Developing A Small Tourist Business

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Target Audience - A buyer of a small family run tourist business who has no previous experience and wishes to develop the business.

Developing A Small Hotel, Bed and Breakfast Or Campsite Business

Introduction

You may be able to find various articles of this nature online written by business transfer agents and other non-qualified people who have never run a tourist business but write articles loaded with keywords to try and attract Google traffic to their website. So before we get started let me lay down my qualifications - together with my wife I have owned and run a successful mountain based hotel catering for 40 guests with evening meals and we currently own and run a campsite. What you read here is based on experience not conjecture.

We have no experience of running large hotels catering for hundreds of guests but thats not the type of tourist business we advertise on this website.

Investment

This is a big topic which is pretty much the backbone of the rest of this document. The first concept I would like to get across is the idea of organic growth, by this I mean that development is funded from the revenue of the business, the alternative is that you use your own money or a bank loan to fund development. If you have no experience then the first style of investment is likely to be the safest.

Organic Growth means that you only invest money that you have already made so you probably dont invest much money in the first year because you are still waiting for your end of year results to see how much revenue and how much profit you made before deciding how much to invest. There are many, many reasons why this approach will be preferable for most inexperienced people.

Lack of knowledge where the investment is required. Since I run BuyMyDreamHotel.com I get to see a lot of questions that potential buyers ask of sellers and I get to see sensible questions but I also get to see a lot of naive questions - the same kind of naive questions I also asked when buying our hotel. Lets assume that the basic business is sound, that all buildings and accomodations are of reasonable and acceptable quality and there is nothing urgent that needs fixing. Under these conditions the advice is do not invest heavily in your first year. You dont understand your customers yet and you dont understand your business yet, you have yet to see end of year accounts and you probably dont know what the final figures will look like, you may have not accurately estimated taxes and outgoings and if you have emigrated you can count on some taxes and fees that no-one told you about.
The magic statement here is so important I am going to repeat it - 'You dont understand your customers yet' - to invest wisely in anything other than basic maintenance you need to understand your customer and you will only aquire that knowledge by running the business and having close customer contact. You will of course encounter a variety of people so we cannot pidgeon-hole people but there are trends, let me illustrate by means of personal experience. Before we bought a mountain based hotel we also looked at a hotel in a health spa town - careful research showed that a lot of the tourists coming to the health spa town were elderly and seeking remedies for ailments, they wanted a lot of non-strenuous daytime activities - somewhere to sit, chat and be served coffee and cakes - by contrast the type of tourist coming up into the mountains was fit and healthy and certainly did not want to hang around the hotel during the day. Guess which business would have benefitted from investment in a nice day room with services?.
The thing I like most about organic investment is that to some extent its safe - you dont spend money you havent made, you get to see the end of year results, take out your wages and discuss tax breaks with your accountant before deciding what to do with the money that remains.

Injected Growth means that you put (or inject) your own money or the banks money into funding improvements which you believe will eventually repay your investment. For the inexperienced this is a very risky proposition and is not recommended unless you believe that the lack of investment is damaging your business. If the roof leaks then you have to fix it.

Example - a campsite, until you understand whether people come to you to relax or to engage in activities you will not know whether its better to invest in some nice outdoor benches and parasols or to invest in a crazy golf course - the easiest way to find out is to observe and ask although you need to be more subtle than asking for wish list because of course many people wish for everything.
Even if you understand your customers needs you may still not know whether the investment will actually pay off - some investments deliver intangibles, in otherwords the crazy golf may not pay for itself in ten years based on the fee charged to play but may pay off if you take into account the number of guests who started coming because you have more activities to engage in.

Maintance - maintenance is not investment, by investment we mean money set aside for improvements, maintenance is merely keeping the 'status quo', do not confuse these two things, be clear what activities are investments and what activities are maintenance, muddled thinking here is a sure route to muddled financial planning which is unlikely to help your business. In general maintenance is unavoidable unless you are downgrading (perhaps a deliberate policy to become 2 star instead of 3 star) but maintenance costs can sometimes be deferred (hopefully with an accurately predicted and accepted negative consequence) perhaps until the next financial year and maintenance costs can be reduced, DIY or shopping around.

Complex Investments - here I refer to serious investments that are complex, have hidden 'gotchas' and generally should be deferred until you really do understand your business and your customer. These really can be great investments but strictly for the experienced, wait until you are sure you know what you are doing before getting involved in these.

