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Do you have advice for selling a B&B?

March 1, 2005

by Kit Cassingham

Selling a bed and breakfast takes planning and preparation. Know what buyer want and provide that if at all possible.

From "Ask Kit!":
Q: I enjoyed your website, lots of information for people thinking about buying a B&B. We are selling our B&B and have found very little on the internet regarding selling B&B properties. We have had four showings in the past 5 months and are having a difficult time finding qualified buyers. We seem to attract those dreaming of the B&B lifestyle with little knowledge about what it takes to be successful or even if they can afford to do it. Most have unrealistic expectations regarding income and occupancy.

Any advice to those of us selling??

A: You'll note, first of all, that I added a category for Selling A B&B so sellers and agents have a forum for their questions and wisdom. Secondly, I hear your frustration but don't hear a specific question I can address, so I'll give it my best and we'll see what happens.

Selling a B&B can be frustrating. You have created a good business, hired professionals to market it for you, and now you are faced with a slow response. The burning question is where the qualified buyers are. I can tell you there are frustrated buyers out there looking for "qualified inns". The challenge is to get the two together.

Here is some food for thought:
* Have you priced the B&B "correctly" and have you shown the buyer how the purchase can work for them?
* Will the new owner have a way of recouping their investment by increasing room rates or the occupancy rate, or by adding rooms?
* Are the owner's quarters desirable?
* Are you getting the word out to enough people?
* Is the B&B a turnkey sale? Will the inn stay furnished they way you have it now or will the buyer have to buy more furniture?
* What condition is the B&B in? Good or needs work? Are the sheets and towels in new-like condition?
* How strong is the business and the potential?
* Is the B&B dated and needs sprucing up?

The average time for selling a bed and breakfast is three years. Generally I have found B&Bs that are priced well for their location, condition, and income, sell quickly. Though one of my last listings seemed priced perfectly and still took three to four years to sell. When I was new in real estate my broker always said that anything will sell if it's priced correctly; the challenge is finding the correct price.

I think if you keep doing what you have been doing [I have the advantage here, knowing what you have done] that your buyer will come along. Feel free to post here what you are selling. Maybe your buyer is on this blog.

Comments

Kit, as usual, has hit the nail on the head! One of the things I most often hear from sellers "for sale by owner" and even from some who are listed with an agent is that they spend time with people who, in the end, aren't qualified to buy. There are a couple of ways to look at this problem.

As a FSBO seller, you have to understand how much cash down (plus reserves) it will take for a buyer to qualify to buy your inn based on income. If your income isn't sufficient to support much debt service, then a prospective buyer should be able to produce evidence of prior qualification with a lender for your purchase price based on their outside income.

If you are listed for sale, then it's your broker's responsibility to do this screening. What happens, though, is that sellers usually want "bed kickers" weeded out (which takes care of most prospects) while still wanting lots of foot traffic by buyers. You usually can't have it both ways. I always warn my sellers that they won't get very many actual visitors at all from me, because I screen like crazy by insisting on certain information regarding financial resources AND providing VERY detailed information about the inn to people who answer the first questions right. In most cases, an inn for a particular buyer can be eliminated this way. It may be depressing, but it's the choice.

In the end, if the property is priced right, the prospects are screened adequately, and the prospect is provided with good, reliable, detailed information, you shouldn't need more than a very few who actually look to find your buyer.
_________________
Peter Scherman
"The B&B Team"
Inn Brokerage and Consulting, From Check-in to Check-out
www.bbteam.com
434-286-4600


Hello! With Kit's help, I am the originator of this topic. We are selling and have joined this forum to share our perspective. I only wish we had found Kit when we were buying!

I'd like to address the points below:

* Have you priced the B&B "correctly" and have you shown the buyer how the purchase can work for them?

I think we have priced correctly based on the following:
Our asking price is $875,000-- house and business. We valued the business at $50k. (The three year average gross.) Our house--no furnishings, no business--was assessed market value of $850k. (based on market evaluation of homes in the area--historic homes, water views etc.) Port Townsend homes in our price range are actually smaller--for example, there is a residence across the street from us, also historic--4 bedrooms/2baths, asking price $798k. We have 7 beds/baths. Side by side with the other homes of our size in the MLS listings we look like the best deal in town. Consequently, there are two other B&B's in PT for sale currently asking over $1,000,000. Approx. same size as ours--worse condition. (in need of TLC and upgrades.) This leads us to believe we are priced correctly.

