Don’t Put Off Selling for Too Long

“The ideal moment to sell a hotel or gastronomy business is often a lot earlier than many businessmen / owners would like to think!”

Most hotel and gastronomy business owners initiate the selling process far too late – often to the detriment of their own family...

this is according to an article written by Dr. Jakob Edinger, a renowned tourism consultant for the leisure hotel industry, about Austria’s Alpine region – to a certain extent his conclusions are applicable to leisure hotels throughout Europe.

Selling hotels and gastronomy properties

Never in the post-war period have there been as many hotel and gastronomy properties for sale as there are currently. In many cases the lack of a successor forces families to sell – a decision that many families leave too late. They miss the ideal time to sell; a delay which can cost millions.

Hesitation is the wrong approach

Every company goes through a particular cycle of development in which a young founding family successfully nurtures an equally young company. This introductory period is followed by a sustained period of growth in which things start to look up. The founding family’s drive and enthusiasm forces the company onwards and upwards. Nevertheless, with time the company starts to mature, the guests start to get older and slowly but surely there are less and less of them. The founding family starts to lose strength and courage, they have less and less drive for necessary investments and changes – both financially and in terms of their personal role. Young, fresh blood would be the perfect solution, but there is often nobody suitable or willing to take over.

Consequently, the family may continue running the company for a number of years without any particular direction or dedication causing it to slip slowly into a period of decline. Thus reducing the potential proceeds of sale. The founding family, understandably attached to the business it has spent years developing, will spend years struggling to reach a decision: should we sell or lease it, or not? The family may go through a rollercoaster ride of periods of optimism and pessimism. Nothing improves and years of frustration can have negative effects on health and reduce life expectancy, with the price that can be obtained for the property decreasing all the time.

The years before an exit often fail to generate any profits – the (ever decreasing) hard-fought profits are often more than equalled by decreasing sales proceeds. After a 3-5 year period of decline a business that brought in €2 million five years ago may now only bring in €1.5 million - a loss of €100,000 or more a year, despite all the hard work.

When is the ideal time to sell?

This may not be an easy decision to make. If you are self-critical enough to consider such a decision then there are two factors which need to be considered:

• When will the business enjoy its highest turnover and profits?
  At what point do you think it will not be possible to improve on these levels. This is the moment at which it is normally possible to obtain the highest selling price - before profits start to decline.

• At what point has the business been milked dry?
  At what point is it not possible to increase profits without making substantial new investments or at what point are working conditions no longer sustainable? By this point it may only be possible to obtain a lower selling price but the owners will have had the chance to make the most of profits and save up in the years before their exit.

Entrepreneurial families will often try to redevelop their declining businesses with half-hearted investments – these late investments are often wasted millions as they will not be reflected in the selling price of a declining business.

Never risk being forced to sell

Some businesses may have had poor seasons in recent years and have particularly suffered from declining revenue per overnight stay. Despite low interest rates many families may find themselves in financial difficulties with overdraft facilities exhausted, banks and suppliers requesting payments, inland revenue and health insurance payments due and not enough left over to make repayment installments.

It is no use being in denial– insolvency or even a forced sale by auction could be the consequence. That is the worst case scenario which is to be avoided at all costs. It is preferable to proactively seek an agreement with the bank or creditors, especially if the family is looking for an exit from the business anyway. A “consensual private sale” agreed upon by both parties is usually the best solution for both family and creditors.

No bank likes to see somebody forced to sell at auction, on the contrary they will do almost anything to prevent it. Therefore if your business is at risk never delay, hesitate or put things off hoping things will get better – be honest with banks or creditors and try to arrange a timely reorganisation or exit with them.

How to find a buyer

The first option most people think of is to use a broker. This can, however, create significant problems – most people baulk at the prices demanded by some brokers, and many brokers demand an exclusive right to market your property, at least for a certain amount of time. If you want your property to be featured, marketed and sold professionally on the national or international market, then you need to call in one of the largest expert brokers for hotels and gastronomy real estate. Only we have the necessary equity, distribution network, contacts and connections, the necessary staff with foreign language skills such as Russian or Chinese, as well as the necessary know-how to present your business on the national and international market. Our hotel brokers know how to market and sell a property discreetly without disrupting day-to-day business.

Other methods are usually considerably more difficult – when placing an ad in the newspaper classifieds, a choice has to be made between disguising the identity of the property and openly disclosing the property’s true identity. Experience shows that the former usually results in very few or no responses at all, whereas the latter should be avoided, so as avoid making the business a subject of gossip and disrupting day-to-day business.