Swimming Pool - Unless believe your business will crumble in the first year without one I would advise that you hold off until you have learnt the ropes. In many countries its not the same as installing a domestic swimming pool - rules and regulations often exceed domestic requirements, you may be required to complete a lifesavers course and some countries demand that the lifesaver is present when the pool is in use. Of course if the business already has a swimming pool then dont just take the sellers word for it regarding your legal duties and obligations. I have known parents of young children to cite lack of a swimming pool as a bonus - they felt that the children were safe to roam free as long as there was no open water.
Bar - Can be a great investment but can also be a terrible drain on resources - what opening hours do you plan? Whats the cost of hiring someone to man the bar or do you intend to do it? Issues of licensing. A bar can change your clientelle profile, families may be displaced over time by young revellers, although you do have some control over the type of client you attract it is often the facilities that you offer that offer some degree of control.
Food - If you are buying a hotel then this is already a core activity for you - however if you run a campsite or campground then this is not necessarily core and some of the comments made for 'bar' apply here as well. Be aware that you may need to complete professional food handling courses even to handle and store simple food types and you may also be required to set aside a room for professional grade refridgeration or freezers with all kinds of regulations and inspections. The classic mis-conception is to assume that very modest and simple food services such as snacks can be served out of a set up based on domestic equipment and experiences.

Dangerous Thoughts

'I understand the idea of organic investment but I will be waiting for ages for the business to make enough to be able to invest in XYZ'. Unless you are an expert and know exactly what your vision is and you are informed by experience rather than conjecture then STOP and think very carefully about what you just said? Whats your confidence level that the investments are not only going to pay for themselves but move the business onto a new level?
'The business as it stands will not support me but I believe investment will produce something that will' - again if you are not experienced then STOP and think - I would recommend you base your decisions on the current performance of the business and make sure that there are no impediments to you achieving the same performance. This is why an established campsite is not usually valued on the land or the replacement cost of infrastructure but instead on the revenue - this is what you are paying for, a re-assurance (but not a guarantee) of a certain revenue when you take over. An experienced campsite owner may choose to start a new campsite business from scratch, buying land, building toilets, getting permissions and licenses and so on, the result will invariably be cheaper than buying an existing business but at the cost of being non-operative at the start ( delay before revenue ), increased risks and increased headaches - starting a campsite from scratch with no prior experience is something that many people talk about but very few inexperienced folks pull it off successfully as they simply lack the indepth knowledge and 'feel' that you can only get from owning and running a campsite.
'The only reason this business is underperforming is lack of investment and vision'. Perhaps the existing owner has already had the same ideas as you, maybe some of them have already been tried and did not work out. Of course an underperforming business might be a bargain purchase for a talented buyer who can accurately spot whats wrong and what needs improving, its a matter of risk management and a realistic assesment of your own abilities and your confidence in your judgement of the current situation and the associated reasons.

Resale Value

Do not enter into any business unless you know your exit strategy - life changes, people change, you plan your entry so you also need to plan ahead and understand your exit strategy. You may plan never to leave the business but you should still have a clear view of what would happen if you did.
In most countries the value of a tourist business is mostly dependent on the last three or four years revenue or turnover. In some cases its literally just a multiplier, say five times revenue with some adjustments for location etc. Of course the buyer may appreciate that your campground has a wonderful house for the owner to live in but this may only effect the "sell-ability" of the campsite when offered at market value - the house might not affect the market value of the campsite as much as you think - it will vary from country to country but dont assume that just because you invested 50,000 into the business that it is worth 50,000 more, it may not be worth a penny more.
If you have understood and accepted the first two points then this, the third you already know - be careful of any investment that will not pay for itself in a timeframe that represents the minimal conceivable period of time that you will hold the business. There are many bargains out there, cases of tourist businesses suffering from a case of over investment where the current owner has not and will not recoup his investment unless of course he manages to persuade a buyer to pay above market rates. Remember that in most cases value is a function of revenue not investment so it follows that investment that has not yielded sufficient revenue increase by the time of sale is probably a loss. The current owner is aiming to recoup his investment by the increased revenue that he benefitted from and an increase in the sale value of the business on account of the improved revenue.
Your business is not worth what you think its worth - its worth what the market thinks its worth and the market doesnt care what you think.