* Will the new owner have a way of recouping their investment by increasing room rates or the occupancy rate, or by adding rooms?

Our rates are not the highest or lowest in a town of about 12 B&B's--but the new owner could certainly increase the occupancy without much effort. We operated the B&B as a "hobby" reducing our occupancy due to a demanding second business and new baby in our second season.

* Are the owner's quarters desirable?

Our owner's quarter are very desirable: 2 bedrooms, 2 bathrooms a family room and office, about 800sf. There is also a Guest House which could be the Owner's quarters if traded for one of the Innkeepers bedrooms. This would give the owner more space an a private kitchen. (about 1000sf total space)

* Are you getting the word out to enough people?

We are promoting on the web and also utilizing the Northwest MLS systems.

* Is the B&B a turnkey sale? Will the inn stay furnished they way you have it now or will the buyer have to buy more furniture?

95% furnished.

* What condition is the B&B in? Good or needs work? Are the sheets and towels in new-like condition?

We have been a B&B for 20 years and constantly upgraded. All linens and towels are 2 years old--top quality turksih spa towles and robes and 400 thread count egyptian cotton sheets. (We went a little crazy buying things when we bought the B&B!)


* How strong is the business and the potential?

The business is great. We turned away a lot of business last season due to the other stress in our family life. The potential is incredible for the right innkeepers.

* Is the B&B dated and needs sprucing up?

The house is immaculate. We did a major overhaul and new decor when we bought it.


So why are we not selling? I feel that although we are priced correctly--we are way too expensive for the average first-time innkeeper. We could only appeal to buyers who could handle a significant purchase upfront and not figure the monthly mortgage part of the equation--the income at present does not meet the cost of the home.

We have been told we are doing everything right in regards to promotion of the B&B for sale and prequalifying the 'bed-kickers'. I can't handle the idea that this might take 2 to 4 years! When we bought the B&B it was on the market for 5 months.

Thank you for your valuable input! We would love to hear from people looking to buy a B&B and become innkeepers and what are the big issues in their minds. What are they looking for? What is the deal-breaker?

Thank you! For those interested our property is detailed on a website:

http://www.unebagatelle.com/ab/house
_________________
Carie & Alain Bude
The Chanticleer Inn, Bed & Breakfast
1208 Franklin Street
Port Townsend, WA 98368


You have chosen a common approach to pricing a B&B, especially when the residential value has outstripped the B&B value. The problem I see with that approach though is that the new owner will have an even higher payment than you do and it could be next to impossible for them to make the payments without an outside job. And in some cases an outside job goes against what the new owners want when they get into the B&B industry.

When you look at the purchase from an investment point-of-view this scenario has a poor return on investment and a poor return of investment. Many B&B buyers don't look at a purchase from that angle, but their lender sure will.

You pointed out that the inn had been on the market for five months when you bought it. Are you absolutely sure? Or had it been on the market for five months with that particular agent, or since they put it back on the market? I only ask so that you can have a more relaxed attitude about the selling time required here.

Again, I'm not saying that you won't find a buyer at your present price, it's just probably going to take a lot longer to do so. Let me urge you again to post your listing in the B&B for Sale section.


As someone who has owned an inn in Hawaii, we faced the same problem even with the fact that we had an additional rental home on the property and with 3 rooms, were doing $100,000 in gross room sales by our 3rd year and could have added the other 2 bedroom house into the B&B for an additional $50,000 per year income. Considering that the actual expenses are quite low, that would have equated to a value that would have exceeded our sale price by at least $200,000.

Reality today is that more and more inns are closing at the sale as they no longer make any sense financially and when so many inns still charge less than $100 per room night, it's hard to justify owning a small inn as in my opinion, a hobby is doing something that's fun, not hard work.

And yes, we are in the market for an inn, but if we're going to invest $200,000 in cash, why would we want to work 90 plus hours a week and not get paid for our time? An inn is a business and it must be looked at that way. Anyone who tells you it's a lifestyle and you are gullable enough to believe it, please go see your shrink.

