Types of Feasibility Studies
There are two main types of feasibility study – and many people confuse the two. Architects will undertake a development feasibility study to determine what is possible on a site. The results should not be confused with a market feasibility study that determines the financial viability of a scheme based on the market(s) for which it will cater.
The results of such a study should then be used to inform the architect’s work to ensure that project budgets are reasonable.

Feasibility Study Objectives
Market feasibility studies are required to:
• raise funding,
• satisfy grant awarding bodies, where appropriate, both financially and in terms of project outputs,
• satisfy the directors that a project is viable,
• determine the optimum facility mix to maximise revenue,
• ensure that all parties agree on the key elements of a project,
• form the basis for initial market and project planning,
• in some cases, provide the argument for business closure or change of use applications/ planning appeals,
• enable third parties to value operating contracts (for example, enable museums and other visitor attractions to vale catering contracts).

What Does the Study Identify?
Hotel, restaurant, leisure and retail market feasibility studies should be completed for any capital project. It is essential that they weigh up all of the market information available dispassionately and relate the findings in potential revenue estimates. These estimates should show the number of units (rooms, meals, memberships etc.) estimated to be sold and the expected tariffs to be achieved, resulting in estimates of revenue and project outputs.

Factors Considered
The information used to form the base for the above assumptions should include the:
• location and visibility of the proposed facilities in respect of the key sources of demand,
• existing and known future competitors, including possible substitutes,
• current and forecast levels of demand and market trends – taking into account known levels of current demand, latent demand, frustrated demand. This data may include information in the public domain, competitor research, market surveys and demographic analysis.
• impact of non-direct but influencing changes in the competitive environment.

Seasonality factors should also be taken into account showing when demand is likely to be highest and lowest – viability can be greatly different if a business opens at the end or start of a trading season.

End Products
Estimates of the project outputs will enable the study to identify the optimum facility mix and also determine the costs of the operation: costs of sales, staffing costs, marketing expenditure, maintenance, insurance etc.

The end results therefore should be statements of revenue and expenditure for the first five years of the project, clearly showing the links between the markets and the forecasts. From these statements will then follow balance sheet and cashflow forecasts, and estimates of project value upon completion.

Buying Your Hotel– The Biggest Decision You Will Make – Part 2

(Buying Your Hotel– The Biggest Decision You Will Make – Part 1 – Here)

If the market is so important, what do you need to know?

The following is a quick guide to help you channel your thoughts. Follow it and you will probably be joining the top 5% or so of savvy hotel buyers.

1. Find Out Which the Markets the hotel is Trading In.

A successful hotel needs more than one market and will preferably have at least three sources of revenue.

Markets can include:
• Corporate activity created by people visiting local companies, government offices, local authorities or other business organisations.
• Conference and meeting activity generated by commercial or association activity. This demand may be generated by local, regional, national or international organisations depending on the location of the hotel relative to roads, airports, ports and stations.
• Exhibition and conference demand resulting from local specialist venues.
• Transport related activity at local airports, ports and stations, or from main roads/ motorways.
• Leisure related activity resulting from individuals or groups visiting local attractions, sporting venues, retail areas, places of historic or natural interest, holiday resorts etc.
• Specialist short break activity created by local features including walking or rambling trails, cycling routes, climbing, fishing, horse racing and the myriad of other sports and pastimes that people enjoy,
• Educational visits to local schools and universities caused by education related visitors, parents, companies seeking to promote their employment prospects,
• Hospital visits, especially close to specialist hospitals that require patients to travel further from their homes which requires the relatives to travel long distances to be near them.
• Social demand created by special events such as wedding receptions and other social celebrations. This market need not be based purely on the local population, some hotels and leisure venues are able to draw wedding receptions in particular from considerable distances as a result of the excellence of their facilities and settings.

Ask the existing operator which markets he/ she is trading in and whether there are records showing how many rooms each market creates a year – and the associated room rates charged.

2. Ask for details of major clients and try to find out how much they pay for their accommodation and how much business they brought to the hotel. Are annual contracts in place and at what tariff? Talk to client representatives – are they happy with the facilities and service offered?

3. Request details of room occupancy during the last year, preferably by day of week, and week of year. Look for periods of quiet trading.

4. If the hotel is over dependent on one market or, even worse, one client, can other markets be attracted?

5. Ask for details of past marketing activity, including copies of marketing literature and details of how the hotel has been promoted. How extensive was the activity? Are there gaps you can exploit? Can you match the activity previously undertaken? What can you do better? If the hotel was previously owned by a group, can you replace the business currently placed by the group’s central reservation and marketing system?

6. Look at the local/ regional area and identify where there may additional trading opportunities. Please refer to the earlier list of possible markets for a guide. Also consider the needs of the local population. Are there trading opportunities being missed by others?