Occupancy, Capacity and Seasonality - development investment is intended to increase revenue. Tourist businesses such as hotels and campgrounds have finite capacities, a hotel has rooms and a campsite has pitches so the question is where is this extra revenue going to come from? Having a clear view on this is essential

Added Value - Your capacity is not going to increase but you can charge more or charge for additional items as a result of your investments. Market Research: Will the market support it? Does the market see things the way you see them?
Increased Occupancy - outside of the high season many successful businesses have low occupancy. If the business has low occupancy in high season then something is wrong so lets assume that high season occupancy is already fully developed. Some investments are intended to increase occupancy in low/mid season. Market Research: Why dont more people come in low/mid season (limited time off work? limited cash? other things to do? weather?) and will the investment really bring more low season trade?
Increased Capacity - expansion by another name, so a hotel gets more rooms and campsite gets more pitches. Market Research: Can you fill the extra spaces and if so then will the additional capacity be used in high, mid or low season? Some businesses will not show a marked improvement due to increased capacity except in high season. In general most tourist businesses suffer the same problem, they make 80% of their revenue in 30% of the year - often increased capacity will only count in the high demands of high season. To turn it another way - if its low-season and you look out on your campsite and see 20% occupancy then what makes you think another 30 pitches is going to change anything? Not all tourist businesses can expand, its a very complex relationship that is determined by location and market sector but some small business just refuse to expand - it may be a successful five room B&B, it may continue to function very well as a five room B&B but it will never become a successful ten room B&B. Just like some thin people will never get fat however much they eat so it can be with a tourist business, it may simply have a natural size that has already been achieved.

Emotional Investments - people running small tourist businesses are often the types of people who naturally like to see other people having a good time and enjoy looking after other people. These are very good qualities, indeed I would say they are requirements, however they can lead to what I would call emotional investments, I will try and illustrate what I mean by this by examples...

'Wouldn't it be nice if the children had a small playground to play in?'
'Wouldn't the guest lounge look great with that expensive designer furniture we saw the other day?'
'I know the cheaper coffee maker makes great coffee but that big stainless steel designer look one that costs ten times more would just look so much better.'

Now each of these items may or may not be a great investment, what I am trying to get at here is a kind of 'window shopping' mentality where new owners get carried away with investments where the prime motive is an emotional response rather than a cool calculated business decision. Are you really going to sell enough coffee to justify the expensive machine over the standard one? Does the expensive machine actually produce better tasting coffee? Its great that you care for your customer but be aware that the most common 'first year fault' is over-investment in frivalities, often at the cost of less exciting but more necessary investment in the core basics. Sometimes you will want to invest in something that will never pay back just because you care but make sure you understand when you are doing this, be concious of it and ensure the investment is one you can afford to write off.

Intangibles the payback from some investments may be very hard to see but it may be significant and worthwhile doing. These difficult beasties are intangible investments because you cannot prove on paper that the investment really did pay off but somehow you know deep in your gut it did.

An example...A campsite owner buys over $1500 worth of flowers every year to plant in his campsite, visitors tell him that it makes a very big difference to them. The campsite owner loves gardening and believes in his gut that the investment is paid back several fold but he cannot prove it. Customers return for a whole variety of reasons and the flowers may play a part but its intangible - you cannot put a figure on any single enhancement to the campsite, only the combined total effect shows in the end of year figures. Its a matter of experience, feedback, knowing your customer and intangible gut feelings.

The recommendation I would make with intangibles is that they may be very good investments but be aware of when you are making an intangible investment and be careful to keep the amounts involved very very modest. Of course an intangible investment that is really a fantastic idea may stop being intangible after a while, the positive feedback may be so overwhelming that you feel the term 'intangible' is no longer applicable and maybe you can start to put a figure on the return even if its an estimate.

Conclusion A lot of the advice on development of a small tourist business boils down to the following points. Its still always going to be your judgement that counts but organising your thoughts and your value judgements can help make matters clearer.

Understand your business
Understand your customer - this is really a repeat of the first statement
Classify the investment you are proposing, is it an intangible, is it to be organic or an injection? Just simply following the mental discipline of analysing your plans this way can help push back the fog of uncertainty and give you a crystal clear view of your plans.
Market research - dont buy a crazy golf course for your campsite until you have seen how popular or unpopular it is on neighbouring campsites.
Understand the maintenance, cost and workload that the investment brings along - for instance in some countries a swimming pool comes with obligation to supply a lifeguard - wages?
How long until the investment pays off? Is it the best investment you could make? How long do you intend to keep the business and how will the investment affect resale value?
What is the cost of not investing? Will your business start to decline if you do not make the investment?

Please note: This document is a work in progress, we will add to it from time to time so please return again. Also it will not be a complete list, what we hope to achieve here is to help others start asking themselves the right questions.

All information is offered in good faith but no responsibility is accepted for the accuracy of information presented here or any situation or eventuality arising from its use. All suggestions and recommendations are no more than that and should not be considered an alternative to professional financial and legal advice.