When I first entered the B&B world innkeepers often lived in sub-standard conditions. It was common for owners to give up their room for a guest, if that meant renting an extra room some night. More rooms means more money, and everyone scrambled for as much as they could get. Too often innkeepers spent more money on renovating the inn than they could really justify, making them cash-strapped. You know what happens when you are cash-strapped, or feeling in over your head. For starters, inadequate living conditions were tolerated.
But the inadequate living conditions started changing as marriages were threatened and selling the inn was challenged because buyers wanted something better than an unfinished basement. They wanted more than a guestroom in their own home! They needed more to attract future buyers.
Innkeepers have gotten smarter through the years, they are moving out of the inn into their own homes. Their quarters are then converted into guestrooms, usually deluxe rooms for more money than other guestrooms. Often deluxe spaces rent more often and for more money than other guestrooms, making this seem like a great idea. But is it a great idea to totally remove owner's quarters from your bed and breakfast?
Based on the business valuations I've done through the years I'm questioning that wisdom. I feel it's a bed idea, and for more reasons than the obvious.
The first concern I have about the lack of owner's quarters is that typically that means there is nobody who knows the property, or the business, on site at night. When guests sleep they are at their most vulnerable. Who is there to take care of them if they have a medical emergency, or if there is a disaster like fire, flood, or tornado? Even being five minutes away can make the difference of life and death, disaster or near-disaster.
My second concern comes from understanding most buyers need a home, and expect to live on the premises when they buy their bed and breakfast. If the inn you are selling doesn't have a place for them to live they either have to convert a guestroom into their quarters, decreasing their income potential and thus their ability to repay their loan, thus lowering the amount of money they can borrow and thus the price they are willing or able to pay for buying your inn. Or, they have to take some of their inn-buying capital and redirect it towards buying or renting a home, again decreasing their ability to repay their loan, thus lowering the amount of money they can borrow and thus the price they are willing or able to pay for buying your inn.
Another point to consider is how many potential buyers will you lose because there aren't any owner's quarters for the new owners? How long will your property languish on the market until a buyer comes along who doesn't need their own space, or has enough money to get both the inn and living quarters? Are you willing to lengthen the amount of time it typically takes to sell your bed and breakfast to make a few extra dollars "today"?
Before you convert your owner's quarters into a guestroom, or two, check with your zoning guidelines to see if it's legal for the property to be unoccupied at night. And as you calculate how much money you anticipate making from the conversion, also consider how much money you will lose when you decide to sell. And even if you don't lose money, how much longer will your property sit on the market? After analyzing all ramifications of your action you can make your move wit confidence you won't have any unpleasant surprises down the road.
]]>The cleaning and housekeeping arsenal I recommend to bed and breakfasts, hotels, and individuals alike includes microfiber cloths, white vinegar, baking soda, and the oxygen bleach StainSolver. Some people also recommend lemons, borax and hydrogen peroxide, but my idea is to simplify and consolidate.
I do have a "magic" all-purpose solution I personally use for a wide range of purposes, but you'll have to contact me for that recipe.
One innkeeping client of mine had two frustrations. In greening her B&B she switched from using paper towels for her cleaning to using rags. These rags were created from worn out sheets and towels. She was frustrated though because she didn't like the lint that was too often left behind and the fact hair and crumbs weren't picked up to her satisfaction. She admitted some of that may have been a problem with the paper towels too, but she was having trouble adjusting to the new regime and probably looking for excuses to go back to her familiar housekeeping routine.
She's not alone in being at odds with what kinds of wiping material to use in cleaning. Which is the most environmentally friendly cleaning "cloth"?
Microfiber is my conclusion. With quality microfiber cloth friction, static and capillary action combine for an effective cleaning action. And because of these characteristics I have found I don't really even need cleaning solutions, though I do use either my "magic" formula or vinegar water in the bathroom and kitchen sometimes.
There are a variety of microfiber cloths to choose from. Sorting the quality microfiber from the "cheap imitation" is important. Liking to keep things simple I recommended my favorite cloth which is wonderful for every cleaning challenge I've used it for: floors, counters and sinks, showers and tubs, glass and mirrors, refrigerator shelves and doors, as well as walls and doors.
The cleaning tip that works for me with microfiber cloths is to use the cloth dry, spritz the surface to be cleaned with water or a cleaning solution, and wipe.
