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Guide to Buying a Hotel in the United Kingdom

Profits of large, corporate hotels may be down but the cheaper end of the hotel market is flourishing. According to several specialist business brokers, there is a shortage of good quality, family run hotels and guest houses in parts of south east England where profits are higher. An owner could expect a turnover of between £50,000 and £100,000 with net profits as high as 50%.

With prices of small hotels and guest houses beginning to edge up, now could be the time to buy. There is growing demand from new-comers, typically in their thirties or forties, wanting a lifestyle change, or taking early retirement or redundancy from middle management careers, who are lookin to get into the hospitality industry.

One broker says "People are far more hard-headed about setting up a hotel business than used to be the case." "Anyone with equity of £100,000 or more in their home could buy a small hotel. They would probably need to take out a mortgage, but with the lowest interest rates for half a century, any reasonable operator should be able to make a decent profit."

There is general agreement that the hotel business is moving upmarket.. Cheap and cheerful hotels are being forced out by new budget hotels, such as Travel Lodges. There is a new breed of family run hotels and guesthouses, offering a higher standard of accommodation, food, services and access to leisure facilities, such as swimming pools and gyms. More British people are staying in hotels and are prepared to pay for better facilities. Rundown hotels will be converted back into housing.

In some holiday areas, there is an oversupply of accommodation and hotels are going cheap. You can pick up a huge, seaside guesthouse in Torbay, south Devon for the price of a pokey, city centre flat. A five bedroom three diamond hotel in Torquay, with owners' flat, within walking distance of the beach, can be had for £225,000; a nine bedroom hotel in Paignton for £280,000, through local estate agent Waycotts Commercial (01803 403070).

Waycotts is asking £365,000 for Knowle Court Hotel, a well appointed 10-bedroom Victorian hotel, between Babacombe and Torquay, with a self-contained flat, bar, dining room, sitting room, commercial kitchen, swimming pool and attractive gardens.

A similar house on the domestic property market might fetch double that price. Until recently, hotel property prices have maintained a close relationship with house prices, which have been moving up fast. The price of a hotel is also related to its profits, however, and since these have fallen in some seaside towns over the past two years, there is now a disparity between hotel and house prices.

Those who buy a hotel with a view to converting it back to a house are taking a gamble. Local authorities are notoriously reluctant to grant consent for the change of use in some areas. However, a hotel can be a family home as well as a business that has the added advantage of generating an income. The typical annual turnover of a small guesthouse or hotel in Torbay is £4,000 to £5,000 a bedroom, but most of the trade is during the summer, according to Waycotts.

Expect to make about £20,000 a year on a five-bedroom guesthouse, rising up to £130,000 on a 20-bedroom hotel including a bar/restaurant, with at least 50% going on running costs. You will pay business rates on anything bigger than four letting bedrooms, and have to comply with fire regulations. But you can offset mortgage repayments and a proportion of food and heating bills against tax.

Several banks and building societies will lend up to 75% of property value on hotels and guest houses at 1.5% to 2% over the Bank of England base rate, over five to twenty five years, including Bank of Scotland and Abbey National…Business. A very useful listing of business loan and commercial finance providers is available here.

The lender will expect to see a business plan. Ideally, you need to be able to show that the hotels existing profit will cover double the annual interest bill and provide a financial cushion in case trade drops or interest rates rise.

The hospitality business is one of the easiest to enter without formal qualifications. However qualifications are available through colleges and local training courses. Many of these can be acquired while running the business. Check the Hospitality Training Foundation website for details.

Tips on buying a hotel

  • Find out why the hotel is on the market, how long the present owner has been there and how much money has been spent on improvements in recent years.
  • A good location is essential. Check the type of custom the hotel attracts and try to determine what potential there might be for improving the business — a bar or restaurant, for example. If you're looking for a business that can operate year-round, a seaside hotel might not be the best option.
  • Ask the local authority if there are any plans in the pipeline that could affect your trade, for example, a new bypass or new local budget hotel. Or, any proposed commercial expansion that could boost your business.
  • Check out the competition and assess where you can offer an edge, for example, a higher standard of accommodation, food, services, or facilities.
  • Study the contract and the details of what is included in the sale and more, importantly, what is not. Furniture, fixtures and fittings for example, may not be.
  • Look at the accounts carefully. If the present owners are doing the work of seven people you will have to employ more staff and your costs will be higher than theirs.
  • Establish whether there is scope to extend the business; for example, outside catering for parties, weddings or conferences.
  • Don't overlook start-up costs. You may need to refurbish and equip the hotel, stock the bar and the restaurant. Suppliers want money upfront when you are a new customer.
  • Consider the cost of any necessary repairs and refurbishment which could be prohibitive in an area where trade is falling.
  • Do find out about business rates, fire regulations and the cost of insurance.
  • Don't buy a failing hotel and expect to convert it back to a house. You will need planning consent for the change of use, which the local authority may be unwilling to grant.
  • Get the former owners on your side; you will need their help and goodwill.

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