The advantage of buying a going concern is that you avoid the legislative, administrative and operational hassles of starting up a new establishment. If you buy an operating hospitality establishment, your target market is identified, you will have the appropriate town planning departures or rezonings in place, you should have the right linen, staff, suppliers, furniture and advance bookings.

The disadvantage is that you are buying someone else’s business. If the business has been run well, this will in fact be an advantage. If, however, the business has not been run well, you may end up paying a lot of money to take over some else’s mess.

When buying an existing hospitality establishment, you are buying a business. There is a danger that a prospective establishment owner may not investigate a potential purchase beyond the building itself. In reality the buildings form only a part of the picture. A prospective purchaser needs to complete a thorough investigation into the physical and financial status of an existing establishment before deciding to proceed with the purchase. The seller needs to be able to provide large amounts of confidential information upfront to satisfy the prospective purchaser’s information requirements and illustrate transparency and professionalism.

The sale price of a well-run establishment will reflect the inherent residential value of the property as well as the value of the operational business. In smaller establishments, the process of arriving at an asking price will depend on market demand, market supply and the urgency of the owner’s need to sell.

A hospitality establishment is a more valuable asset than a normal residential property, due to the fact that the purchase of the property is part of a business. On the other hand, potential buyers specifically looking to buy an existing small hospitality business may be few and far between, therefore the price may have to come down in order to attract potential purchasers in this market segment.

The value of the operational business will be established by reference to the accounts, assets and bookings, but buyers will also look at your existing income projections.

It is important to bear in mind that business valuations are opinions, they are not set in stone. Specialist estate agents, business brokers and accountants will tell you what they think the business is worth according the books of account, but ultimately the sale happens when the minds of a willing buyer and willing seller meet on price and the detailed issues covered in the sale of business agreement.

Apart from inspecting the establishment’s financial accounts and booking information, a buyer needs to be looking at the market in the location, hospitality trends in the area and the reasons for sale.

There is almost always a gap between the sale price asked and the price that can be justified on the information available. Goodwill is taken into account but is very hard to quantify exactly, so this aspect often becomes a point of negotiation.

It can be very hard to remain business-minded with these sorts of opportunities; a purchaser may fall in love with the area, the house and the idea of being a host. Don't let those views cloud what needs to be a carefully considered business proposition. If the figures don't support the purchase price, move on to the next option.

Corine van Dyk is the course convener of the University of Cape Town’s 10 week distance learning Certificate Course in Guest House Management, designed for both prospective and established guest house managers.

Click here to stand a chance of winning this course to value of R5130.

For more information please visit www.getsmarter.co.za or contact Deborah on (021) 683 3633 or via email on deborah@getsmarter.co.za.

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