Other microfiber products I have found that make my other cleaning tasks easier include dust wands and waffle towels for dishes. To avoid doing floors on your hands and knees there microfiber mops too. In doing floors take care of the spots before starting wet or dry mopping, and it comes out perfectly with an easy swipe or two of the mop head.
The second frustration my client had was she hated toting the myriad cleaning solutions around the inn. My arsenal of cleaning "solutions" includes white vinegar (diluted to a 1:15 vinegar:water), baking soda, and StainSolver. I do have environmentally friendly cleaning products available for some situations, but rarely use them. I can clean any and every surface in the house with those items.
Bathroom cleaning, mirror and glass cleaning, laundry, kitchen cleaning -- they are all easy with microfiber cloth and basic kitchen ingredients. Nobody gets hurt, the house gets clean, and the budget is eased too. Housekeeping isn't so bad when you keep your cleaning regime simple.
Check out how the microfiber (my favorite microfiber cloth is the Great White, Super Cloth) and StainSolver work for you. You'll be happy with the results.
]]>After discussing the various approaches different hotels take -- let guests ask to have sheets and towels changed; let guests ask to not have sheets and towels changed; tell guests your frequency of when you change sheets and towels, like every three days -- they opted to change guest linens every three days. Of course they allowed for the need or request for a more frequent change.
A sheet and towel reuse program saves in various ways: conservation of water, energy, laundry supplies, and manpower, and saving money by not having to replace sheets and towels as often, and by not wasting resources.
Their large commercial front loading washer and dryer were already saving them time and money. Front loading washers are both water and energy efficient. But that was the end of the good news about their laundry room.
Out of habit and cost savings they were buying bulk laundry supplies from various discount, big-box stores, but supplies that are hard on the environment and the people using them. They had big buckets of laundry soap, mega-dispensers of fabric softener, and gallons of bleach lining their shelves.
There are several good environmentally friendly laundry products available, but they can't compete in price to the deep discount detergents found at the big-box stores. But using baking soda and white vinegar in the wash and rinse cycles is a cheap alternative to fabric softeners, and I urged that change. I also introduced them to an oxygen bleach that was gentle on the environment and people, and at a competitive price to chlorine bleach.
Aha! It turns out one owner and the housekeepers preferred the products on the shelves to others. It's one thing to retrain the staff, but if the ownership isn't behind the changes the changes won't happen. And that was the bottom line in this case: one owner and housekeeping against the other owner.
So while the hotel never changed from the environmentally harmful laundry supplies the owner in favor of the change converted her home laundry to a greener one. She's still experimenting with the laundry soaps, but she's not using fabric softener or bleach anymore and instead using baking soda, white vinegar and the oxygen bleach - StainSolver.
Going green is a constant set of decision making steps. You may not be able to do everything you want right away, and you may never be able to take some of the green actions you want to. And you decide between two products that have short-comings, short-comings you have to balance in your quest for being green.
But taking the first step with future steps planned right behind them is the way to start. Use the savings from your each action to help fund subsequent actions, and watch your B&B get greener and more sustainable all the time.
]]>We recently redeveloped and relaunched Bed & Breakfast Browser (http://www.bbbrowser.com). Innkeepers can now submit and manage their own listing
details and photos. Inngoers can write reviews and upload their own photos.
What makes our directory different than nearly all others is that we do not charge fees. The idea is that by not charging fees, we can build the
largest, most in-depth B&B directory, for the benefit of inngoers (with that will come success for the innkeepers). The playing field on our site
is level. Any innkeeper who wants to upload a 100 photos can do so. And we will be glad to receive dissatisfied reviews from inngoers without the
pressure of having accepted $200 from the listing B&B. Transparent, free, and useful is the idea.
We are interested in feedback on the new site and our "without limitations" approach (eventually the site will be tastefully supported by Google
AdSense in case anybody was wondering). We also would like to get word about our relaunch out to inngoers and innkeepers alike.
Thank you for reading.
]]>
Desperate Buyers
My most recent buying clients had the wind knocked out of their sails by the numerous severe hurricanes the Gulf Coast has suffered in the past few years. They were ready to go to a less volatile location and bed and breakfast innkeeping seemed like the perfect change of career and lifestyle for this couple. So they called me.
My first suggestion to every aspiring innkeeper is to take "how to" seminars, and this couple already had plans to do so. They also bought my Buying Series ebooks and some of my consulting time. It seemed to me they were off to a good start.
