is usually attached to a restaurant or diner, and is typically smaller than a hotel. It appeals to a market somewhere between a hotel and a motel and offers private rooms for short-term stays.
Resorts – These usually have a hotel attached and offer a much wider range of amenities and services, designed for more high-end customers who want to have a contained holiday or break. The idea of a resort is to provide everything the customer needs within the premises.
Hostels - For travelers on a budget, hostels offer cheap accommodation with a range of rooms from dorms to single or doubles. The amenities are usually basic, though they may include a pool and a bar. Typically, guests pay for a single bed in a dorm of between 4 and 10 beds, and these are more of a social
As you can probably tell, each of these requires a different approach to running it and will come with a varying degree of revenue. The size, location, and organization will be significantly different depending on the model you’re after, which is why it’s so important to understand your motives and resources before starting the search.
If you still have no idea which direction to go in, it will save you time to hold back and figure that out first. If you do have a clear plan, it’s time to go over out how to buy a hotel business.
How to Buy a Hotel Business
The process of buying a hotel involves a series of thorough research and analysis steps, including substantial due diligence to make sure the business is as it seems and no unpleasant surprises are lurking. At any stage, if the data you’ve gathered doesn’t match your expectations, you should be prepared to pull out and start again.
Buying a hotel business is a costly endeavor, and falling for the sunk costs fallacy is a rookie mistake that could vastly reduce your chances of success.
The whole process of how to buy a hotel, from start to finish, can now be broken down into ten rough stages. Here they are, in order.
1. Identify your desired outcomes
To expand a little on the previous section, you’ll want to start the process by looking at which criteria you’ll be looking for in a target business. If you’ll be hunting for short-term projects, or have specific investment targets you want to hit, this will affect the businesses you seek.
You’ll also want to think about expansion, both from the business perspective and the physical space required. Your chosen criteria will depend entirely on you, but to get you started, here are a few things to consider:
- Property type
- Cost of property
- Stability of cash flow
- Competition in the area
- Potential changes in market
- Your skill set and experience in running and/or acquiring new businesses
Of course, there is plenty more to consider, but at the very least you’ll want to hone in on some of these before you start your search. Once you’ve narrowed things down a little, you’ll start finding prospective businesses.
2. Put yourself out there
This is the time you’ll make it known to the world that you’re looking. Contact brokers, industry consultants, and hotel companies themselves, and consider ads to show your intent. In return, you’ll receive preliminary offers that can be pruned for high-value prospects into a short list of available options.
This screening process is going to save you a tremendous amount of wasted time down the line, so exercise some restraint here and make sure you’re vetting these offers in the right way. There are going to be experienced people who can help you in the process at every stage, so always consider leveraging them if you’re not sure.
An experienced consultant can help you learn the red and green flags as well as possibly offer up some leads for unlisted businesses you might be able to chase up. At this stage, you may start thinking about forming a working relationship with them too, as they can come in handy with negotiations and other processes down the line.
3. Get some help
As we discussed, running a hotel involved a dynamic and variable series of tasks, and buying one is equally complex as a result. Unlike simpler companies, you’ll likely need to put together an acquisitions team, the size of which will depend on how complex the target company will be.
The first task of the team will be to figure out a valuation of the company and to do that you could benefit from hiring a broker and an accountant, at the very least. The broker can help bring the seller to you, and the accountant will be qualified to go over their books to see if they’re reporting finances accurately.
Other help may be required, and an appraiser could be useful. However, appraisers come in all shapes and sizes, so it’s important to get one who is experienced and qualified in your area. An attorney may also be needed to make sure everything that happens is compliant and to identify any deal-breakers early.
Depending on the building itself, and whether you plan to modify or alter its build and design, it might be worth getting in a consultant at the early stages. An architect can establish the condition of the building and tell you what’s possible in terms of expansion or renovation. Then, consider bringing in engineers to check the inner workings of the structure like the electrics and plumbing.
4. Your market research
This process may seem intimidating when it comes to the cost, but it’s a critical part of the filtering process. Ideally, you’ll quickly discard a large portion of the offers that came in and be learning more about what to look for in the process.
The remaining properties can be whittled down to a handful of the best candidates, and these will be investigated in more detail. At this stage, it’s time to run some rudimentary market and competitor analyses in order to inform a more committed decision about whether to go ahead or not.
This research will be combined with a deeper investigation into the earnings of the business to develop your bid price.
5. Your business plan
It’s important to have an understanding of the potential for market changes or trends in order to establish the longevity of the business in its current state, and in the state, you wish to get it to after acquisition.