It doesn't matter what type of business you own or buy. If you have to only buy yourself a job, Put your money in some income property and post your resume on Monster.com and go to work for someone else for 40 hours a week with benefits and 2 days a week off plus paid vacations.
You'll thank yourself for it. You'll have a life.

Now on the other hand, if you find or create that rare B&B that makes lots of money, by all means, go for it! Just be prepared for the time commitment and other aspects of running an inn.


As always, Kit has hit the nail on the head! As a new inn owner, the purchase experience was quite enlightening for me.

Looking for a career change, one of my main purchase requirements was that the inn had to be self-sustaining and support debt service. An outside job was not even an option! Owner financing of some sort was going to be a big plus if I could find it. I looked at many many inns in the price range that you are asking and could not find one where the business could support what I would have been paying in terms of a mortgage..and it was quite disappointing. As Kit said, the property values were so high that only someone with money to burn or a couple with one outside job could make a go of it.

We were able to come up with some creative financing where the properties (my inn consists of two homes) were financed as regular mortgages and the "business" including all of the furniture, fixtures, assets, etc, were financed by the owner with a down payment, long term financing and a very compelling interest rate. It was a win-win for both us and believe or not the deal was agreed upon in the 2nd month that the inn was on the market.


It is interesting to read the various questions and comments regarding selling or buying a B & B, with reference to my perspective as a business broker.

Obviously, many sellers and buyers need in-depth education in the matter, which is way beyond the scope of this commentary. However, I would offer a couple of comments from a business brokers standpoint.

The sale of any business is a joint-venture between the owner/seller and business broker. Although a B&B always includes real estate, the real estate itself is only a part of the driver and value. Rather than call your local residential real estate agent, think in terms of finding a business broker also licensed in real estate. The approach difference will astound you. Your business broker will start with explaining their role, i.e., we are a partnership to sell the business, at the highest price possible. That does not mean that we just get to decide we want a Million $ and we can sell it for that. What if it is worh $2 Million, or $100,000?

We have been working with a B&B under this premises, now for over one year. They have a sale price goal, but the B & B could not support it for two reasons: Condition, and Net Operating Profit. The B & B needed quite a bit done to be up to saleable condition, and the income stream had been down following 9/11. With due diligence and perseverance on the part of the owner/operator, they have now repaired and replaced about everything that was a major detriment, PLUS they have cleaned out all of the dead storage areas so a buyer can actually see what all is there (space, etc.). We expect to put this B & B on the market later this year, in the $1 Million range, and it will justify itself!

The valuation process is extensive. The unknown is what value is a business that may not have that great a net return? It is always in the eyes of the beholder. There is some value in the 'free living', if you want to call it that, and some value in the entertainment and social aspect of owning and operating a B & B. It has value, but how much?? But myadvice is always, keep all the income on the books. that is what a buyer is buying, and that is what you can take to the bank!

In addition, your broker is screening the buyers (If they are experienced and doing it right.) They (we brokers) don't need the 'practice' of showing properties to individuals that don't know what it takes to buy and don't have the wherewithal to buy a substantial business. Our practice, as is the practice of business brokers that I am familiar with, to require a non-disclosure agreement and a financial statement from the buyer, before we go any further. Any knowledgeable buyer knows they have to prove their ability to buy before they can have the financials of the seller. If the buyer is not experienced, then the broker is duty bound to help them understand the process - a seller is not going to give out their financials just because someone is curious! ONLY to QUALIFIED buyers - that are willing to prove they are qualified!

I would say that about 70% of inquiries are not qualified buyers, but rather just have a 'dream' about 'owning their own business'. In my own case, I always take them through the process, slowly, and teach them how to go about buying a business. It requires some financials, and a business plan. (I always love the 'I have a backer and when I find the business the backer will come up with the money'. Requirement: The backer then needs to sign the non-disclosure ALSO, and must provide his financials!) These are hard and fast rules, and no exceptions. It results in, as one of the commentaries I read today said, for few showings. However, when the seller has to get their place in tip-top shape for a potential buyer, they only want that for QUALIFIED BUYERS!