As many aspiring innkeepers do these people started sifting through the online listing for their perfect B&B. They found lots of lovely inns across the country. None of them really fit these buyers' reality (read that as available investment, suitable climate, and mis-matched business style) though, so my challenge was to take the stars out of their eyes and the rose-colored glasses from their faces. That's never easy.
What came out of our discussions was that to me these were desperate buyers, they found desperate sellers, and were going to jump before completing their education. Warning! That's not the way to approach buying a bed and breakfast. It's an especially bad idea if you are going to put your life's savings on the line with your decision.
Lessons to share from these buyers:
My personal lesson, which I seem to relearn with every client is to continue to offer my best knowledge and insights, and then let go of the results. It's not for me to take credit for innkeepers' successes or failures. It's for me to learn from each job so I can continue to provide the best I can.
I don't yet know what these buyers have decided to do, but time will tell. I hope they make the best decision for their situation. They either will have to live a long time with their decision or tend their wounds from a bad transaction.
Business Value
Once in awhile I have the joy of working with a client more than once. A valuation client came back for an update to see if the improvements to the property and cash flow would garner a listing price the innkeeper could live with. The building and operation changes were good and will have payback in a few years, but not yet.
What I learned in going through the new numbers was the innkeeper was trying to make the bottom line look better by reducing expenses. While that can be a good move, if it's an indication of improved efficiencies, it can also be a bad business move or just a smoke-and-mirrors move. In comparing the previous valuations with the newest one it seemed to me not much had changed for this innkeeper since buying the inn.
Let me remind you of some business basics.
Buyers and financing are available for strong businesses. Work at making your B&B a viable one so when you are ready to sell you can get a good price. A "good" price is one where you get your investment out and some profit. Make long-term decisions for building your business and watch long-term results reward you.
Sticky Sellers
Back when I was a B&B Broker I approached one innkeeper several different times as buyers I was working with expressed interest in that very kind of inn. Each time she turned me down. Now, I appreciate not being ready to get out of the business, but make sure you are giving it your best and enjoying the process if you are going to stay an innkeeper.
This particular innkeeper never really enjoyed innkeeping and didn't build the business very much. It showed too. And then life happened. Health issues made it imperative to sell quickly, but the innkeeper continued making bad decisions. The inn is still on the market after several years. Between a high price and a badly run inn this innkeeper's market is slim.
When you find you don't really like innkeeping be willing to let go, especially if a buyer knocks at your door. Just because you haven't done what you dreamed of doing with the business don't turn away from a serious buyer. Run the business as if tomorrow could be the day you have to sell. When you do have to sell put a "today" price on the inn, not a "next week" price. Your dream selling price may not be a reasonable purchase price. Properties that are on the market for too long get stale and buyers and agents tend to avoid them.
Don't stick to your inn longer than your time, if you don't want to be stuck with it long past your interest.
Buying and selling are the flip side of the same process. Approach the side you're on this time with business savvy. Avoid greed and desperation. Go for long-term decision making. And take those rose-colored glasses off so you can see the world as it really is, not just how you want it to be.
The biggest problems is that the down economy is keeping them from buying green cleaning products because they cost more than the bulk supplies they can get from Costco, products that aren't known for being environmentally friendly. After sharing some more cost effective laundry supply ideas, like baking soda and white vinegar in the wash and rinse cycles, respectively, I introduced them to the benefits of cleaning with water and microfiber.
Water and microfiber are great for basic cleaning. For heavier duty cleaning and sanitizing an environmentally friendly cleaner adds boost. The reason microfiber is such a good cleaning tool is because technology has created a fiber that picks up dirt, grime, dust, grease and particles. Though I'm big into using natural fiber fabrics I'm totally behind microfiber because it almost eliminates the need for cleaning "chemicals", it reduces the quantity of cleaning products because of its efficiency in removing dirt from surfaces. In my mind, this is a great use for petroleum-based fibers.
Though a good microfiber product costs a bit more than other products you can buy, and of course more expensive than using towels and sheets that can't be used in guestrooms because they are tired, frayed, or stained, they are long lasting and reduce the ongoing cost of cleaning "chemicals" so they pay for themselves pretty quickly.
These hotel owners are starting with replacing their expensive laundry supplies with the inexpensive alternatives of baking soda and white vinegar. They are benchmarking their utility usage. And the money they start saving in the laundry room they'll use to buy microfiber supplies. They'll get tax write-offs from donating their tired sheets and towels to charity. And that purchase will let them save even more. That's a win:win.
If you want to see the environmentally friendly cleaning supplies I recommend visit my Green Cleaning page.
