Hotel Buyers Dictionary
Thinking of buying a hotel? Do you know your eWOM from your RevPAR? The hotels industry is full of potentially baffling abbreviations and industry jargon; get to know the meaning behind the terms below and you can search for your ideal hospitality business with confidence.
In the hospitality industry, the ADR, or Average Daily Rate, is simply the total earnings from letting rooms on an average day. It doesn’t include earnings from the restaurant, bar, or any other hotel facilities; it also doesn’t include unoccupied letting rooms. For instance, if you have a 10-bedroom hotel that earns £800 a night and only 8 rooms are occupied on an average night, your ADR will be £100 (£800 divided by 8 occupied rooms) rather than £80 (£800 divided by 10 total rooms).
The ADR is particularly helpful when trying to determine the likely earnings of your hotel once you take it over, and will give you a sense of where the hotel sits in the local market.
In the hotels industry, a concession agreement is where a hotel grants another business the right to trade on its premises. In exchange, the concession holder (concessionaire) pays either a rental fee, a share of their earnings or a combination of both back to the hotel. Examples of concession agreements could include a spa and wellness centre, surf school or crèche.
Concessions can help a hotel to offer a unique range of guest services that they couldn’t otherwise offer. The service might either involve a lot of red tape (for instance, scuba diving or child minding services), or specialist skills (for instance, aromatherapy and massage services), making a concession agreement the natural choice for the hotelier. One potential drawback is that – due to the third-party nature of a concession agreement – the hotel owner has less control over the quality of their guest’s experience from arrival to check-out.
When buying a hotel, it’s important to know what long-standing concession agreements are currently in place with local providers. You don’t want to enter into a situation where existing commitments interrupt your plans for your new business. You need to ensure that you are fully aware of each concession agreement, and ideally meet every concessionaire yourself, before you exchange contracts.
A central reservation system, or CRS, is simply a digital version of a hotel or guest house’s reservations book. The hotelier can enter letting room details onto a CRS (details such as in-room facilities, seasonal room rates and guest bookings), and this can help reduce the risk of issues such as overbooking.
Many CRS systems will also handle some of the basic customer service elements of a booking: everything from sending confirmation receipt emails, to follow-up emails asking for customer feedback, can be automated and diarised by a CRS.
The biggest benefit of a CRS is that they often link up to what is known as a GDS, or Global Distribution System. These GDS networks are booking networks that allow travel agents and websites to place hotel room bookings on behalf of their customers directly through the computer, without the involvement of your hotel’s front desk. Once a travel agent places a booking, it can appear in your hotel’s calendar automatically, without absorbing the precious time of your own in-house bookings team.
If you take room bookings from a travel agent or intermediary booking service, they will expect to be paid a commission on those sales. The commission rate payable can be anywhere between 10% and 30%.
Before you buy a hotel, make sure you fully understand how much of the hotel’s income comes from travel agents and travel wholesalers. Commission-led room bookings can offer a valuable income stream, however the margin on each booking is often smaller, and it tends to take longer to get paid for rooms booked through the travel trade. You might need to ensure that your cash reserves are healthy enough to cover the hotel’s ongoing costs while you await payment on outstanding invoices, particularly in the first few months following your business purchase.
Nothing has transformed the hotels industry quite as much as the internet – guests can now voice their opinions of your business online on a variety of public forums without even leaving their room, and their opinions can have an immediate impact on future bookings. The term eWOM, or electronic Word-Of-Mouth, is a shorthand way of describing every hotel’s precious online reputation.
A good rating from a site like TripAdvisor can be tentatively considered a ‘business asset’, especially if the hotel is near the top of the list for its area, as the good reputation will drive bookings. It’s important to remember that ratings can go down as well as up, however; any new hotels opening in the area, or any improvement in competitor’s offerings, can affect your business’ position in these eWOM rankings.
Sites like TripAdvisor are meant to give tourists a chance to read first-hand feedback about hotels before they book their holiday, but they also offer unprecedented amounts of detailed reputational information for potential hotel purchasers. Before buying a hospitality business, you can now trawl through years of customer feedback about the hotel or B&B, get a sense of how the hotel performs at different times of the year, the kind of guest it attracts, what makes the hotel special and areas where it lets itself down.