One of my favorite 'stories' is about a business seller that had listed his business with 2 previous brokers. They had each shown it 10 - 15 times over the course of their year listing. No sale. When I listed it i required extensive documents, etc., - owner said I was demanding too much, but he gave it all to me. I produced an extensive prospectus. I qualified several inquires and determined that all but 3 of the inquiries were not qualified financially and one was just not a good match. Of the three that were qualifed, only two had a sincere interest in this particulare type of business. I picked what I thought was the best of the two, and we delivered financials, reviewed with their CPA, and then did the full physical tour of the business. The buyer bought it that day, for full asking price, and the financing took 2 hours, plus appraisal and due diligence time. Total to closing was 60 days. The first showing, this one, was 8 months into the listing! Screening keeps a lot of 'tire-kickers' out of everyones way to get to the real buyer! The sale was only $350,000, but worked out well for everyone!

Good luck, and get good professional advisers to work with!

Mike Blackmon, Broker
DIAMOND REALTY
DIAMOND BUSINESS CONNECTIONS
Omaha, NE


I think that Mike Blackman said it right. Very few agents work for their commission and it takes a lot of work gathering the info to be able to sell a B&B. We have reviewed a number of properties in the last year and we know absolutely what will work for us. Almost all of the properties we have reviewed with various agents have had little or verifiable information regarding income and expense. Many of the agents didn't have this info themselves so they really couldn't properly represent the property. We are always up front with any FSBO or agent as what we have available financially and a good agent will be able to let you know immediately whether or not a particular property will work for you. Qualifying a buyer is equally as important as taking a proper listing and in my opinion, it is better to decline a listing from an uncooperative seller than to take the listing with the hope it will eventually sell. In the 9 years I was a real estate broker in California, before I moved to Hawaii, I never had a listing that I took that didn't sell. And yes, I didn't have as many as some agents who would like to tell you that they only are listors (which means that in their minds once they have the seller sign on the dotted line, their work is done. They might though, spend a hundred dollars or so with some classified ads) Then they just sit back and let all the other agents do the selling then show up at the closing to collect their check.

It really pays to shop around for agents if you want to make your property sell. When we had our place for sale in Hawaii ( no business brokers there), we first had it listed with an agent that would never accompany the selling agent to show the property. He even sent people to us without any agent present as " we were the best qualified to show our property." We had many agents that came up to the B&B without having ever previewed the property and wanted us present to answer all their questions. Well, that's the agent's job; to be prepared to properly show the property. Being unavailable for the initial showing, in my mind, allows the buyer to really look at the property without the owner hanging around. Another issue is that this physical seperation between the buyer and seller allows for better negotiation. The property is showed, the questions are answered between brokers and the negotiation begins.
I believe that an immediate meeting face to face reduces your negotiating ability and you have hired an agent for just that purpose. To show the property and answer any initial questions during the showing.

We had buyers who had studied all the late night real estate seminars who would ask questions like " well, you have listed for this much but what would you really take for it" and "are you willing to take a large second while I finance it for 100% because I don't want to use any of my cash." These type of things are just what you want your agent to deal with so you are not placed off guard and the wrong buyers are eliminated.

If you are buying a B&B as a business, then approach it as a business.

If you want to do it as a hobby, then the income aspect isn't as important but just remember that a B&B is a lot of hours and many just hanging around waiting for guests to arrive so you can greet them. If you're a person who likes to be on the go all the time, this probably isn't the business or hobby for you as it will tie you down for a considerable amount of time.

Terry


I have to agree that all the above advise is very informative for businesses.

If you have already sold your property then, congratulations! If you haven't, maybe you should consider a different marketing approach.

With the information in your second posting, if this where my property, I would market it as a private residence instead of a business. That way, it can marketed as a home with potential to be a B&B, a positive. Instead of marketing it as a business that probably would fail because of real estate values. I would think that there would be more "qualified" buyers for the home then, for the business.

It also sounds like you might even be able to be money ahead. By selling the property as a home and auctioning the contents, you may end up with more money in your pockets.

Of course, you probably should get professional opinions on legal and tax matters.

This is just my opinion and it may not be that simple but, I think its worth a look.

Good luck!!





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