A young couple sought my input on how to best organize their busy day in their new bed and breakfast. They had retired from the corporate world so they could spend more time together and be closer to their families. Starting with two guestrooms and a tea shop seemed like a step they could manage on their own, but they found that "small" was draining them and they hoped I could help them streamline their operations and establish better procedures to get everything done they wanted.
I first urged them to establish areas of responsibility. The idea is that each person was in charge of specific tasks that the other couldn't interfere with. When input was wanted help could be asked for, but the "ownership" line had to be respected and not overstepped. No back seat driving is allowed.
After talking awhile it became clear that though they loved the guestrooms the tea shop was their true love. Their true market niche is a tea shop more than bed and breakfast. What a great awareness for them to reach! Now they can proceed building the business they enjoy most and put their focus there. Income from the rooms can augment the tea shop and the guests can provide the travelers' exchanges they cherish, and energy can be saved for their best money maker and satisfaction source.
The focus they gained from that awareness has let them let go of the "shoulds" they have picked up along the way and given them energy to build the tea shop into a community center and source of joy for many. They are making more money and not wasting time doing things they don't want to do.
]]>Don't buy any B&B before you check out this amazing opportunity!
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So what does all of this mean to you as B&B innkeepers -- active and aspiring? Now more than ever you need to seriously consider buying an existing B&B rather than starting from scratch, if you are an aspiring innkeeper. If you are an active innkeeper, you are better off holding your prices at their current rate to help you weather the uncertain financial times we are facing.
Focus on the value you are providing, not the room rate. Customer service is value and is your best marketing tool and great customer service is the advantage B&Bs have over hotels. Add value to what you already have and hold tight.
Consider having more than rooms to sell as a way of increasing your income potential. Multiple income streams is a wise business style I've proposed for years, and now see it as even more important. This is a great time to co-market with other businesses to create packages to make it easier for your guests to spend money with you and to improve their good time so they'll come back and tell others about you.
If you've been paying attention to my messages in the past you have a clearly defined market niche. How can you expand that notion without making it fuzzy or diluted? Figuring that out can be one secret to your success in the coming months and years. And it's good business.
The environment, with its environmental issues in the hospitality industry, can't be ignored now. Conserving resources is another aspect of solid business practices, so pay attention to what you "throw away" and save money. ECOnomicallySound.com is a resource you can use to help you improve your conservation measures, and EnvironmentallyFriendlyHotels.com is a resource for you to use to promote your green inn.
We seem to have entered some unusual times. Translate that to being more diligent about doing your homework, offering great customer service, having a solid market niche and conducting solid business practices. We're in for some interesting years.
]]>Laws across the country will make a difference to this issue. Once you find the B&B property you want to buy here's what generally happens.
The earnest money is an important part of an offer, and in my experience the earnest money you offer should be high enough in your original offer to show your interest and commitment to the purchase. Some Sellers will ask for what feels like an obscenely high earnest money, and your broker may suggest an insultingly low earnest money to protect you. But if the Seller perceives you aren't serious, as illustrated by the amount of money you put down here, they'll not accept your offer. I don't call that protecting your interests when that happens. Make sure the money is deposited into an escrow account, not the Seller's pocket.
Verify all claims of business operation are as presented. Will the zoning and licensing indeed transfer with the sale, or do you have to start over? Does the zoning allow for the business as you are buying? I've seen innkeepers sell their inn with a wedding and special events sideline that weren't allowed. Is the parking as required by the zoning? Signage? Are the well and septic system sized for the business you are buying?
Then there's the issue of the changes you want to make to the structure(s) and business. Can they legally be made, or what do you have to do to make the changes? Can they physically and feasibly be made? I knew a Buyer who had magnificent plans for taking a top floor area and turning it into civil owner's quarters. Well, he didn't check it out with a building engineer before he bought the inn, and found out after the closing that it was both physically and financially "impossible" to do. That changed his whole attitude about his new inn.
Avoid problems by conducting a thorough due diligence. Know what you are buying.
Is the party you are under contract with the same person who owns the building you want to buy? I've seen the two names not match; that was an interesting closing. Does the legal description fit what you were told or understand to be what you are buying?
You and your agent will form a team. It's important to be open in your thoughts and communications with your agent. The more they know about you, your situation, and your dreams, the better they can help you reach your goal of buying your ideal B&B. Part of the task your team must tackle is to learn and understand the B&B zoning restrictions that will affect your purchase. If your agent finds a house that seems to be an ideal configuration, style, or location for a B&B, don't get too excited until you confirm that the zoning will allow you to create the business you dream of. Even if the property is an active B&B, double check that it’s zoned for and licensed as a B&B — some inns are operating illegally!
