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Hot Tips For Your Accommodation Business
2 May 2008
After seven years running my own accommodation business and now specialising in the valuation of hospitality and accommodation businesses, I would like to share with you a few tips to enhance your business performance.
1. Why Cash Is Not King
As a Valuer looking at businesses on behalf of prospective purchasers I am often told by both vendors and purchasers about the amount of cash they are taking and how this should be reflected in the valuation.
The reality is that any prudent Valuer will only base their assessment on actual financial performance.
In other words, if you take out cash during the year, you cannot expect to reap the benefits when you sell. Given that a capitalisation rate of 20% EBIT (earnings before income and tax) may be justified from sales evidence, the effect when you come to sell is that every dollar can be worth five dollars on the sale price. In most cases this is reflected as goodwill which is non-taxable.
2. Presentation
Regular maintenance and replacement of chattels is a must if you want to enhance the value of your business. In my experience there is a clear correlation between the standard of presentation, occupancy levels and turnover. Where operators are not reinvesting in their businesses there is generally a clear pattern of falling occupancy and turnover which will be reflected in the valuation. In addition, as part of the valuation exercise we prepare a proforma budget of likely financial performance and will make allowance in our projections for deferred maintenance items.
3. Replacements
As you replace chattels we recommend you update your chattels list with a note detailing the replacement items, date of purchase and price. This will provide a helpful guide for the listing agent when you come to sell and from a valuation perspective will enable to the Valuer to get a more accurate picture of the age and value of these items.
4. Lease Extensions
For leasehold businesses, the length of term left to run on the lease is a major factor in the determination of value. The ability of a purchaser to finance themselves in to the business will be directly related to the remaining term of the lease, as this is the maximum period that any prudent lender will extend a loan for. Therefore you may need to negotiate with the landlord to purchase an extension of the lease. There are many different rule of thumb methods of assessment for a lease extension however, in my experience each case is different. Ultimately the value is related to the projected super profit available over the remaining portion of the lease. You should seek specialist advice from a Registered Valuer experienced in this type of work.
5. Occupancy
If you are not a detail person completing the daily accommodation survey for the Statistics Department can be an onerous teeth gnashing task, as I know from past experience. However, this information provides an important barometer of your business performance over a period of time. As Valuers, we need statistics to analyse your business and weight this against the performance of other businesses that have sold. It is a simple task to transfer this data to a spreadsheet along with turnover performance, so that for each month you have a clear picture of occupancy and turnover. This is vital information for you and your Valuer to analyse your business performance.
6. Marketing $$$
If you are new to business you will be bombarded with sales people trying to prise yet to be earned dollars out of your pocket with a promise their advertising is the greatest thing since sliced bread. The reality is that unless it is targeted, you are applying a scatter gun approach. A simple method to measure the success of every advertising dollar is to ask each customer how they found out about your business. If you have a programmable till this is a much easier exercise than trying to record manually.
At the end of the month you can input this data into a spreadsheet and see a clear pattern of what works for your business. You will also have valuable information to give to your Valuer when he asks you where you advertise and what it costs.
7. Revitalising Your Business
Service, not a tangible item but a major impact on your turnover. It seems simple enough but a number of operators still cannot get the basics right. I find I can gain a good impression of the strength and likely future direction of a business based on my initial call to set up an inspection time. Some operators are jaded and tired and this is reflected in their telephone manner.
After seven years in the accommodation business my wife and I felt we were getting to this stage ourselves. We managed to revitalise ourselves and enhance our sales prospects by putting ourselves in the shoes of a prospective purchaser. In other words, what changes would we make if we bought the business tomorrow. This resulted in us reviewing all parts of our operation, including reception, presentation, maintenance, marketing, networking and the clients' experience. The end result was a five year business and maintenance plan which we were able to supply to prospective purchasers with a fall back position that if the business did not sell we would implement the changes to ensure the business continued to grow.
All simple stuff really but stuff you generally only learn the hard way in the accommodation game.
Wayne Wootton
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.