Vision to Success: An Entrepreneur's Story
By W. Don Turner, Board Chair, California Lodging Industry Association
CLIA, The California Lodging Industry Association, is made up of many such entrepreneurs. Men and women that have started with a dream, something small, and turned it into a strong, independent, growing and thriving example of the "Great American Success Story"
Over the next few articles I will chronicle this process drawing from some of my own experiences as well as some of the stories and experiences that have been shared with me by great people that I have encountered in the Industry.
Before embarking on the purchasing or the building of a hotel with any chance of having it be successful, the architect of this dream must embark on a well-charted course that incorporates experience, expertise, the knowledge of others as well as sound business plan.
Expertise is acquired through experience. Many entrepreneurial hoteliers that are admired and respected by this author are people that have started in small family businesses or worked their way up through the ranks, learning the industry through their experiences as an employee. They begin their careers as owners after having had the invaluable benefit of learning the business from the ground up, having managed the front desk, changed the beds, supervised the maintenance, and worked with the community to build the image necessary to insure the hotel's success and position in the community.
It has been said about many great people in our industry and throughout the business world that it is not how smart you are or how much you know, but that the key to one's success is how you choose your counsel. The knowledge acquired by others is an indispensable tool. Each successful person that you encounter in our industry has information to share. That is why associating one self with an organization like CLIA can be such a vital asset. The opportunity to discuss your plans and the challenges that you are facing with a team of experienced, talented professionals can be indispensable.
The exercise of developing an effective business plan is crucial to the process of buying or building a hotel. A business plan, in effect, becomes the blue print for the project. It forces the entrepreneur to go through every aspect of the project step-by-step examining all of its phases and allowing for each contingency that may arise. A good business plan addresses acquisition costs, pre-opening costs, general and administrative costs as well as operational budgets and costs. In addition, it incorporates studies on staffing requirements, product analysis, market analysis and a strategic marketing plan under which the property will be presented to the community. It will have schedules for use of funds, capital requirements and repayment of borrowed funds.
Most enter the world of hotel ownership by way of purchasing their initial property with a hope and a promise, supported by experience and a sound business plan as well as capital that is saved, begged, borrowed and leveraged in any reasonable way possible.
Times have changed dramatically in the past few decades. The capital necessary to buy or build a property has increased exponentially with those times. At the same time, traditional lenders have refined their lending criteria and developed a significantly stiffer set of standards by which they make their loan decisions. In this first article it would seem appropriate to examine some of those means of capital acquisition.
Often times the capital demands of a new project will require the infusion of capital from a non-conventional source like a limited partner. This process is one that needs to be considered very carefully. Partners are wonderful allies when you are taking their money, but can be huge considerations when you are operating your business in challenging times, expanding your business or, in the end, selling it. All aspects of this relationship must be addressed and documented in minute detail. Matters like buying out or buying down the partner, providing him with a return on his investment and his involvement in your operation are essential concerns.
Regardless of whether your venture is a solo venture or one that includes investors and partners, conventional financing, no doubt, are an integral part of your capital acquisition process. In decades past, it was often possible to go to a local banker and borrow the capital necessary to open a hotel or a restaurant by simply explaining your intentions to that banker and sharing a creative concept. There is a story of a young man going to his first banker looking for money to open his first restaurant and having the banker's only criticism being that the young man was wearing a pair of desert boots with his suit. (They were his only shoes at the time.) We got the loan and in its first year of business the restaurant earned gross revenues in excess of $500,000. The year was 1969 and the total capital investment including land and building was under $40,000.
Bankers today are much more sophisticated and expect the people to whom they lend money to be as sophisticated as they are. They are required to protect loan portfolios from the event of every possible contingency. That means that the properties that they lend on must have value well in excess of the levels at which they lend. Borrowers are expected to guarantee the loans that they apply for with equity in other assets and to support their loan applications with very detailed business plans, operating projections, use of capital information and operating resumes strong enough to convince the lenders that their project will be successful.
Many lenders these days will require a borrower to "flag" their property, by becoming a member of a franchise association. Bringing in the successful expertise and governing body of a franchise association that has a strong track record in the industry can go a long way towards making a lender feel more comfortable with their loan. The process of qualifying for a franchise requires the prospective operator to perform appropriate due diligence sufficient to reduce the chances of failure. Furthermore, the franchisor, in many cases, will provide operating systems, direction and ongoing supervision once the property is open to insure both the franchisee and the franchisor's long term success.
In addition to conventional financing through the local bank, the government has established programs to assist the entrepreneur with his first project as well as future projects. These programs are offered by the Small Business Administration, SAFE BIDCO (in California) and a number of programs directed toward assisting special groups including minorities and others in the acquisition of funds.
Many of these funding programs are designed with the entrepreneur in mind. Although they require an operating history on the principal as well as an operating history on the property, if it is an acquisition, these programs allow for some significant of flexibility in the operating plan. They provide for the proposed project to deviate from its past operating history in both concept and projections. This provides the developer of the project to truly insert his own vision of what the property will be in the future and build his business plan around that vision. Most of these programs provide guarantees to the banks backing the project allowing the lending business to stay in the community. Bankers feel far more secure with the loans that they make to local business people when they have a federal or state guarantee supporting the loan. These ventures build the local economy by way of providing employment, developing a tax basis and increasing the value of their property and the community as a whole.
In my next articles I will talk about finding the right location, acquiring the property, upgrading the property and turning it from a sow's ear to a charming boutique property that is the rage of the community. (And your banker's favorite story).
Don Turner has founded or co-founded restaurant companies in both Northern and Southern California, owns and operates Jorad & Company, a Napa based consulting firm that specializes in operational and financial consulting for businesses offers accounting services and has long term successes in both start up and turnaround endeavors. He owns the Golden Bear Inn in Berkeley, California and is the current Chair for CLIA, the California Lodging Industry Association. He is a past director of the California Restaurant Association and serves on a number of private boards. Mr. Turner can be contacted at 916-925-2915 or firstname.lastname@example.org Extended Bio...
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