One buyer I know bought a house that seemed to be great because of its size and earlier renovations adding a bath for each bedroom. It had been an assisted living home for years so it seemed likely, according to their agent, that it would be readily zoned for a B&B. They discovered after closing the deal that neighbors were upset about the new B&B and zoning would never get changed, they would never legally turn that property into a B&B. Bad teamwork, I'd say.
I've talked to many an innkeeper who was selling a B&B that wasn’t zoned or licensed as a B&B. They were confident the new owner wouldn't have problems with the neighbors or government entity (city or county planning and zoning). They also refused to go through the hoops of changing the zoning before the sale because it was too difficult or too much work. Be very careful in such situations. The very act of changing zoning could bring enough attention to close the business. You don’t want that to happen after you buy the B&B!
My final comment about working with an agent is that I think you want to be careful about relying on the listing agent to take care of you. Generally, the listing agent works for the seller. Their fiduciary responsibility is to that client, not to you. They may be fair and honest with you, but they generally won't work as hard for you as your own agent would. I think it's a much better situation for you as the buyer to have your own agent, rather than use the seller’s agent, because there is so much detail to be aware of that you want someone on your team looking out for your best interests.
It's been my bias since before I became a Realtor to use a Buyer's Agent. That option has been readily available in Colorado for many years. I have found that other states don't use Buyer Agency nearly as much and have very different attitudes about that business relationship. Clearly you have to go with the local approach to real estate, but do look into it and push for it as much as you can. That business relationship gives you the best service, in my opinion.
Now you have a start on questions to ask your agent. Some of the questions are interview questions to help you decide who to hire, and some are to help you through the process. Questions should arise as you proceed; ask them so you stay on track. And have fun. This is an important part of the process, and the energy you get from this process will reflect in your inn operations. Make it a positive energy.
]]>I've thrown this question in not to be a deal breaker but to be a reminder to both you and the agent that lending can be the most difficult part of buying a bed and breakfast. Some people think finding their B&B is challenging, but it's often nothing compared to finding a loan. If you are looking for a B&B in areas the Broker hasn't worked before it wouldn't be unusual for a lender to not be known.
Inspectors are important in getting a solid house, or at least in informing you of what you exactly are buying. If there are major problems found in an inspection you may still opt to go forward with the purchase, but it might alter the price or terms you are willing to offer.
Don't forget that renovation and repair costs are always more than anticipated. The work takes longer too. Some of the problems found may be merely cosmetic, so not a big deal to repair or replace, but they might be huge. Unless you have a strong business plan that supports your business model in that property, it might be prudent to walk away from a property that has lots of bad problems.
On the other hand, if you can get a great deal on the purchase of a B&B that has inspection problems, and you love the challenge of major repair, buying this kind of property might be perfect for you. Be honest with yourself about the energy, time, stamina and funds you have in tackling such a project though. It would be a shame to start on a repair job, after buying a bed and breakfast, only to have to give it up because you didn't have all you needed to complete the task.
I've seen an interesting array of approaches to this topic. It's not straightforward. Even with your Broker's guidance on this, let me urge you strongly to get your tax person involved the final allocation.
At the very least you'll allocate the real estate and personal property (FF&E -- furniture, fixtures and equipment) values. You may have a break out for goodwill too. And some opinions are that the real estate value be broken into land and improvements, while some lump it all together.
I've seen allocation for the real estate range from 74-79 percent. Allocation values for personal property range from 4-7 percent. Goodwill allocation percentages range from 15-22 percent. As tax code changes, attitudes and ideas about this change. Individual situations also impact how the valuation is approached.
Just to learn more, ask what your Broker suggests.
This batch of questions builds on the questions you've already been reviewing and thinking about. This education will help ensure you make a wise B&B Broker decision, as well as bed and breakfast purchase.
Now it's time to find out if the agent has participated in a completed sale of a bed and breakfast for sale. How many have they done, and which side of the transaction have they been on? In an ideal world they have handled both buyer and seller sides of the transaction so they can bring more experience and awareness to your transaction.
