The Critical Role of a Business Plan in Attracting Funding
Many characteristics of successful investors may be generalized. When it comes to putting up a transaction, vision stands out as the most obvious and crucial of these attributes. An investor's vision can be captured in a business plan. This document serves to synchronize efforts and provide a baseline for the duration of the investment process.
Investors have varying perspectives on corporate strategy. Some follow a rigorous procedure that involves extensive evaluation and calls for piles of supporting evidence. For other investors, a basic paper outlining the current status of the property, the desired future state, and the steps necessary to get there is sufficient.
A business strategy, no matter how you slice it, is invaluable for getting the property from here to there.
Value of Preparation
Everyone has a unique perspective on the value of planning. The vast majority of us simply put together crude blueprints that hit the high points, and that's all. However, there is a wide variety of attitudes about planning, from those who despise it to others who get obsessed with it. The sweet spot is somewhere in the center, when planning doesn't eat up too much time but still improves the outcome of the actual work. Finding that sweet spot might be difficult.
The value you derive from drafting a plan depends on its purpose, which in turn determines its substance, depth, breadth, and spirit.
If you create a business strategy with your target market in mind, you'll be more effective. Its worth extends beyond being a repository of your own thoughts and notes to a map of the investing lifetime.
Key Points Need to Be Made Clear
The question, "What do we do with it?" should be at the center of every strategy for investing in real estate.
Operating pro formas, rehabilitation scope and budget, and investment returns are worthless without a precise explanation of the existing state of the property and planned future state. This is the catalyst that initiates a chain of linked clarifying points.
A vision without effective communication suffers a slow and painful death in your execution.
Successful team communication is built on the basis of well-thought-out strategies for putting those plans into action, which in turn originate from a sound company strategy. Artifacts include investment and loan marketing packages, tactical planning, and tracking and reporting.
Projects that are part of the larger plan can be more easily directed with the aid of these derivative works. Since consistency and integrity must be maintained throughout the execution process, clarity is of highest significance.
Organizing the Squad
It's impossible to succeed in business on one's own. To succeed, internal and external stakeholders must work together and align their goals and strategies.
This alignment is developed via the use of your company plan and its offshoots, which lay out the goals and the strategy for achieving them in a straightforward manner. However, the plan by itself does not provide any means of implementation.
Stakeholders on the inside can be quickly identified. Most investment teams are rather small, and their tasks are clearly defined by the specific sectors of the business in which each stakeholder participates.
There are many potential external stakeholders, and it would be hard to identify them all in advance. They consist of banks, governments, businesses, citizens, and others in the community. Every stakeholder group has its own unique set of requirements and expectations when it comes to interacting with you and your property. That's why it's so important to capture the essence of the company plan by adhering to a set of core values.
Spirit of the strategy is more important than specifics when it comes to team alignment. Even if you have a lot of influence over your internal team, the external stakeholders who are responsible for 90% of your success are outside of your sphere of influence. To meet these needs consistently over the course of an investment's lifetime, you'll need to foster a culture that can deliver.
From Concept to Reality
The hard work of your team after you close will make all your ambitions come true. However, when it comes to actual business operations, the business strategy seldom accounts for or addresses all of the potential threats.
The quality of any kind of written communication, such as a business plan, depends on the quality of the final draft. What they fail to accomplish is illustrate the many side conversations and ideas that were discarded during the document's creation. That side project dies with the creators.
The more individuals you can get engaged in the planning process, the better it will turn out.
The manner of death penalty execution varies greatly from culture to culture. An open and honest culture is chaotic and full of arguments. It is also effective and equitable. Once a problem arises, the most qualified individual applies themselves to fixing it.
This stands in sharp contrast to secretive societies that present a false image of peace and order. Underneath the surface, however, inefficiencies, unresolved problems, and untapped ability abound.
Organizational Outline for a Business Plan
Even if your business plan is written on a bar napkin, it probably won't get you funding from banks or investors. On the other hand, you may spend weeks developing a detailed strategy that covers every possible scenario. However, such effort may be futile because there are so many potential negative outcomes for a hotel investment.
The hardest part of creating a high-quality hotel investment plan is striking a balance between the plan's intricacy and its readability. Audience and plan partners will determine specifics, but a high-level outline covering all the bases will make the process much more manageable.
The business plan is constructed in an organic fashion using the below structure. These may or may not be the headers and order that your final plan takes. Nonetheless, the progression leads from the current state of the property to the actions taken on it and the results anticipated.
Status Report on the Premises
The constructed setting is the starting point for any property description. During a property tour, you will assess the grounds, exterior, common areas, rooms, and other building systems. While it is true that the current condition is mostly determined by the operations and contract positioning, it is also true that the operations and contract positioning are crucial.