Familiarisation trips, or “Fam Trips”, are where a hotel or guest house offers travel agents and other suppliers the chance to stay in their establishment for free (or at a significant trade discount). From the hotel owner’s perspective, the purpose of a fam trip is to give key individuals in the travel industry a sense of the quality of their accommodation and facilities. If organised properly, fam trips can result in an improvement in a hotel’s reputation, bookings and subsequent earnings.
Boutique hotel owners will often offer a smaller-scale fam trip, where local and national press are invited to stay in a hotel in exchange for a (hopefully) positive review. This kind of marketing strategy can be effective in cases where the hotel is genuinely offering a high-grade or transformed service, but similar to eWOM, fam trips can backfire if the hotel isn’t yet ready for thorough industry criticism.
To learn more about fam trips, it’s worth approaching your local regional tourism organisation, who may already organise a number of fam trips every year.
The term “Forward Bookings” refers to the value of letting rooms, events and functions that a hotel has already booked into the future. For instance, if a hotel is advertised as having “50% forward bookings for the next 6 months”, this means that half of the rooms are already booked and due to be occupied every night between today and 6 months from now.
Forward bookings are very helpful for new hotel owners. Once the buyer becomes the legal owner of the hotel, they usually need some time to learn the ropes – the ‘forward bookings’ figures allow them to work with a reasonable level of confidence that they’ll earn enough money to keep wages and bills paid while they get themselves up to speed.
Global Distribution Systems are networks that work with a CRS (Central Reservation System) to enable hoteliers to take bookings directly from travel agents without the involvement of their own bookings team.
The guest mix of a hotel is a demographic breakdown of the kind of guests that the hotel attracts. Each hotel will generate a fraction of its earnings from overnight business guests, couples escaping for a romantic mini-break, families staying for weeks at a time and so on. Depending on the guest mix, you’ll need to ensure that the hotel you plan on investing in has the right facilities and staff in place.
Guest mix is also important on a more personal level, particularly if you’re buying this business as part of a lifestyle change. You might dream of running a popular holiday hotel full of happy families, but if the hotel you’re looking at earns most of its money from midweek business customers, then you need to be realistic about whether you’ll be able to change this …and whether it’s the right business decision to do so.
When drawing up the sale agreement for a hospitality business, the buyer and the seller both need to decide what items will be included in the sale and what items will not. This list is known as the inventory.
A hotel’s inventory sheet can enable the new purchaser to save money, by allowing them to focus their spend on items that are of genuine value to them. For instance, if you are buying a 100-room hotel with monogrammed dressing gowns and you plan to change the name of the hotel, you might not be interested in retaining the gowns, but you might want the existing towels, bed sheets, table linen and any other unbranded items included in the sale. This can all be set out in the inventory.
The buyer of a small B&B or boutique guest house might not see the point in mentioning a few dressing gowns to save a little money, but inventory lists are just as important – if not more so – in this situation, as they can offer clarity on what needs to be repaired or replaced in the near future. The cost of buying new televisions, tea-and-coffee-making stations, plates or even hotel stationery can add up very quickly, and the inventory document gives you a clear picture of what’s present in the hotel, what needs fixing, and what needs to be replaced as soon as the new owner takes over.
The occupancy rate shows the percentage of rooms that are occupied over a given time period. The annual occupancy rate is a helpful figure, but it doesn’t tell the whole story; the occupancy rate in August, when schools are out and many hotels are fully booked, is usually much higher than the occupancy rate in February (traditionally a quieter month), for instance. As a rule of thumb you should find out the annual occupancy rate for the past three years, and then the average occupancy rate of each particular month – this will help you forecast your future earnings.
Overbookings happen when the hotel books more guests than it has rooms, on the assumption that some guests will cancel at the last minute. Depending on the cancellation policy of the hotel, overbooking can help you ensure that your hotel meets the highest possible occupancy levels, however it is not a practice that your guests will appreciate if they arrive after a long journey to discover that the room they booked is no longer available. In overbooking situations such as these, the overbooked hotel is obliged to arrange comparable accommodation nearby.
Depending on the size of the hotel you’re thinking of buying, overbookings may be a good indicator of demand in the local area. Ask the seller whether they ever overbook the hotel, or whether or not they get any business from local hotels in the area that do sometimes get caught out by overbooking.
