Quick guide to know if it is a profitable business

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If you are reading this, you are probably the top 10% elite of people in the world, determined to make a change in your life. Starting a business doesn’t necessarily need to be a trail and error process. Here is a quote that i live by ” Do not reinvent the wheel”.
Some of the most successful businesses in the world today are from Improvising existing services. There are of course, multi billion/million businesses that thrive on new innovative ideas. Which ever way you choose, whether to pick an existing business and improve it and make it better than other competition, or innovate and create a new business idea. Below is the basic criteria to take point before engaging in the project.

Buying over an existing hostel
Information you will need

  1. Are you buying the business together with the building/land?
    (Purchasing the business together with the building/land together is the best option. This gives you total control of the business and property and avoids any rental uncertainty in the future) 
    5 important things you need to know about Property Investing
  2. Is the land leasehold or free hold? 
  3. If you are only buying the business, what is the monthly rental?
    (Is the rental fixed or is it a increment model)
  4. Check out the lease term and also the conditions for the business?
    (Important, as some business owners tend to sell the business towards the end of the rental contract term. The landlord may renegotiate for a new rental rate which may affect your income) Are there any royalty terms attached to the business?
  5. Consider the condition of the building. Will you need to renovate? What are the additional costs like? 
  6. Double check licensing and local by laws. Don’t buy Illegal businesses 

Innovative Ideas
In this category, you would be inventing or creating a new business segment that is non existent in the current market. 

Discuss these points with your team before you proceed

  1. Time period to create/ realize this idea
  2. State and municipal bylaws
  3. Acceptance of public to this new idea. Who will your target market be?
  4. Costs of creating a new product. Is building material easily available? Do you have the necessary skills to build?


Calculating your ROI (Return on Investment)
Before any transaction is made, you would need to calculate to see if you would be able to make a profit and how much. Here’s a basic calculation you can use: 

Return on investment or ROI is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year in question. The basic formula for ROI is:
ROI = Net Profit / Total Investment * 100.

Imagine this scenario. You have been wanting to either startup or buy over an existing hostel. Here’s a quick calculation i always use. (Examples are for training purposes)

You come across a business selling lock stock barrel (Inclusive business and property)
Buying the business:A
Building Cost: B
Misc Costs (Licensing, Renovation etc) = C

Monthly operating costs: D

Number of rooms: 10
Price per room,per night: 100
Gross daily income if full house: (Number of rooms) x (Price per room,per night)
= 10×100 
= 1000 / day
Gross monthly income = E (1000 x days in a month)

Gross Yearly Total Income (F)= (Monthly income x 12 months) + Ancillary Income
Nett Yearly income (G)= F- (Fixed Cost + Variable Costs)

ROI = {G/(A+B+C)} x 100 
ROI in %
If you reverse the formula 

Total Investment/ Total Yearly Nett Income = Years to get your investment back

Personally any investment with a return rate of about 5 years is normal for a hostel.
Anything less than that is a good investment.