What to bear in mind

One of the biggest problems when trying to sell a property is finding the “right” asking price. Many people make the mistake of starting off with an unrealistic asking price. This results in an extended period of time in which nobody shows a real interest in the property, followed by a decision to substantially substantial drop the asking price being made under pressure. It is far more sensible to set a realistic price to start off with and offer some room for negotiation, so as to ensure a quick sale. Once a solvent buyer has been found, it is highly advisable to seek a tax advisor’s advice concerning possible tax issues surrounding the sale and qualified legal advice for legal issues. If possible have your own lawyer or notary draw up the sales contract and do not leave it to the other party. It will be money well spent. Your hotel broker at ASP Global Hotel Brokers will be able to advise you further.

Current situation:

• Most sales in the last 20 years were forced sales – it is only since 2010 that there have been more cases of people surrendering their business voluntarily
• Concentration of cases in older resorts: Bad Gastein, Velden, Seefeld, Zell am See, Garmisch, traditional bathing resorts, ...

Reasons:

• Health factors, stress, age
• No successor
• Necessary investments cannot be put off any longer
• No more access to credit

The most common mistakes made by people exiting a business:

• Constantly putting the decision off and waiting for years before acting
• Setting an “unrealistic” initial asking price
• Making legal or tax mistakes or being ill-prepared
• Going about it the wrong way and with not enough discretion
• Entering into poor contracts

What determines the value of an enterprise /hotel / hotel real estate / gastronomy property is the ability to make money (revenue and cash flow) with it in the future.

It is not the extent of existing assets (capital) and their replacement values which are relevant but solely the ability to make money with them in the future!!!


Leisure hotel industry – hotel property / gastronomy property valuation using coefficients

Hotel Category	Ratio to Turnover	Ratio to OR II*
3-star hotel	Turnover x coefficient 1,8 - 2,0	OR II x coefficient 8-10
3,5-star hotel	Turnover x coefficient 1,9 - 2,3	OR II x coefficient 8-10
4-star hotel	Turnover x coefficient 2,0 - 2,5	OR II x coefficient 8-10
4,5-star hotel	Turnover x coefficient 2,3 - 2,8	OR II x coefficient 10-13
5-star hotel	Turnover x coefficient 2,8 - 4,0	OR II x coefficient 12-16

*Operating result before tax, including allowance for depreciation

Comparative valuation methods for hotels and gastronomy establishments

Using data from previous sales of similar hotels in similar locations and the establishment’s capacity it is possible to provide a rough property valuation. Differences in location, condition, the standard of facilities, different functions and states of preservation mean that these are of course only very rough figures. It does not take other factors into consideration (seasonal hotels, city hotels, occupancy rates, prices) which will also affect the value of a property.

Hotel/gastronomy properties are nearly always sold for considerably less than the new construction price because they nearly always a personalised, specialised entity and are often visibly in need of repair and investments. Issues surrounding planning permission and other legal restrictions may also make it difficult or impossible to make changes to the purpose for which the property is used.

Comparative valuation methods – buying price per room to ascertain the value of a hotel property

Hotel Category	Buying Price per room dependent on condition *	New Construction Value *
3-star hotel	€ 30.000 to 60.000	€ 65.000 to 90.000
3,5-star hotel	€ 40.000 to 70.000	€ 75.000 to 120.000
4-star hotel	€ 60.000 to 80.000	€ 110.000 to 175.000
4,5-star hotel	€ 70.000 to 100.000	€ 125.000 to 180.000
5-star hotel	€ 150.000 to 250.000 or more	€ 200.000 to 300.000 or more

* Applicable in Austria, Germany, Switzerland, northern Italy (South Tyrol). Differing criteria and land and building prices mean that other countries and regions use different valuation approaches which the tourism experts at ASPI AG or the hotel brokers at ASP Global Hotel Brokers will be happy to explain to you in detail. ASP has this information readily available for over 150 European regions.

Average valuation method using the first two valuation methods income approach coefficients and comparativevaluation method –asset value

1 x asset value + 2 x net value ( turnover and OR II)
divided by 3

Hotel and gastronomy property sellers or buyers need to consider the following decisive elements:

• It is not the asset value nor how much has been invested in the last ten years that counts – what is important is what the hotel can generate in the future – it is the future profit prospects that are for sale!
• Does the business have a future? Does the location offer any opportunities? Can the business develop to an appropriate size? Is there enough land available? What potential for development is there?
• To find a buyer it is important to consider who might be suitable. Can any synergies be generated? Are there any other possible usages for the property?
• What would for example a construction company have to pay if it wanted to redevelop the hotel into retail space, offices or apartments? What is the actual land value when demolition costs are considered (the minimum value)?