Your business plan is a written document that you use to convey your intentions and guide the business. It is a road map and it is shared with your lenders, investors, and possibly your managers. You frame your business plan during the search for the right hotel investment. When you find the specific project, you update the business plan around that hotel and use it to firm-up commitments with lenders, investors, and your management team.
To develop a business plan, you start with an idea about why you want a hotel and where you want to take this project. The “why” is your investment goals. Clear goals are a basic part of your presentation to investors. The “where” or “what” frames your investment criteria. These enable brokers and others to show you appropriate opportunities. They also enable investors and lenders to decide if you will be offering an investment that also meets their criteria.
At the beginning of this process, you can’t know what you don’t know. It is reasonable to modify your goals and criteria as you understand the market better. Once you evaluate a few deals, your goals and criteria should firm-up. It’s fine to adapt your goals and criteria as you move along, but you should always have a vision to give you focus and help you keep on track. You can add clarity and detail to your business plan throughout the process of becoming an owner.
Investment goals
Why do you want to own a hotel? What makes a hotel a good investment for you? As you learn about hotel investments and the role of the owner, you will get clear about your purpose.
Your role: What part of this business venture is exciting for you? A hotel can be an actively managed investment in which you hire a general manager and spend some time on the business daily. It can also be an investment you oversee, for instance by supervising a management company that takes on the day-to-day business functions. A hotel can be a business you operate personally, effectively a job for yourself and a significant time investment. In this case, you can be a hotel employee and earn a paycheck in addition to your returns as an owner. Or it can be a passive investment in which you are not involved in the operation.
Cash flow: This is a business project, so money matters. A hotel can generate cash flow for you and your family. As the owner, you earn money from the profits. Like any business, it will have ups and downs. Some hotel investments have stabilized and are reasonably predictable in terms of profitably. However business investments are not as regular as a paycheck; as an investor you ride the ups and downs of the business. Some hotel investments will require ramp up periods when they do not produce cash flow. Some hotels are in markets that have a steady business flow from month to month. Others are in highly seasonal markets and make money some months but lose in others. Businesses carry risk and can lose money, particularly in the short-term. The investment you choose determines the stability and size of the cash flow you may receive.
Asset appreciation: If you are interested in a long-term investment, you may select a hotel that has strong potential appreciation. It may have lower or inconsistent cash flow. But it may be in a market with anticipated long–term growth that will pay off in the value of the hotel in the future. Of course, whether that payoff is available in 5 years or 15, if at all, carries risk. If your goal is long-term appreciation, you may not make money on your investment if you choose to sell early.
Your goals may include other motivators. Some hotel owners enjoy the idea of using the hotel in their role as a community leader or envision themselves as a hotelier host. Some are interested in employing their children and teaching them about business.
Investment carries risk and you may not attain your goals. But if you understand what you want, you are much more likely to succeed.
Investment criteria
Investment criteria are built to satisfy your investment goals. Criteria are specific so you can use them to assess an acquisition target.
Public: Some parameters are meant to disclose publicly to intermediaries (brokers, bankers, colleagues). Knowing that you are clear about your criteria, and what they are, will encourage people to show you opportunities. They build your deal flow.
Public criteria might include:
- Price range – dollars per room and/or total investment range
- Profitability – such as cash flowing upon purchase or turnaround opportunity
- Geography – how far from your home base you want to go
- Size – for instance, a range in number of rooms (100 to 150) or an investment value ($10 to $15 million complete – including purchase and renovation)
- Property type – full-service, select-service
- Brand – this might include specific brands or brand classes, time remaining on the franchise, renewal possibilities, conversion opportunities
- Condition – do you want to take over a producing asset in excellent condition or do you want a hotel that needs work (and gives you the upside of sweat equity)
Price range, geography and size may be the criteria needed to encourage deal flow. However, if you are only interested in very specific types of hotels, and are willing to wait until that asset is available, you might share additional public criteria.
Internal: You will also want parameters for internal review. These allow you to quickly determine if you want to pursue a particular acquisition. As you look at an assortment of hotel opportunities, you can imagine taking on projects that are impractical. Your internal investment criteria are the wall that enables you to maintain discipline. Internal investment criteria for a hotel deal might include:
- Minimum acceptable IRR
- Minimum acceptable rate opportunity – recognizing that this may change once the asset is under your management
- Barriers to entry – for instance, a downtown location may have lower risk of market and revenue dilution from new competitors because of a lack of undeveloped land; this is a barrier to entry
- Market mix & demand sources – the kind of business you want to run (corporate, extended-stay, luxury, economy, roadside, leisure destination…)
- Upside – are you looking for a business for which you can improve marketing and increase rate, a business in which you can reduce expenses, or a business where you want to keep current successful management in place
- Look and feel of the building – you should like the physical product that you own
Formulate the business plan
A business plan is a cohesive vision that you use to run your hotel company. While you will have more detailed plans as the project launches, this is your roadmap for success and plan for the hotel’s facilities, marketing, operation and financial performance. Financial institutions and investors look at your business plan to understand your business prospects before they invest. This is a persuasive document for lenders, investors, LLC members, franchise companies, management companies and key members of your hotel management team; its elements are:
- Executive summary: a picture of your hotel and your expectations for the business investment on the first page
- Project description: a high-level overview of your history, business legal structure, the hotel concept and facilities, key partners like your franchise company, unique selling points of the hotel, a summary of your financial plans and why you are excited about this project
- Hotel description: a more detailed description of the hotel and its facilities including pictures and/or renderings
- Market analysis: your explanation of the value of this opportunity through a summary of the demand generators and competitors including local industry statistics (STAR report), an assessment of advantages/disadvantages for your hotel and its primary competitors as well as projections of occupancy and average rate (KPIs)
- Operations plan: your plans for a manager or a management company; information about the franchise or brand or plan if your hotel will be independent (service standards, staffing, manuals, marketing plan, property management computer system, etc. may be available on request)
- Funding request: your ask and your explanation of why this is a good investment; this defines how much funding you are raising and when, project costs and estimated return on investment
- Financial plan: a financial forecast (five-year income and expense statement), historical data on the property if available, and projected KPIs like occupancy and average rate
- Appendix: supporting documents and detail to supplement the business plan such as pictures, detailed budgets, quotes for renovations, etc.
Depending on your specific project, and the requirements of your investors and lenders, you can add to the contents of your business plan.