Every home has its advantages and disadvantages. The strengths of your company strategy are accentuated while the weaknesses are made more bearable. A SWOT analysis — strengths, weaknesses, opportunities, and threats – is the most appropriate instrument for this work.
A SWOT analysis is driven by status and locus of control. Whether anything is an attribute or a challenge depends on its status, and their origins depend on the locus of control.
Strengths – attribute generated from an internal source
Weakness – challenge generated from an internal source
Opportunities – attribute generated from an external source
Threats – challenge generated from an external source
To make structural or operational adjustments, this study provides the groundwork.
Positioning in the market is also discussed at length here. Size and makeup of new demand, as well as rival supply that threatens your share of that demand, are outlined.
Your operational strategy should be based on anticipated demand and sales quotas. A review of the hotel's current performance is necessary for determining what renovations are needed to attract the guests you anticipate under new management.
Renovations' Overall Aims and Objectives
The majority of the decisions about the property's upgrades are determined by a PIP required by the brand. However, there is considerable leeway in adjusting the PIP's specifics to better suit the demands and preferences of your ideal customer.
Though ROI is obviously important, maintaining brand integrity is what really propels the PIP.
Every building project must balance the needs for speed, affordability, and quality. There is value in all three, but you'll have to choose between two of them. It's possible to get something quickly and cheaply, but the quality will suffer. In a similar vein, time and money are wasted while attempting to rush out a high-quality product due to limited availability of necessary materials.
Fit the renovation's scope into the time frame you're willing to invest. Some tasks, including replacing outdated systems, may be acceptable to finish despite the inconvenience to guests. However, your property condition assessment (PCA) may conclude that the remaining usable life does not warrant such a project at that time.
Convince others that your restoration plan is sound by providing a concrete spending plan and evidence gleaned from PIP and PCA inspections.
Techniques for Running a Business
Two-thirds of a hotel's operational strategy should be dedicated to revenue management, while one-third should focus on yield management.
The bulk of the operational plan, including pro forma operating budgets, revenue segmentation, contract positioning, and other financial parts of the business plan, will be directed by your management firm. Human resources are still the most important part of any business strategy.
Culture has a huge influence on sales and bottom-line performance, but most human capital strategies only outline the organizational structure and establish who remains and who departs. While the management team sets the tone, it is the frontline employees that actually make the property what it is.
Your company plan's financials seem straightforward. You may just cut and paste your financial model's tables and analyses here. Prose and imagination are necessary for a successful property culture campaign. That's more of an art than a science.
You could be asking, "What's the point?" Manuals, systems, and procedures for all of this are available from the management business.
Sure enough, you're correct; they do. Still, it is on you to find and manage the management firm. Assume that their goals for the property will be consistent with your own. Only by articulating a distinct goal from the start will this be possible. Don't leave anything to chance.
Timeline
The majority of commercial real estate ventures get a return on their initial investment within two years. Upon finalizing lease terms, a retail, office, or industrial property owned by one of the Big Four CRE investors might be sold at a higher price. Just as a hotel may swiftly increase its value by stabilizing its rent roll with better quality tenants, so too can an apartment complex.
Accommodations vary greatly. The process of stabilization is lengthened.
For a hotel to have a successful business plan, it must establish itself as the go-to spot for its ideal clientele. This is only achievable with a well-developed sales and marketing strategy, tried and true revenue management practices, and carefully considered business segmentation.
When renovations are added to the mix, they can negatively affect guests' overall experience and make it more difficult to win back their loyalty after the fact, extending the payoff period of the investment.
Within two to three years, most select service hotels will be able to recover and begin earning improved returns as a result of a repositioning plan. Since full-service hotels have more rooms to sell and function space to fill up with longer lead-time customers, their recoveries are often slower.
Think about how your refurbishment and operating schedules fit in with your desired capital structures. Bridge loans offer greater flexibility for deep value-add initiatives, while bank or CMBS loans offer lower interest rates and better terms for stable properties. Different deadlines and levels of efficiency are expected of each of these.
Investing Capital
Without including OPM, a conversation on real estate investing would be lacking.
The most profitable investors consistently employ the utilization of financial leverage. By exchanging their know-how and effort for reduced equity investment and more favorable investment returns, sponsors are able to engage in more and larger ventures through debt and equity arrangements.
Having a wide network of contacts in the financial sector opens up additional opportunities for business partnerships.
Investors looking for value-add and opportunistic returns would not be a good fit for a company model that envisions a core plus acquisition. All three of your assumptions—the holding period, the risk level, and the expected rate of return—are wrong. Furthermore, if you continually promote deals that don't meet their investing objectives, you risk alienating those connections.
Obtaining funding for a transaction should follow having a business strategy (or at least the key aspects of one).
Potential investors and lenders might expect this paper to help them better understand the deal's goals and parameters. In a similar vein, the business plan's contents may be simply adapted for use in collateral papers aimed at investors and lenders.
