Buying Sole Trading Hotel...possibly...subject to Due Diligence

[fuzzynavel]

I am looking at purchasing a hotel which is currently trading as a sole trading company. The building is part of the business and is listed on the balance sheet as an asset worth £700k

Numbers:
Business turnover £1.1m
Profit £100k
Property is on the balance sheet as £700k
Business is for sale including the property for £700k

Business has been for sale for 4 years and was valued at the end of covid when takings were decimated. It has since recovered to match previous highs and has room to grow further. I expect that if it was valued today then it would be substantially higher....Although....a business is only worth what someone will pay for it.

Owner has other interests and is desperate to retire.....there is a management team in place and she has no day to day involvement.

I know how to deal with Ltd companies....I have been working out of them for years but I have never been a Sole Trader. How do I even go about buying a Sole Trading business

Any thoughts appreciated.

 

[Mark T Jones]

This is one business where you can get a meaning valuation from the likes of Pinders.

the legalities should be fairly easilly navigated by your legal advisors

 

[fuzzynavel]

This is one business where you can get a meaning valuation from the likes of Pinders.

the legalities should be fairly easilly navigated by your legal advisors

Cheers, will look at Pinders.
Unfortunately, I have bought plenty of property of various types but I haven't purchased a business before...Lots to learn about TUPE etc and will need to use a new legal team as mine will do commercial BTL purchases but not proper commercial businesses.

 

[WaveJumper]

Are you sure it would command a greater valuation, the hotel game can be brutal there is very stiff competition especially with Air B&B, there's a reason its been for sale for over 4 years.. What makes you think you can increase the profit.

 

[Mark T Jones]

Lots to learn about TUPE etc and will need to use a new legal team as mine will do commercial BTL purchases but not proper commercial businesses.

And about hotels!

If the existing owner is competent, they won't be turning up & standing behind a counter, but they very much will be running the business - which takes skills and experience.

 

[Gyumri]

I am looking at purchasing a hotel which is currently trading as a sole trading company.

I have never been a Sole Trader. How do I even go about buying a Sole Trading business

Have you ever been a hotelier is surely the more pertinent question. But if you wish to try your hand at it then buying the property from the retiring owner is something you can do through your limited company. Or you buy it in your name but run it through the Ltd to protect yourself against claims from customers (who will be contracting with your Ltd as the hotel operator).

You should also get acquainted with the staff beforehand because if they are employees then they are entitled to kept their jobs.

 

[IanSuth]

Here is the checklist for TUPE from ACAS but it really is not something to wing it with - getting it wrong will cost you far more than you save so unless you are sure you really know what you are doing engage an HR professional to help you

Step 1: Check when the rules apply - TUPE: handling a transfer - Acas

How employers should handle a TUPE transfer, including advice on preparing for a transfer and steps to follow during and after a transfer.

www.acas.org.uk

 

[fuzzynavel]

Are you sure it would command a greater valuation, the hotel game can be brutal there is very stiff competition especially with Air B&B, there's a reason its been for sale for over 4 years.. What makes you think you can increase the profit.

There is a manager in place with some clear ideas on areas for investment that will increase revenue. The current owner has been trying to retire from the hotel after the death of her partner as it was their thing....it no longer interests her and she isn't involved day to day. She has other pursuits that take here abroad frequently and she spends little time at home.
I think there is a lot of hesitation in buying hospitality businesses after COVID....if there were any weaknesses then they no longer exist. The fact that this hotel is still open and has doubled top line revenue in 3 years is testament to the business robustness.
The local area is getting stronger in terms of industry. The hotel is already running at 70-95% occupancy most weeks throughout the year. The revenue growth won't come from the rooms unless we can buy adjoining properties and expand. The bar and restaurant are under-utilised...The function suite could do more. There is a fire escape issue that prevents the space being used more....this could be solved by talking with a neighbour and seeing if they would sell a bit of their garden that appears unused...
From my experience in BTL in the area, I know the key players who are running SA's....there is a symbiosis that can be had there...Even simple things such as offering discounts on food to people who are travelling could work out to be very profitable....A lot of people don't know that the restaurant and bar are available for walk ins....The manager couldn't explain why they hadn't advertised but the current owner doesn't allocate a marketing budget...she depends on word of mouth and is happy with the status quo.

hope this helps.