How many of the transactions they were involved in failed? That's not as negative a question as you might initially think. There are extenuating circumstances, beyond the agent's control, that can cause a transaction to fail. Situations like the buyer or seller changing their mind; the buyer not selling their home within the contract deadline; the buyer not securing financing, or insurance even; the bank could renege on their promise of funds, too. Hearing about the agent's experiences will give you insight into how they handle "speed bumps" you encounter along the way.
This question reminds you to probe to find out what they have done on their own to get educated. The agent doesn't have to have read everything available on the subject, though that would be good, but if even one book has been read or one class taken, that's an indication they are dedicated to being a good agent for you, and others down the road.
I come from a long history with Buyer Agency when it comes to working with buyers. Much of the country isn't as familiar with or fond of Buyer Agency as I am coming from Colorado. But even within Colorado there are pockets of pro-agency and pockets of anti-agency real estate professionals.
Your options include Buyer's Agent, Seller's Agent, Dual Agent, Transaction Broker, and Sub-Agent. A Buyer's Agent works for you, the buyer; you are the person they have their fiduciary responsibility to. A Seller's Agent works for the seller; their fiduciary responsibility lies with the seller. A Dual Agent is an agent who works for both the buyer and seller -- with their written approval -- and owes fiduciary responsibility to both parties. A Transaction Broker facilitates the real estate transaction; they don't represent either the buyer or the seller and only work as guided by either or both party. A Sub-Agent is a real estate professional who represents the seller but doesn't have a contractual relationship with the seller, and may not even know the seller.
It seems to me that you want someone in your corner who will work for and with you rather than just assist you in the transaction. When you find an agent you want to work with strive to go with Buyer Agency, unless it just won’t fly. It wouldn’t fly because they aren’t expert in Buyer Agency and thus aren’t comfortable doing that or because Buyer Agency is looked upon unfavorably in the area.
You should expect at the very least a Purchase Contract (the name changes slightly from state to state) -- though some agents like a Letter of Intent instead. You could also get copies of an Agency Contract -- the method of establishing your working relationship, a Promissory Note, and a Seller's Property Disclosure. An ideal situation would be to also get copies of the various clauses, conditions, and contingencies your agent uses -- or would use -- in such a purchase as yours.
You are getting the idea now of how many questions you need to be asking. And the issues you are covering by exploring an agent's background are becoming more clear too. You may spend a long time, and lots of time, with this person, so make sure you have a good relationship and communication before going very far down the path toward your B&B purchase.
When a B&B broker isn't available in your area I used to recommend finding the best residential agent in town. Then it occurred to me that commercial experience would be helpful instead because a B&B sale transaction isn't as simple as a residential transaction. I have finally come to the realization that the training and background are what is important, but attitude is also important in the agent you choose to work with. Shop carefully.
Here are the first few questions in this four part series.
Yes! And you want an experienced one. If you have the luxury of finding a B&B Broker the most important question to ask is how many inns have you sold in the last three years. Not every part of the U.S. has B&B Brokers, so you don't have the luxury of choosing between them. If you can't work with a B&B Broker, consider hiring a B&B Specialist (broker or consultant) to at least consult with you through the process).
This is one of those open-ended questions that's good to ask during interviews to see what the person has to say. You not only get an answer, but you also get a sense of the person and their communication style. Has the agent helped anyone buy or sell a bed and breakfast?
Have they even stayed in a B&B? Several? That's a decent first step in knowing about them and having an affinity for the business. Has the broker attended any B&B conferences or seminars? Just how involved has this person gotten in the industry? Do they network with other B&B Brokers around the country? Are they a resource for B&B Appraisers?
This is a small industry, being a B&B Broker, and the active agents attend conferences and network. As with innkeepers, brokers have lots to learn and gain by networking, like at conferences. Not only will the brokers meet other brokers, but also the consultants and vendors who participate, making them a more valuable team member and asset to a new innkeeper.
Answers to these questions may not be relationship breakers but the answers do give you a clue to their level of involvement in the B&B industry, their level of understanding of B&Bs and how they can help you best. However, if the agent tries to convince you that such questions are not important or relevant, that is a relationship breaker -- move on immediately!
Ideally you will be able to hire someone who is involved and knows the industry well. If you can't find that person, at least seek someone who will care enough to learn more. You may be their first opportunity to be involved in the B&B industry so you can help them learn as you go -- if they are the right person to work with.
