There is a lot of research that must be done before you buy an accommodation establishment. There are the obvious physical aspects like the location, size of the property, quality and age of the building, quality and condition of the furniture, fixtures and fittings as well as number and size of rooms.
So now you have found the "perfect" B&B/guesthouse/lodge to buy. There are more questions you need to ask about the establishment and how it is run.
Questions to ask:
- How dependent is the business on the personal involvement of the existing owner? If the owner is no longer involved are there enough skills remaining in the business to ensure it continues to run smoothly?
- How important is the existing owner from a marketing standpoint? For example, close personal friendships may have developed between a B&B owner and the clients. Will these clients be lost when the owner is no longer involved?
- Are there any special relationships with suppliers, local community, industry associations, etc. that could be lost if the existing owner is no longer involved?
- What is the customer profile? Does the existing customer profile fit in with the ideas you have for the business going forward?
- Is there a loyal customer base? Are there comprehensive records of guests? Do they show a pattern of repeat visits or are the majority “once off” visitors? If so, is this an acceptable situation in relation to the type of establishment and its location?
- Is the property well located for its target market? This may be near a beach or the bush for the leisure market, or within easy access of commercial centres for the corporate market. If not, are there any other potential markets and, if so, how would you access them?
- Is there potential to grow the customer base? Is there room to expand the facilities and would the increased revenue justify the costs?
- Is there a loyal workforce? Are there comprehensive staff records and if so what has been the staff turnover rate? Are there any long serving staff members?
- What, if any, are the staff training needs? How easy it to access this training and what would it cost?
- What occupancy rates have been achieved and how seasonal are they? Are records of occupancy kept? Are they recorded on a per bed or per room basis? Are the occupancy levels (i.e. number of rooms booked vs. number of rooms available) in line with industry norms and local conditions?
- Does seasonality play a part in occupancy levels? Do occupancy levels in the low season fall to such an extent to warrant closing for that period? In that event, what are the businesses obligations to the staff?
- What, if applicable, is the usage of the restaurant other than for breakfast? Is there an opportunity to increase this usage? If so, what would be the cost implications in relation to the increased revenue?
- What gross profit margins are being achieved in the restaurant and bar? How do these compare with industry norms? Are the stock control systems adequate? What is the shrinkage (waste) factor? Can this be reduced?
- How do the rates charged compare with those of similar establishments in the surrounding area? At these rates and at the occupancy levels achieved, what profit is being made per room? Is this a reasonable return on investment?
Valuing the Business
Make sure that you are being a reasonable price for the business. When valuing an existing accommodation business, the following industry guideline can be applied:
The ratio between the ADR (Achieved Daily Rate) to the value of the establishment is approximately 1:1000, i.e. take the total revenue achieved over a year divided by 365 to get the ADR. Then multiply by 1000 to get the value of the establishment as a going concern, including property and equipment.
So now you know what kind of questions you need to be asking about the business before you write any cheques. Make sure you have all the facts – preferably in writing.
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