Guide to Buying and Operating a Guest House in South Africa (Part 3)

So You Are Serious!

5. The Skills You Need - You're a partnership now!

You don't necessarily have to tick all of what follows. But you do need most of them. The skill sets you don't have you're going to have to outsource - and that can be rather expensive.

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Brian says..." It's a couple thing. It would be a rare individual who had the diversity of skill sets needed to do this. Couples can cover more ground between them. In a "full service" situation, you're running 3 entire businesses - bar, restaurant and hotel. You have to handle, between you, all marketing, product, process, maintenance, labour, finance and technology issues. And a lot of the skill sets you need to run a B & B are girl things.

So What Are The Skills?

5.1 People Skills - How Easily Do You Establish Rapport?

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Janette says..."Real experience in a front-line, customer-facing role is invaluable. If you're trying to run a "full service" operation, you're meeting, and entertaining, new people on an almost continuous basis. It can be very demanding when you're busy. But it's also very satisfying."

5.2 Technology Skills - Are You Internet Capable?

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Brian says... "You're going to be spending 4 hours a day behind your computer. Responding to enquiries that come in and creating new content to keep Google interested and preserve your rankings on page 1, 2 or 3 for your keyword search terms."

5.3 Maintenance Skills - Are You DIY Handy?

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Brian says..."I'm practically helpless. So we have to outsource. And it costs a bomb."

5.4 Culinary Skills - Are You a Dab Hand in the Kitchen?

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Janette says..."Food matters. A lot. It doesn't have to be "chef-y" but it's got to be quality ingredients, thoughtfully prepared."

5.5 Managerial / Process Skills - Born Under Virgo?

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Janette says..."Some things have to go like clockwork. Room strips and cleans, breakfast, dinner preparation, plating-up and serving. You're relying on unskilled and untrained people who don't really relate to your need to have things done exactly the same way, time after time after time."

6. Financial Due Diligence - Don't get ripped off.

You've found a place you think you might like to buy? The business is held inside a Close Corporation or something similar and they've even got audited financial statements. Looks kosher.

Be Wary.

Why?

Let's look at the income statement first. These kinds of businesses generate quite a high percentage of their takings in cash. Personal expenses are going to have been written off against the business. So the income line is probably understated and the expense line is probably overstated. But by how much? You're never going to know.

So treat the financial statements (audited or otherwise) with circumspection - at best they're a guide, at worst misleading. You have to get a handle on those enquiries. How often is the phone ringing? How many e-mails are coming in a day? It's the only real indicator of financial viability.

Now the balance sheet. The only bit that matters (generally) is the assets and the creditors line (make sure that the sale contract indemnifies you against undisclosed creditors). Back to assets. Asset registers are never right, even in the biggest corporates, with huge resources. In a small business, it's likely to be a lot less right. Whatever you're offered that purports to be an asset register, there is no way around the need for you to personally do a complete inventory. If you don't the previous owner will simply take whatever's not listed.

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Brian says..."We relied on the assets as reported in the AUDITED balance sheet! The new or new-ish linen disappeared. So did the lawn mowers and the weed-eaters. And a rare tree orchid. And God knows what else."

Next the Close Corporation or whatever structure the business is held in. Dump it. You heard me. Dump it. Buy the assets out of the business. Don't buy the structure. Undisclosed creditors and the plethora of opportunities for creative tax planning make buying a CC or whatever a risky proposition. The last thing you want is a VAT Inspector knocking on the door wanting to peruse the last 5 years' records and holding you accountable for anything he doesn't like. Ditto on the income tax side.

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Janette says..."We did it right here. Just as well. Five VAT inspectors arrived unannounced two weeks after we took over."

You have to immunize yourself against any possible previous malfeasance.

OK. Now what?

You need 3 things:

* The asset register spoken of earlier. Even if you have to create it and you're doing it from the point of view of developing a list of the things you want to buy. Negotiate any exclusions.

* You need to estimate the expense line. Be conservative. A good "estimator" is the wages bill. Multiply that by the number of rooms the place has.

* You need to get a handle on the number of enquiries that are coming in - either e-mails or phone calls. How many a month? How many a year? Is it seasonal?And you want to see those e-mails so as you can do a random check to verify that those enquiries were authentic.

Now be conservative. Assume that enquiries will convert into confirmed bookings 30% of the time. (You should do better than this. After all, if he or she is taking the trouble to phone or fill in the web site form, he or she is already half sold.) Now, given that the industry average booking is a couple on a 2 night stay, work out what the average value of a confirmed booking is going to be and you've got a good projection of turnover.

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Brian says..."E.G. If you average 120 enquiries per month, a 30% conversion rate will generate 36 confirmed bookings. If your per person per night sharing D, B & B rate is [say] R750, a single booking is worth R3000 and your average monthly income will be R108000. Plus bar sales."

Does it make financial sense?

Is the turnover covering the expense line by enough to service any debt you might be thinking of taking on. And to fund those improvements that you just know you want to do.

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Brian says..."And if the web site has ‘value', be sure to secure all rights to it. It's the difference between making a bit of money and going broke. It's THAT important."