7. Once you have identified which are the main markets for your hotel, ask yourself whether the existing hotel is catering well for the needs of these specific visitors. For example are restaurants trading at the right time and offering the right menus, are the bedrooms fitted out appropriately, could other facilities be added that would make the hotel more attractive – such as drying areas for walkers, better facilities for business people wishing to work in their rooms etc. Once you have identified changes, cost what it will take to make the necessary changes and any additional operating costs that will be created as a result.

8. Visit competitors. Consider how competitive your potential new hotel is in terms of facilities, price, service, standards and location relative to the main markets you are seeking to cater for.

9. Consider how you can raise the average revenue per room, either by increasing occupancy, the average tariff paid by room or both.

10. Consider whether you can add additional facilities or services such as more meeting rooms, a leisure club, spa, additional bar restaurant, or re-style existing facilities to make them more attractive. If adding additional facilities will there be a knock-on to other areas of the business that may cause problems. For example additional rooms may put a strain on the reception, the restaurant or the car park. Can this be managed effectively?

11. Review the services available from hotel marketing consortiums and local marketing associations. Consider how they can help you increase revenue. Is the internet being used to best advantage?

Its Different for My Size of Hotel

The size of hotel you are buying does not make any difference to your approach when buying it. Whether you looking at a five bedroom property or a 600 room resort hotel, the questions are the same. Don’t believe that your business is any different because it is either small or large. The key issues remain exactly the same.

The objective of this short report is to bring these key issues into focus and to ask you to stop and consider some simple points just when you heart is screaming at you to buy. All purchases from choosing a toothpaste to buying an hotel, involve logic and emotion, whatever anyone may tell you. Yes investing in an hotel is swayed just as much by emotion as any other purchase you will make and, believe it not several £m investments deals were pushed through for emotional reasons – not logical ones!

So just for a moment, step back and consider the following statement because you will not hear it from the hotel sales agent:

The Purchase Trap

The number one trap is that people think they buying a building! They look at the rooms, the restaurant, the grounds, the car park and believe that that is what they are investing in.

And it isn’t.

If you think that private buyers are the only people who make this mistake – you would be wrong. Large companies make the same error too.

How to Avoid the Trap

When buying, don’t limit your focus to the building – the physical structure. Don’t believe that the building marks the extent of your purchase.

What you are really buying is a key to access the short stay accommodation market. That is it. Nothing more and nothing less.

If you don’t believe this, look at some of the older hotels in the country that are being changed into residential flats, or have become houses of multiple occupation, old people’s homes or just derelict because the market they once served has moved away.

This may sound dramatic, but the fact is that a hotel only remains a hotel whilst a market can be attracted to it. Once that’s no longer the case, it is just bricks arranged in a certain configuration looking for another purpose.

Understand that what you are buying is nothing more than a vehicle that will enable you to earn a future income stream by trading in selected markets. Of course it must meet certain building specifications: be sound, water-tight and offer a range of facilities etc. but the key factor is that the hotel must enable you to earn sufficient money from your future guests to enable you to cover the overheads, improve the facilities as the market demands, cover the funding requirement and make a profit.

The hotel is merely the funnel through which you will draw your revenue. It is the market that will provide the cash. So research the market the first and concentrate on that as much, if not more than, the building.

Remember that in very few cases is a hotel the primary reason why people choose to stay in it. For most buyers or guests, the hotel is a secondary purchase after they have chosen to visit an area or place. This is why recognising the strengths, weaknesses and opportunities created by the local market is so important.
Tips on how to do your own hotel feasibility study are to follow.

Six Simple ‘Rules of Thumb’ to Check the Value of Your Hotel Investment

(Buying Your Hotel– The Biggest Decision You Will Make – Part 1 – Here)

(Buying Your Hotel– The Biggest Decision You Will Make – Part 2 – Here)

Once you have a better understanding of the market, you should now focus on the building and ‘the deal’.

1. Base the value of the business on trading profits and not the number of rooms.
2. Separate the revenue created by letting rooms from food and beverage and the sale of other services. Room revenue is always the most profitable.

3. The purchase price should be between 4 and 8 times profit, except in exceptional circumstances,

4. A Simple Test of Value: Divide the revenue generated by the rooms only by the number of available letting rooms to calculate the average room rate. Then divide the purchase price by the number of rooms available. The purchase cost per room should be close to the average room rate multiplied by 1,000 – unless food and beverage revenues are substantial.

5. Purchase price should be 1.5 to 3 times annual revenue. The greater the share of catering revenue in the total revenue mix, the lower the multiple should be.

6. Total loans should be less than 70% of the purchase price – and preferably be much less!

7. If in doubt, appoint an external consultant to test the market viability and feasibility for you.

At this point I wish you every success with the transaction and future operation of your hotel!