If your agent isn-t aware of the hours an innkeeper can make the inn available to you for inspection, you should be aware and guide them. Innkeepers are busy with their guests during breakfast and at check-in time; those are bad times to try to visit an inn and innkeeper. Between breakfast and check-in innkeepers are tending to other business matters like housekeeping, reservations, and marketing (both at the grocery store and in the promotional sense); that's the best time to visit, but do be aware that you may not see rooms that haven't been cleaned and readied nor may you see rooms that have guests in them. Ideally the innkeeper will have gotten the guests' approval to see occupied rooms, but you can't count an that. Awareness will go along way in winning the seller's respect for you and your search.
]]>GRM is calculated by multiplying the annual gross room income (GRI) by a factor. This approach looks at a B&B at its most basic level -- income. There is no question of how the money is spent, or therefore how the business is run. This approach allows properties to be compared on the same plane, regardless of location, amenities, or size -- the income reflects the business as it is. Other income sources, such as gift shops, special events, and rentals (bikes, boats, and skates being examples), are typically considered separately. The B&B, including the real estate and FF&E (furniture, fixtures and equipment), is the primary business you sell. There may be other businesses, like gift shop and restaurant, and they're valued separately.
The national factor range is 3-7. The variables in this range include level of amenities (private baths, jetted tubs, room phones, fireplaces), maintenance and condition of the property, and location. The national factor average is 5.
GRI x Factor = Price
ex: $140,000 x 5 = $700,000
NOI is calculated by taking the normal operating expenses (NOE) and subtracting them from the gross room income (GRI); the result is then divided by a factor, or capitalization rate. NOI includes only normal daily operating expenses -- no debt service, personal items, extraordinary expenses, or management costs are included. This approach shows the whole picture of income and expenses. Most commercial real estate investments use industry standards in making assumptions for the income and expenses to calculate the sale price. Therefore, that is the primary approach used in pricing commercial and investment properties. However, B&Bs don't yet have universally accepted industry standards for income and expenses, so one can't as easily gauge the soundness and fairness of a B&B's income and expenses (e.g., is the shown income all there is, and how much of the expenses are really personal) to therefore calculate a sale price. The national factor range is 9-13% (with the same reasons for variability as found in the GRM discussion). The national factor average is 11%.
GRI - NOE = NOI
ex: $180,000 - $108,000 = $72,000NOI / Factor = Price
ex: $72,000/ .11 = $654,545
NOTE: There are some consultants, innkeepers and speakers who think this formula is to multiply the NOI by the factor as a non-percentage. That works beautifully if the value is 10, but as soon as the value changes the results are skewed and incorrect. The factor is a percentage, and it is divided into the NOI.
Price per Furnished Guest Room
The Price per Furnished Guest Room formula is useful only if the inn has a 65 percent occupancy rate. I personally don't value this approach because I feel it ignores the condition and amenities of the rooms, the building, and the strength of the business, though the 65 percent does acknowledge some of the business value. I believe that the business strength is important since that is what you are selling and is a reflection of the building condition and hospitality. Others use this approach so I feel compelled to show how to use this -- in case an Inn you are examining has a 65 percent occupancy rate. The price range runs from $80,000$155,000. There is no national average because that number is so specific to a property, based on its quality and extent of amenity.
#Guest rooms x Factor = Price
ex: 7 x $125,000 = $875,000
Price per Square Foot
The Price per Square Foot formula is useful only when the inn has a 65 percent or higher occupancy rate. I don't like this approach for any real estate, unless you are comparing identical properties, because it has the same limitations as Price per Furnished Guest Room, only to an even greater extent. The price range is $100$150 per square foot, but that higher price could be much higher if the finish was exceptional and amenities abundant.
$/SF x Total SF = Price
ex: $125 x 6,000 = $750,000
At this point, according to these rule-of-thumb formulas that the examples shown were all applied to the same sample property, the suggested sale prices results in values of $700,000, $654,545, $875,000, and $750,000 (nearly a $200,000 span!). Applying your knowledge of the area, competition, condition of the building and marketing plan helps you narrow in on the most reasonable sale (or purchase) price for "today". "Today's" price is the most reasonable to consider since that’s where you are at the time of purchase. Many sellers tend to price their B&B inns based on what they hope to sell for by the end of the typical sale period, which is three years -- "tomorrow". The challenge is getting to a price which satisfies the "today"-thinking buyer and the "tomorrow"-thinking seller.
The factors used in these rules-of-thumb will vary up or down depending on the condition of the property, the degree of luxury, the location's desirability, the degree of amenity (private bath vs. shared bath, gardens, jetted tubs, fireplaces), and maintenance quality. My favorite rule-of -thumb is the GRM, because I feel it most accurately reflects the business. If you can get a clear, accurate picture of what the net operating income is, then NOI is an even stronger indicator of what you can expect of your bottom line if you plan on operating the same way as the present owners. The challenge with any pricing strategy is the subjective aspect of selecting the factor.
