Revenue tells you what a business collects. The queue behind it tells you what the owner keeps.
Over the years, I have watched more than one investor fall headlong for a city centre hotel. It usually goes the same way. They study the room rate, sketch the numbers on the back of an envelope and arrive at a delightful conclusion: a bed that costs very little to make up, sold every single night afresh.
Then someone opens the P&L.
Business rates. Ground rent. Insurance. Taxes. Wages. Energy. Each line helps itself to a slice, with impeccable manners, the way the British do in a queue. By the time the eye reaches EBITDA, the room has gone very quiet. So has the investor. The envelope, it turns out, had been an optimist.
This is not just a hotel problem. I have seen the same error made, with great confidence, in boardrooms a long way from hospitality: the belief that a large business must also be a valuable one. What an owner actually keeps depends far less on the size of the top line than on who else is standing in line for it, and on what terms.
Picture every sale as a £100 note handed over at the front of a long and orderly queue. Allow me to introduce its members. You may recognise more of them than you would like.
The Taxman
He does not queue. He was there before the guest arrived. Of every £100 a guest pays, £16.67 belongs to HMRC before the guest has mastered the light switches. Nobody has ever mastered the light switches. A hotel is, in effect, a courteous branch of the Exchequer that happens to serve breakfast.
The Booking Site
Next comes the website that made the introduction, and it expects around a fifth of the evening for its trouble. It is a matchmaker that takes a cut of every anniversary and, should the guest ever think of returning, will helpfully introduce them to the hotel across the road.
The People
Then comes payroll, roughly a third of every pound, and the one member of the queue I would defend to the last, because in hospitality the people are the product. I have yet to meet a guest who chose a hotel for its spreadsheet. They return for the receptionist who turned a cancelled flight into a good night’s sleep.
The Treasury, having already pocketed its VAT, comes back for a second helping through employer National Insurance. It is the only diner in the building that eats twice and never once picks up the bill.
The Council
Business rates arrive with unfailing punctuality, whether the hotel is full or empty. UKHospitality projects that average rates for hotels could rise by 115% over three years, a remarkable rate of appreciation for a building that has not moved an inch.
The Landlord
In the city, freeholds are a rarity, so most of us rent the very ground we stand on. The landlord’s sole contribution to the guest experience is the ground itself, which, to be fair, the guest would miss. The energy company and the insurer follow close behind, like relatives at a wedding buffet.
The Newcomer
Mayors in England are to be given the power to introduce an overnight levy, charged as a percentage of the room price, with no national cap planned. It is the only member of the queue that gets a pay rise every time you give yourself one.
The Owner
At the very back, holding the umbrella for everyone else, stands the owner. Economists call him the residual claimant, which means he is entitled to whatever is left. Read that again, slowly, with the stress on “whatever”. Anywhere else, a person left at the end of the line shouldering everyone else’s risk would be called a hostage. In hotels, we prefer the word investor.
An Ordinary Tuesday
It took me longer than I care to admit to see the pattern. Some of the queue take a percentage of everything you sell: the taxman, the booking site, the levy, often the brand and the management company too. The rest take a fixed sum and do not much care how your year went. Each claim may be perfectly fair: tax is the law, rent pays for a building and commission buys customers. What matters is where each one stands and how much of the risk it carries.
Some take a percentage. Some take a fixed sum. Not one of them takes a loss.
That privilege belongs to the owner alone. If you are paid last, you do not truly own the business. You are its shock absorber.
Every finance director I know can recite the order in which creditors are paid in an insolvency. Hardly any could tell you the order in which they are paid on an ordinary Tuesday.
Two companies with identical revenue can be entirely different businesses.
Swap the hotel for almost any other business and the queue looks familiar. A restaurant selling through delivery apps hands over a hefty share of every order before the food has left the kitchen. A brand selling on Amazon pays a fee on every sale, then pays again to be seen. A software company in the app stores can give away up to 30% of each subscription it sells. A manufacturer selling through distributors and retailers watches two margins disappear before its own. The names change from one industry to the next, but the owner is still at the back.
And the queue may be about to grow. Google has already begun rolling out AI in the US that books hotels on the user’s behalf, and any business without its own relationship with its customers will find one more gatekeeper standing in the way.
Courting The Guest
The shrewdest hotels judge every booking by what survives the queue, which means spending money on the guest instead of the middleman.
When a hotel closes its rooms on the booking sites for a busy night, someone has simply done the sums. Loyalty points for booking direct cost far less than the commission, and they leave the guest feeling a little cleverer than everyone else in the lobby. The local company down the road, meanwhile, is offered a rate that looks almost indecent on paper. It isn’t. No commission is paid, the same faces return week after week, and loyalty, unlike commission, compounds.
Candour obliges me to add that booking sites are not villains. I have known hotels where eight guests in ten arrive through a single site, most from overseas and many never to return. For them, the booking site is the front door, the devil we cannot live without.
The art is knowing precisely what you are paying for. Let the booking site make the introduction, then give the guest every reason to come back directly: an upgrade next time, breakfast on the house, a welcome no intermediary can match.
Rent the customers you cannot reach. Own the ones you can.
Who Will Stand Where You Stand?
The best owners I have worked with go a step further. They ask everyone who joins the queue one question: will you stand where I stand? Put plainly, shall we do well together?
Take the management company that runs a hotel on the owner’s behalf. Some charge a fixed fee. Many take a slice of sales and a share of profit, in proportions that vary from one agreement to the next. Some owners run the hotel themselves, swapping a fee for a great deal more work.
Consider an agreement charging 3% of revenue and 4% of profit. On a hotel taking £5 million a year, the 3% alone is £150,000, paid in a good year or a dreadful one. A fixed fee works the same way. Only the profit share rises and falls with the hotel’s results, however the agreement happens to define them, and that is where sensible owners push for more of the fee to sit.
There is a simple exercise that works for any business. Take £100 from each of your channels and walk it, slowly, past everyone with a claim on it. Note who takes a percentage, who takes a fixed sum, and who, if anyone, would feel your pain in a lean year. Best attempted after lunch rather than before.
Few boards have ever seen their business drawn this way. The first time they do, the room goes very quiet. I recognise that silence. It is the one the investors made.
So what changes once you have seen it? Growth, for one. A channel that doubles its revenue while the queue doubles its share has made the business busier, not richer, and busier is an expensive hobby. Dependence looks different too: rely on one platform for most of your customers and you have handed someone else the pen. And so does value, because a buyer will always pay more for profit that does not depend on anyone else’s goodwill.
How, then, does a business outside hospitality move up the queue? Much as a hotel does. Forget the taxman. Nobody has ever won an argument with HMRC, and I would not advise being the first. The effort goes where the terms can be changed.
Start with the customer. Give people a reason to come to you directly, something cheap for you to give and valuable for them to receive: a free dessert through the restaurant’s own app, members’ prices on the brand’s own website. Then look at everyone else in the line and ask how they are paid. A rent tied to takings, a partner paid for new customers rather than old ones: the more of anyone’s reward that depends on new business or on profit, the more they stand beside you rather than in front of you.
None of this happens in a quarter. It happens one contract renewal at a time, and there is always one coming up.
Everyone gets paid before you do. Budgets come and go, and that will not change. What can change is who stands in your queue, in what order, and on what terms. Most owners spend their careers trying to make the £100 bigger. The wealthiest ones I have met spent theirs deciding who gets to touch it first.
So, who is standing in yours?