Inn Cahoots is a boutique hospitality firm based in Austin, TX. Inn Cahoots launched a unique boutique hotel concept in 2019 designed for high-end group travel and has expanded that concept to Nashville, TN. The work done for this client over the course of 6-8 months was primarily focused on banking, treasury, payments and capital markets.
Overview of the Problems the Client was Experiencing
Access to Capital for Construction
Access to capital for small businesses in generally challenging, but especially in the hospitality space. Inn Cahoots experience with the capital markets, senior bank capital specifically, had historically been challenging due to the consumer nature of the business and the fact that revenues are mostly tied to hotel bookings, event bookings and food and beverage sales.
Existing Capital Structure Was Fragmented
Since launching in 2019, the client had been successful in raising senior debt from banks, but had to establish several banking relationships in order to meet its capital needs. The capital structure of the business was adequate, but the banking relationships were challenging due to having to manage two different senior banking obligations. The specific challenges the client was facing related to monthly and quarterly reporting requirements along with significant reconciliation issues.
Significant Risks Associated with Interest Rate Environment
The client was faced with an unfavorable interest rate environment given the Fed's movement of short term rates over the course of 12-18 months. These movements served to increase the cost of borrowing by over 400 bps, which translates to an increase of ~$1.2MM in additional interest expense for the company. The client needed to refinance, but establishing the right capital structure was challenging given the expectation that short term rates would come down over the next 24-months and the need to avoid being locked into a high fixed rate over that same period.
Payments Infrastructure and Reporting
The client, like many other small businesses, uses numerous financial tools to manage the business. Payments is no exception, but the challenges associated with the business model stem from the various types of payments involved. The types of payments included hotel bookings, event bookings and food and beverage payments, all of which required their own payments infrastructure.
Overview of the Solutions to the Problems
In addition to solving the challenges referenced above, the main goal over the next 12-24 months is to reduce the amount of time the founder is spending on the operational side of the business, while optimizing EBITDA and NOI over the same period. To accomplish this, the following priorities are being established:
Development of Management Reporting
Designed to assist decision making, compensation, alignment of goals with staff and management. The goal within the first 30-45 days was to establish a basic set of management reports to evaluate the business using available resources
Identifying Areas to Align Staffing Resources with the Needs of the Business
While focusing on highest margin areas of the business. This would include a staffing model evaluation (currently, the GM is the sole manager responsible for operations). In addition, identifying areas to align compensation with the priorities of the business. The goal within the first 30-45 days of the engagement was to evaluate current staffing model and make recommendations
Completing Financing Arrangements
As discussed above, this will include a bank and treasury transition for the Austin business from the two incumbent banks to a new community bank equipped to meet the capital needs of the business but also able to be flexible with regard to capital structure. This transition is underway and expecting completion in Q4 2024.
Developing Payments Capabilities To Meet Operational Needs, but Also Reduce Processing Costs Overall
Includes addressing cost of processing payments for the hotel and bar businesses (currently processing through Elavon for the hotel and through First Data for the bars). Evaluate current costs of payments, deficiencies in payments capabilities and make recommendations.
Results of the Solutions Proposed and Executed
The client had success from a capital perspective with respect to both the existing operational business in Austin as well as the new project construction financing in Nashvillle. More work is necessary with respect to both, but highlights include:
Structuring Financing
Structuring financing for the Austin business that allows the client to fully take advantage of the expectation for lower rates over the next 24-months. Specifically, the allowance for a one-time “float down”, which will allows the client to bring the rate to market based on the then current WSJ Prime – 75 bps and save ~$120K in interest expense (anticipating 100bps reduction in Prime over next 12-months).
Successfully Completing Financing
Successfully completing financing at market rates (Prime) for the construction financing related to Nashville, which is a win given how tough the construction finance market is at present.
Obtaining A Personal Line of Credit
Successfully obtaining a personal line of credit for the client, which will allow flexibility from a cashflow perspective going forward.
Payments Infrastructure Evaluated
Payments infrastructure was evaluated both in its current state as well as alternative options that would meet the current needs. The solutions presented would likely streamline payments and reporting related to food and beverage and scoping was done to evaluate the resources necessary to make the change.
Recommendations On Management Reporting
Recommendations were delivered with respect to management reporting. The focus of the reporting included the ability for staff to evaluate their specific areas of responsibility as well as identify areas where changes can be made that will create operational efficiencies and improve EBITDA.