 

[fuzzynavel]

Are you sure it would command a greater valuation, the hotel game can be brutal there is very stiff competition especially with Air B&B, there's a reason its been for sale for over 4 years.. What makes you think you can increase the profit.

The valuation at the moment is purely based on the value of the bricks and mortar. The owner (as a Sole Trader) is the business and has no intrinsic value.
Once in a limited company the hotel and the business will be combined into a single profit making entity which will allow a new valuation. Obviously I will have the bricks and mortar valued before I go ahead as the refinance of the property will form part of my deal structure to get the owner a lump sum payout with the rest deferred.

 

[fuzzynavel]

And about hotels!

If the existing owner is competent, they won't be turning up & standing behind a counter, but they very much will be running the business - which takes skills and experience.

The owner rarely turns up at all and has no interest any more. That is why it is attractive. There is a management team in place who have multiple decades of experience.

 

[fuzzynavel]

Have you ever been a hotelier is surely the more pertinent question. But if you wish to try your hand at it then buying the property from the retiring owner is something you can do through your limited company. Or you buy it in your name but run it through the Ltd to protect yourself against claims from customers (who will be contracting with your Ltd as the hotel operator).

You should also get acquainted with the staff beforehand because if they are employees then they are entitled to kept their jobs.

I've not been a hotelier but there are people in the business who have the skills that I don't. I do not intend to make any changes to the way that the business is run and have made it clear to the manager that she is an integral part of the purchase. There will be no changes to staff from my side although, who knows what will happen when they find out that they have been sold. Deferring payments and keeping the current owner onboard to re-assure the staff for the first 6 months may be a good idea.

My plan is to shift the building and the business into a Ltd company inside my current holding structure. I already have "Investment", "Development" and "Consulting" businesses inside the holding structure and would be quite happy to add a Hotels group inside the holding structure too. There will be some more accounting overhead but having a hotel group structure will allow purchase of more businesses and sale of the group in the future.

 

[Mark T Jones]

I appreciate this is a forum thread, not the whole story, but I do hope you have done far more research. The idea that you buy a hotel & the management team will run it is frankly terrifying!

I say that as someone who has a lot of customers in the industry and who is active on several online hotel communities.

 

[fuzzynavel]

Here is the checklist for TUPE from ACAS but it really is not something to wing it with - getting it wrong will cost you far more than you save so unless you are sure you really know what you are doing engage an HR professional to help you

Thanks,
I had already determined that TUPE was likely to apply. I will engage appropriate experts as and when required.

 

[Socio South West]

The owner rarely turns up at all and has no interest any more. That is why it is attractive. There is a management team in place who have multiple decades of experience.

Hope your takeover is not like 'The Damned United' - the dramatised account of player power at Leeds Utd in the early 70s.

It sounds an exciting project, but the best answers for you are going to come from your professional advisors.

Best of luck!

 

[fuzzynavel]

I appreciate this is a forum thread, not the whole story, but I do hope you have done far more research. The idea that you buy a hotel & the management team will run it is frankly terrifying!

I say that as someone who has a lot of customers in the industry and who is active on several online hotel communities.

I have done nowhere near enough research yet.

I have my first sit down with the owner and their accountant this week.
We haven't even looked at an offer or development of Heads Of Terms yet. Still very early stages.

The management team are there for a reason. Why shouldn't they run it?
Obviously I don't know them yet and we have no relationship but, if there is one thing that I have learned in business it is, to bring in people that are better than you to do jobs that you don't want/need or have capacity to do.

Buying my first BTL was terrifying, buying and developing my first BRRR was terrifying, Buying and developing my first SAs was terrifying. Working with utility companies to install services to a derelict building before development was terrifying... Running my business as a Project Management consultant for multinational companies was terrifying at first....

