Opinion please.Partnership or Reseller

sysprogrammer

Hi Everyone,

I have received sound advice from this forum before and I'd like to ask again.

While on holiday recently I got talking to the owner of the hostel I was staying in and it transpires that she is not technically minded whatsoever and is seriously in danger of closing the business due to lack of income.

the hostel itself is in a good location with other hostels around, but she has zero online presence and furthermore , the place needs a good lick of paint and new bed linen throughout.

I offered to setup a decent website and register her on backpack online ( the hostelworld backend software).
I also offered to renovate the hostel as I am young and I can spend a week working from the hostel with some friends.

My question is what sort of partnership / payment agreement should I ask for in return for my help ?
I came up with 2 scenarios and thought I would ask the Pedro's and Boards members what they would do.

Option A : This lady would give me a rate for Dorm beds and private rooms and I would add my commission and sell for her on a website I design.

Option B : Ask for 50% of the profits. currently there are 2 long term guests and sporadic bookings , her current take home pay is under €100 after expenses.

I believe option 2 is my preferred choice as I know I can dramatically increase her turnover, however I thought I'd garner some of the collective wisdom here first.

My cousin runs tours in the area and she said that she would use the hostel if I got it up to standards. And also I have worked in the hospitality industry before.

I would intend on employing a live in manager and reduce the work required by this landlady (allow her to enjoy a bit of retirement). if this is a factor in the decision making process.

Thank you for reading this far, please let me know if you require more information.

SysProg

antoinolachtnai

You are basically investing in the hostel, both in the brand and in the building.

You will not make any money with either of the options you give above. The effort you put in will be far greater than the return you will get.

You basically need to make an arrangement to buy the hostel, not necessarily all in one go, but over time. Some sort of arrangement where you both own a percentage, but ultimately, you need to be in a position to buy her out.

If she is really only taking home 100 euros a week from this business, and if she has her own home separate from the hostel, then it shouldn't be too hard to buy her out. At least, rationally speaking. The problem is that people aren't always rational about things like this.

A lot depends on what age this woman is. Older people are easier to talk to about these issues, because they realise they need a nest egg.

Another, completely different way to do this is to reckon up the value of the work you propose to do. Say it is 25000 euros. Then arrange that she will pay you this 25000 euros, plus interest, out of the increased turnover and profits.

jimmii

Do you need them involved? Sounds like you will be the only one doing any work of value and they will still be getting 50%. If they want out then I would be looking to take it off their hands instead of becoming their partner as it doesn't seem it is a line of business that they can bring much to.

sysprogrammer

to be honest , I would prefer if they took a percentage and left me to it.

jimmii

sysprogrammer wrote: »

to be honest , I would prefer if they took a percentage and left me to it.

Why?

sysprogrammer

Hi jimmii

1) It gives me carte blanche on my vision for a hostel ( I'm not Elon Musk but I do know the industry and would prefer clean bright and new looking hostel).

2) I don't want someone untrained speaking on behalf of my company/hostel.

3) I can just see no benefit to having the person on site. when I would prefer to renovate and hire in competent trained staff.

hope this helps

jimmii

Why would you want to be handing over them a percentage still? It sounds like you really should just be taking over completely instead of giving them free money. Would the value of the property be such that it would be too high to buy her out so you need her on board just for the building or will she be bringing something else to the table to justify taking 50%?

sysprogrammer

Jimmii ,

You got it in one , all I want is the use of the building. And the value is too high to buy it outright.

they provide no additional benefit to the deal.

thanks for your input, spot on regarding my circumstance, and you gave me a smile.

cheers,
D

pedroeibar1

I can see where Jimii & Antoin are coming from on this, but I’ll assume that a straight purchase is a non-runner due to your cash situation. There are several issues involved in this.

Don’t call it a partnership - that has connotations of a structure which is not suitable, so let’s call it a JV and the “bean an ti” Madam.

The correct approach depends on the needs/wants/drivers of the people involved. For example, Madam might like a bit of company around and the actual profit might not be top of her priority list. She also might not want to be rushed off her feet and be happy with a small sideline rather than have a busy business, albeit a profitable one. You might want a back-seat role, but could be dragged in to a bigger involvement to protect your investment. I also infer that Madam would run a mile at the thoughts of ‘doing email’ and handling on-line bookings. She might not even want to do business with you and consider your ideas daft.

My perception of hostelling is that it is at the bottom end of the accommodation ladder – back-packers, students, etc. and primarily a cash business. But, like all accommodation businesses the occupancy rate is critical. What and where is the target market? How seasonal is the business and its location? Summertime only? Can it promote hill-walks in winter? Local history tours? How many beds are there? Dorms or rooms for couples? What will the marketing cost per bed be? How does the back-end of the payment/booking engine work/cost? How many bed-nights do you have to sell to breakeven? Depreciation would be high on beds/linen/etc. How is the laundry done? Can it be outsourced to a firm like Spring Grove?

Lots of people totally misunderstand the hospitality sector, just look at the total screw-up the property developers made of it when they started to get involved (Ashford/Shelbourne/Burlington, etc. etc.) IMO you cannot run a successful hospitality business by remote control. If you have an on-line payment facility that’s a help (particularly with ‘no-show’ bookings) but the ‘off the road’ business will invariably be cash and that is both very tempting and impossible to police with employees.