Hotel rooms and common areas are in constant use by tired travellers in new surroundings, so wear and tear is something you’ll always need to consider when buying a hotel. It’s a fact of life that luggage will scrape against a wall now and again, champagne flutes will be broken during events, and items like taps and toilets will deteriorate over time.
A good housekeeping team can keep the place looking clean and well-maintained, but over time every hotel needs refurbishment. Interiors go in and out of fashion; sometimes refurbishment work is less about ‘repair’ of what’s there, and more about ‘rejuvenation’, in an effort to meet the changing tastes of your clientele.
Ask the current hotel owner what refurbishment work has taken place recently, and – as with any other property purchase – make sure that you get the opinion of a qualified surveyor. You need to err on the side of caution when it comes to refurbishment costs, and make sure that you will set aside sufficient cash to withstand any unavoidable refurbishment work.
RevPAR, or Revenue Per Available Room, tells you how much money the hotel makes on each letting room over a given time period. RevPAR is a very helpful benchmark when trying to decide about a hotel purchase; while goodwill, staff and location are all nuanced and subtle factors, that require a degree of intuition and personal judgement, the RevPAR figure is a solid, immovable value that you can rely upon when preparing your purchase offer.
The RevPAR is simply the ADR (Average Daily Rate) multiplied by the Occupancy Rate, so for instance if you were looking at a hotel with an ADR of £100, and the occupancy rate was 75%, then the RevPAR would be £100 x 0.75 = £75 . RevPAR could be measured on a daily, monthly, annual or seasonal basis using the same formula; it’s a helpful way to get a sense of how two or more hotels compare at varying times of the year.
RevPOR is similar to ADR, or Average Daily Rate. RevPOR can be a helpful number when you already know the number of rooms and the RevPAR; if a hotel has a high RevPOR but a low occupancy rate, then there may be an opportunity for the new owner to increase earnings by increasing the hotel or guest house’s occupancy rates.
Seasonality is the variation in earnings, bookings and occupancy rates experienced by a hospitality business at various times of the year. Every hotel experiences seasonality to some degree; busy and quiet periods in an average week, month or year will affect the business’ earnings and subsequent cash flow, so it’s important to have a solid understanding of this before you proceed with your purchase.
Whether it’s a one-star hostel or a five-star luxury resort, a hospitality business’ star rating is possibly the most recognisable marker of its quality and guest offering. While a hotel’s eWOM can change course in a matter of days, its star rating tends to remain unchanged for months or years at a time, and cannot be undermined by competitors or opportunists.
While in some countries the star rating mechanism can change depending on where the stars have come from, in the UK all official star ratings are awarded in accordance with the AA’s hotel star rating guidelines, visible at the link below…
You don’t need to hold five stars to run a successful hospitality business in the UK. In reality, the market for overnight accommodation is incredibly broad and nuanced, and successful businesses exist at all levels. You don’t need to expend all of your efforts on reaching for a star rating that doesn’t suit your property; if you and your staff can fulfil or exceed the expectations set out by the hotel’s star rating at the same time as maintaining a sensible profit margin, your business will stand the test of time.
It’s a sad fact of life that – regardless of whether you’re running a B&B or a large hotel – a small percentage of your guests will steal items from your hotel room during their stay. You probably already expect to replace pencils, shampoo, tea bags and other small in-room items on a daily basis, but have you considered the cost of replacing slippers, towels and hair dryers?
Quiz the current owner on what they usually expect to lose in terms of inventory every year, and what the average replacement costs are. While it may not be an immediate concern at the purchasing stage, it will soon become an issue you’ll need to think about once you’re running the business; it makes sense to understand the rate at which ‘big ticket’ items are stolen early on, so that you can build this theft rate figure into your business plan.
When buying a hotel, the utility costs are more important than they would be in less energy-intensive businesses. When setting out your operating costs, you will need to anticipate the price of ensuite bathrooms, laundry services, professional kitchens, lighting, heating, air conditioning and possibly a television and minibar in every room.
Ask the current owner for some recent utility bills, or ask to see where these costs are recorded in the accounts of the business; you might be able to trim some operating costs out of the business when you take it on, but your utility costs are unlikely to become much cheaper without investment in other areas such as insulation and/or equipment.
Do you know of any other hotel buyers terms that you wish you had known when you were starting out? Let us know in the comments below:
By Sam Haythornthwaite at DaltonsBusiness.com