Using an experienced inn broker will help you tremendously because their industry knowledge will help them in their pricing approach. I've seen too many buyers and sellers caught up in the inn to the fault of over valuing it for what it is to them. Either the inn doesn't sell or the buyer pays too much and struggles with keeping the inn financially viable, and occasionally losing it to foreclosure. These rules-of-thumb give you sound guidance for the general "size and shape" of the price target. Don't thumb your nose at this approach.
Once you determine a price range using these formulas, test the price from the lender's perspective. With a 30 percent down payment (30 percent is the minimum you should put down on the purchase), is the annualized debt service less than or equal to 40 percent of the income? If it is, then you as the buyer can operate the business successfully and the price is "reasonable" for the income. If not, you need to evaluate whether this purchase is a good idea. There can be extenuating circumstances that make some "bad purchases" become "good purchases" in Putting The Puzzle Pieces Together chapter. Look at those circumstances carefully, evaluate them with your situation in mind, and make a decision. Be careful to not fool yourself -- try to not let your heart rule your mind. Both heart and mind need to be involved in making these critical decisions.
When in doubt, don't.
What can you afford to buy? My quick rule of is to multiply your available cash that you plan to use for this B&B purchase (home equity, savings, gift money, stocks/bonds) by three to see which price ballpark you can reasonably look in. If you have $200,000 in available cash, a $600,000 purchase isn't unreasonable for you. You may be able to afford a slightly higher price than that, but you still have an idea of your price target. If you have additional outside income to help support you and the inn, you can buy more inn than this formula indicates. But if you are buying an inn to be self-supporting, then pay close attention to this advice.
This bears repeating -- don't buy more than you can afford; this is one real estate purchase that you don’t want to leverage. Many buyers with $100,000 think they can buy a viable B&B, make lots of money, and have a healthy cushion. My experience is contrary to that. I have seen innkeepers file bankruptcy and lose not only the inn but their cash and time investment too. I've seen them lose money in their operations and sell the inn at a loss. I've seen the stress of insufficient funds break up relationships. Make sure you buy within your means.
There are loans out there for buyers with a down payment of less than 30 percent, but they are hard to get (80 percent loans are rare, and as of this writing I don't know any innkeeper who has gotten a 90 percent loan). Even if you could get a higher loan-to-value (LTV), it doesn't make sense to leverage your money this much when buying a B&B. Inns operate with a low profit margin. The mortgage is the biggest item in the budget. Keeping the mortgage less than or equal to 40 percent of your gross annual room income allows you to better survive down times such as off-season lulls, natural disasters (hurricanes, tornadoes, earthquakes, and forest fires are some that immediately come to mind that I know have impacted innkeepers' businesses), recessions, and even terrorist attacks. You can trim the budget in slow times in many categories, but once you have your mortgage, that's one expense you can't as easily trim, especially if your cash flow is tight and your money reserve low. Focus on keeping your debt service as low as possible so you don't become a casualty of "slow times".
You'll also want and need cash for closing costs, moving costs, operating reserves, and "ramp up" costs. Ramp up costs are the funds you need to announce to your guest list you are the new owner, modify the inn's web site and brochure, freshen linens/paint/etc, or even to decorate/renovate to make the inn more your style. Caveat: don't go overboard initially making changes because you will want to "know" the inn and your business before making big changes. Also, you want the inn's cash flow to finance those changes to keep your early cash outlay as low as possible. "Life happens" and you don't want to find yourself in the position of owing more money on the inn acquisition and renovation than you can get out if you have to sell early in your ownership.
I firmly believe where there's a will there's a way. My approach to innkeeping is that you can do anything you want as long as it's true to your dream -- and you convey your dream to your guests. (For guidance on developing your dream, my eBook Building a Good Foundation is invaluable.) There are few rights or wrongs in this business. That's part of the beauty -- and the curse -- of this industry. There are those who "know" you must have more than 8, 10, or 22 rooms to be a viable B&B. Others are of the school you must have a restaurant with your inn to be viable. That's true for them but doesn't have to be true for you. Follow your dream. Do your homework, consult with experts, and determine how you can make your dream viable. Make adjustments to the dream, guided by your homework results. Then act on your dream to create your reality.
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