Do the sums, see what the potential could be, if worthwhile then lease the premises from Madam with a defined/pre-agreed option to purchase structure. And if possible plan to run it yourself, or get a family member to do it. Offer Madam a share in the on-going business – it could be a useful involvement. Otherwise sit down with Madam and work out a simple arrangement to take a cut from the bookings you generate, along with a service contract to maintain the site.

Consider a long term lease, with a get out clause if its not working for you. Figure out a conservative estimate of what you think you can bring in weekly, and then come up with a figure for her thats more then what she's currently getting (which isn't a lot).
That should be an attractive offer for her, gets her off site and gives you carte blanche. Ask for a 10 or 20 year lease, with an option to buy for a certain price, and a 3 months notice clause in case it doesn't work for you.

sysprogrammer

Folks,

some excellent answers and I will have to go away and think now for a while about this.

Madam has stated she would like for me to take over the business, as she does need a nest egg and it is getting a bit much for her to handle.

I do already run a tour group in Ireland and I feel this would be an ideal base location for the South West tours. this is why I am examining the hostel in the first place as I already have some pre made business.

I can see that this information would have been valuable at the start of my post, so I do apologise for omitting this information, I just wanted to keep some degree of anonymity.

Pedro - you are correct on your images about hostelling , and it is adventure tours , hiking , kayaking and the like that we cater for. I believe the hostel would be a lovely addition to the profit margins however I am weary of becoming too involved to protect my investment. I have been utilising hostels around the area for a few years and I know how the show runs.

a long term lease may suit both parties quite well. I shall investigate this further.

Agreed about it being a cash business and I have devised a way to maintain an eye on the rooms (and in turn the staff) on days where I may not be around.

Thanks Pedroeibar and El Rifle, ye are 2 of the main reasons I asked here in the first place. invaluable advice.

Sysprog

pedroeibar1

Best of luck with the planning, IMO there definitely is a niche in that area, what with the weak euro.... the shoulder and off seasons will be the hardest, but I guess you know that anyway
As for QUOTE=sysprogrammer;95359605]...... I'm not Elon Musk but I do know the industry and would prefer clean bright and new looking hostel).[/QUOTE]
please do not let him be your style icon, the go-to guy for techies' decor is Ian Schrager , the industry's Mr. Uber Cool :cool:

collegeme

My first thought was a long term lease. You should seriously consider this since you don't have the cash to purchase the property from her, you can essentially pay her a rent every month. That way you take 100% of the net profit which should increase due to the work you will put in.
Pedro makes a great point about the cash aspect. You need to put in as many controls as you can (subject to cost v benefit) to monitor the cash aspect. This shouldn't be to hard on a small scale like this.
I'm thinking areas that feed back to the question, "was this room was occupied?" "how many were there in that room, for breakfast ?etc" even incentives for customers to tell you the dates they stayed.
Best of luck with it.

sysprogrammer

thank you for your thoughts collegeme, I have been thinking along the same lines myself and I believe I will have to visit a few more hostels to see how they operate (a cash business).

I was thinking of making it card only payment , and then have a heat sensor in each room to poll at set intervals throughout the night to se if anyone is staying there or not (can't have cameras in the rooms !! ). this would deter staff from taking cash at the door and lining pockets.

again , how to effectively police this when I am not around is a work in progress.

pedroeibar1

Systp, IMO that sensor idea is not going to work. Also, hostel users would be more cash oriented so why shut off a revenue stream? Payment policing is down the line in the business model, figure out the basics first..... company structure/staffing/room/bed count, occupancy rates per season, etc. Then until you figure out a way of stopping "shrinkage" just allow a percentage of t/o to it.
I know of a bar where the owner (foreign resident) had a wifi camera installed over the till, checked it randomly, caught a barman taking cash, phoned the bar and fired him there and then.

pedroeibar1

pedroeibar1 wrote: »

Systp, IMO that sensor idea is not going to work. Also, hostel users would be more cash oriented so why shut off a revenue stream? Payment policing is down the line in the business model, figure out the basics first..... company structure/staffing/room/bed count, occupancy rates per season, etc. Then until you figure out a way of stopping "shrinkage" just allow a percentage of t/o to it.
I know of a bar where the owner (foreign resident) had a wifi camera installed over the till, checked it randomly, caught a barman taking cash, phoned the bar and fired him there and then.

Is it still predominantly cash in this day and age? What about a 5-10% discount for an online booking in advance, given that the market is very price conscious and surely checking locations online before arrival.

pedroeibar1

I agree, I doubt that the majority would be cash - a booking engine with payment is a definite "must" as no-shows would be a big problem (I think I mentioned that above). I'd suspect that in the hostel sector no-shows would be higher than the norm, due to the type (casual) of customer. I've a friend with an up-market country house B&B business and he takes a booking deposit by credit card and most, but by no means all those people settle by CC . However, a sizeable portion of his "walk ins" pay cash.

collegeme

wifi camera on the till would be essential if it were my business (It's ok isn't it once you have a sign notifying staff?)

sysprogrammer

thanks again for all the suggestions , as Pedro said it is something to think about further down the line but I am looking forward to starting the thread for 'how to watch a cash business'.

some of the other idea's bandied around are electromag doors that can only unlock via the hostel booking engine (not too hard to code or deploy) thereby logging all room access or door open events.

At present for our tour company , bookings are only taken with a deposit , and this is a straight percentage of the overall fee which has proven effective at stopping no-show's.