We grow in life by doing difficult stuff. The growth will not come from playing life on easy mode.

 

[fuzzynavel]

Hope your takeover is not like 'The Damned United' - the dramatised account of player power at Leeds Utd in the early 70s.

It sounds an exciting project, but the best answers for you are going to come from your professional advisors.

Best of luck!

I was thinking more about the Glazers at the other United...Use a leveraged buy out and pass the debt on to the target, thereby freeing your capital to go again.

It will be exciting, especially when the bills from the professional advisors start coming in!

 

[KeithGreen]

Buying a sole trader business is sometimes referred to as a goodwill and asset sale/purchase. One significant difference is that you won't be taking on any business liabilities as they stay with the outgoing sole trader. For example if she took out a bounce back loan, that remains with her, as will any taxes accrued up to the sale completion date. She will have to prove title to the assets i.e. they are hers to sell, but some F,F & E may be on lease or HP etc.

A good commercial solicitor will provide all the necessary practical advice regarding TUPE, novation of any business contracts (if any), equipment leases or finance (if any) and so on. And will of course be able to draw up, or advise on, the necessary purchase contracts and associated documents.

If you are going to transfer the business into a NewCo you may want to consider (and take advice on) putting the freehold property into one limited company, and the business into another. That separates the valuable freehold from the ups and downs of the trading company.

 

[fuzzynavel]

Buying a sole trader business is sometimes referred to as a goodwill and asset sale/purchase. One significant difference is that you won't be taking on any business liabilities as they stay with the outgoing sole trader. For example if she took out a bounce back loan, that remains with her, as will any taxes accrued up to the sale completion date. She will have to prove title to the assets i.e. they are hers to sell, but some F,F & E may be on lease or HP etc.

A good commercial solicitor will provide all the necessary practical advice regarding TUPE, novation of any business contracts (if any), equipment leases or finance (if any) and so on. And will of course be able to draw up, or advise on, the necessary purchase contracts and associated documents.

If you are going to transfer the business into a NewCo you may want to consider (and take advice on) putting the freehold property into one limited company, and the business into another. That separates the valuable freehold from the ups and downs of the trading company.

Keith, thanks for the insightful reply.

Goodwill and Asset is the conclusion that I came to through my research too. I would have preferred and nice simple share transfer in a ltd company purchase but that is not available unless I convince her to incorporate before I purchase...seems like an unnecessary expense and waste of time.

I have a commercial solicitor in mind that has done some contract creation work for me in the past. I just want to get past the first vendor meeting and then look at engaging them once we are sure that we want to explore the process around moving forwards with the purchase.

In regard to the property itself I have 3 options.

1. Property and business under one Ltd Company
2. Property into my property investment SPV and Business into another VAT registered company which pays rent/lease to my investment company
3. Buy the building in my SSAS pension, have a separate VAT registered company to manage the business which pays rent/lease to my pension

I already have 17 properties in my investment SPV but they are all residential apart from 1 which is going through a commercial to resi conversion....I may need to set up a separate SPV to hold purely commercial properties to keep it cleaner...I'll take advice from my tax accountant.

thanks again

 

[The Resolver]

This is one business where you can get a meaning valuation from the likes of Pinders.

the legalities should be fairly easilly navigated by your legal advisors

Mark. their website suggests they are property valuers but not business valuers. Yse they value the business potential of property but not the business itself. The business potential of the bricks and mortar (location, size, layout etc) remains the same whether the business actually run from it is making or losing money. Maybe, if you know them to do that they have a separate site to the one I looked at. (I am always on the look out for good business valuers for my clients.)

 

[Mark T Jones]

Mark. their website suggests they are property valuers but not business valuers. Yse they value the business potential of property but not the business itself. The business potential of the bricks and mortar (location, size, layout etc) remains the same whether the business actually run from it is making or losing money. Maybe, if you know them to do that they have a separate site to the one I looked at. (I am always on the look out for good business valuers for my clients.)

My information may be out of date, but historically Pinders very much 'the' valuers for hospitality & care business.

I agree, that if not Pinders it is business rather than property valuers that they need.