The deal-selling strategy you choose should be based on your desired capital structure. You will outline your strategy for filling the capital stack at acquisition and throughout the investment lifetime in this section. In many cases, people just hope for the best, but a well-thought-out plan will provide better results.
Benefit from Putting Money Away
Investment returns are still the ace in the hole.
The hotel industry multiplies the inherent dangers of real estate investing. A financial model can help you aim for success, but the profits it predicts are unlikely to really materialize. Therefore, every business strategy should include a "base case," a "optimistic case," and a "pessimistic case," each of which accounts for risks and opportunities that might diminish or increase the expected profits.
Spending a lot of work on this area isn't necessary, but it will assist offer the potential for gain or loss along with tactics to generate or reduce such possibilities.
The issue of relevance is also important. Your investors and lenders will care about different aspects of your investment returns. Cash return and internal rate of return (IRR) are more important to investors than debt service coverage is to lenders.
Make sure to tailor your pitch to the specific requirements of each possible investor. In the future, when you are constructing marketing materials and fielding inquiries regarding the value of your deal, you will find this to be a great help.
In Conclusion
Even though it's the first thing readers see, the executive summary of your business plan should be the final thing you write.
It's a waste of time to start with the executive summary. This part of your business plan is a two- or three-page synopsis of the most crucial information in your whole document. You put it together by selecting text from your document and cutting, pasting, and altering it.
You need to keep the listeners in mind. What should people focus on if they just have a few minutes to read this paper to grasp the gist?
Your section serves as excellent practice for extracting and condensing key points for use in subsequent papers that you will create based on this business plan.
Derivatives of the Business Plan
A solid business plan serves as the basis for all subsequent investment activity and gives rise to many subsidiary papers. There is no point in the investment life cycle that these documents won't be useful for, from the first contract to the final sale. They set the pace for asset management and motivate other parties involved to follow suit.
The most noticeable variations on the overall business strategy may be seen in the various hotel investment phases listed below. This underlying agreement will serve as the foundation for the rest of the terms of your transaction. All significant decisions should be guided by it, and its spirit should bring clarity when dealing with unforeseen dangers.
Financial Investment and Loan Arrangements
To capitalize on a transaction is the first priority. You put in a lot of effort and resources into things like due diligence, third-party reports, and legal work. All of these expenses will pile up rapidly, causing you tension until you can secure financing to complete the acquisition.
Both equity and loan investors will want to know more about the property's history, the quality of the sponsor, and your investment strategy. However, their priorities differ on how the money should be split.
Mortgage lenders care most about whether or not the property can afford the monthly payments. Despite the importance of increasing the value, it is more necessary to focus on the cash flow that is already in place and expected to come in.
Alternatively, investors care about both monetary returns and value creation. Unlike any other asset class, real estate investments consistently yield a dividend and may be grown through proven methods.
Revealing all relevant information is of paramount importance.
While financial estimates are crucial, due diligence on the property and market is equally essential. There is no such thing as too much information provided up front. People wonder whether there's anything you're not telling them, or if you haven't accounted for every possible outcome.
Teams Devise A Contingency Plan In Case of Emergency
Everyone involved in a hotel investment is crucial to the project's success. They have an innate understanding of this and are eager to help out, but all too often they aren't given the information they need to do so effectively.
Sponsors typically assume that professionals already have a firm grasp on how to best integrate with the organization. However, each transaction has its own characteristics that set it apart enough to need defining obligations from the outset.
There is a time-honored custom of holding a "kick-off meeting" before beginning any project. Distribution and completion of project management artifacts such as budgets, timelines, accountability charts, etc. are carried out with due diligence. Each project's vision and objective remains the primary responsibility throughout the investment lifetime.
Understanding the project's role within the larger context of the company's strategy is crucial to maintaining cohesion. It gives them a sense of pride in having helped create something bigger than themselves.
Although most team members probably won't need to view the full business plan, it's still crucial to provide them with enough information to foster a sense of teamwork and commitment to the project.
Documentation and Monitoring
The foundation of trust is found in open communication. In addition, trust is crucial for maintaining healthy and productive partnerships over time.
Stakeholders' expectations will be shaped in many ways by your company plan and its offshoots. Everyone benefits from regular updates on the investment's progress toward its goals, but especially the financial stakeholders (lenders and investors) who have explicit, contractual reporting duties.
In trying times, it's vital to keep some things under wraps since an open book inspires fear. Think about how much more productive your team will be if they can overcome adversity by working together, despite the additional expense, and make a decision.
Accomplishing monetary targets may be easily monitored. They frequently make physical appearances. In contrast, it is difficult to quantify the intangible performance factors that underpin those bottom-line outcomes.
Each quarter, prioritize two or three key aspects of the company plan. Keep the effective ones and create a structure around them. Leave behind the ones that don't work and move on to the rest.