Here is where you’ll need to draw up an early business plan where you can document your findings and project your potential financial situation. This business plan needs to cover all components of the business including the physical assets and be constructed realistically, factoring in reasonable time frames for any modifications you hope to make to the company.
Your bid price will be based on this document, so the more accurate it is, the better your deal will likely be. You’ll need to understand the factors that drive changes in the market, what your growth and decline will look like, what your market segments will be, and the state of your current and future competition, among other things.
Your business plan also needs to contain detailed and accurate financial projections. We can help you, help yourself here. Check out our Hotel Financial Projection template to see how we can help you build your financial data into well-structured and relevant financial projections for the next five years. Or you can use your acquisition projection template to create projections specifically for an acquisition. The templates are entirely customizable and come with support.
Use these as part of your business plan to calculate how well your investment is likely to perform and to help consolidate the information you need to make and place a fair offer.
6. Bidding and negotiations
Once your offer is in place, it’s time to negotiate. Ideally, this will be a short process in which the buyer accepts your offer in a brief meeting and you can move on to the next steps of talking about the specifics of the agreement. If the buyer refuses the offer, it’s up to you whether you go higher or back out, but if you’ve done your research well, you should know the true value of the company and be able to back up your claim.
If the agreement to purchase is reached, a letter of intent can be signed. This is to show that you’re both serious and to lead to detailed negotiations and due diligence to come.
7. Agreements on key terms and assets
The letter of intent isn’t a legally binding document, but it will demonstrate your intention to buy, and should naturally lead to the relevant documentation you’ll need to be given access to the financial papers of the company. Usually, an NDA will be signed here before you can proceed, and at this stage, negotiations will continue around the specifics of the buying contract.
If you’ve got an acquisition team from previous steps, this is where they’ll be most valuable. If you don’t, you should build one. You’ll need to identify the interests of all third parties here, as well as the terms surrounding how the money and assets will be transferred.
Discussions between the buyer and the seller, with experts present, should cover financing options, the condition of the premises, what to do in case of default by either party, assets included and excluded in the purchase, and a detailed list of the assets.
Hotel businesses have a lot more to them when it comes to assets than simply the business itself, so be sure you have someone onboard who knows the process well and can advise you on what needs to be included in and excluded from the deal.
Before you go into the due diligence, you need to have some contingencies set up to cover your costs if the seller is unable to follow through with their promises for whatever reason. These should be agreed upon before moving to the next step.
8. Your provisions checklist
Now, you’re closer to a completed purchase and sale contract, but before it’s signed, have your team draw up a relevant checklist of all the provisions that need to go into it.
Here are some examples of provisions that should be covered:
- Purchase Price
- Deposit amount
- Business assets
- Due diligence
- Financing type
- Mortgage terms
- Seller’s deliverables
- Employee liabilities
- Seller Representation
- Closing date
- Closing expense
- General clauses
This is not an exhaustive list, and your consultant will be qualified to pad it out, but these are some of the most important provisions to account for before signing the agreement.
9. Your due diligence
This investigation covers the physical assets and operations of the company, as well as the local market and environment. Essentially this stage is to make sure the seller’s claims are validated and unearths any hidden issues that may have been overlooked.
The calculation of your offer needs to be backed up at this stage, and as such, the potential earnings need to be thoroughly assessed and validated. Here is where you’ll find all the light fittings that need to be replaced or the collapsing water tank that needs renovating, but you’ll also be able to ensure that the projections you made based on the seller’s claims are accurate.
If any of these things do pop up, it’s up to you how to proceed. Remember, pulling out at this stage is better than jumping into a bad deal, despite all the money and time that’s gone into it so far, so be cautious. If you find something that suggests the seller has been dishonest, this is a much bigger red flag than unearthing an innocent oversight.
From your NDA you should be entitled to a full financial audit, so bring in the qualified help to make sure everything is transparent and above board. If everything is still to your liking, it’s time to make the purchase.
10. Closing the deal
The timeframe for this stage depends on several variables, but if you’re planning to manage the business yourself or immediately employ a manager for the role, the closing will coincide with the takeover of operations and transfer of the title.
Commonly, you’ll want your attorney, the attorney of your lender, the title company, and your broker present; the seller will likely bring in a similar team. After the necessary allocations and prorations are calculated, mortgages are signed and the money and properties are transferred.
At this point, you’re the new owner of a hotel business!
Buying a hotel can be a particularly lengthy and complex process due to the nature of the business. Hotels are complicated and diverse businesses to run, and this makes it a lot more important to bring in the right kind of help and ensure your research and documentation are accurate.
Before you start, be sure you know what you want. Then, narrow down the options, perform the relevant research well, and lean hard on the due diligence before signing over the funds. If you do all that well, you’ll end up with the hotel business you were looking for.