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Financing A Bed And Breakfast For Sale

May 25, 2000

by Kit Cassingham

Finding the bed and breakfast for sale you want to buy is only part of the challenge in becoming a B&B innkeeper. Getting the money to buy the inn is also important. Here are tips to help you finance your bed & breakfast - small inn for sale an easier, smoother process.

At the conference I attended this spring, I sat in on Feasibility and Appraisal presentations, which gave me a better understanding of why financing B&Bs is challenging for so many buyers. There were several interesting points which I can share with you which will help you in your B&B acquisition quest. This information also applies to sellers, since if buyers can't get financing you can't close the sale.

Banks and lenders are primarily interested in appraisals and say that feasibility studies are not helpful to them. Feasibility studies are good for the buyer to conduct so they can understand how they will make money, but the lender wants to see the facts of "what is" to make their decisions. Comparable sales are good for lenders to have and comprise a major portion of the information they want to see. Money is tight for hospitality properties, but as lenders see more studies on what makes lodging properties good businesses, and therefore good investments, they understand the industry better and are able to better justify hospitality funding.

A property's market value is different than the appraised value -- it's generally more. A person conducting a valuation won't just look at the previous year's income, they also do some historic analysis. The use of real estate taxes can be a value guide, but again that doesn't completely reflect a property's value. Questions you have to ask, when looking at real estate taxes, are "how are they calculated?" and "were they reassessed at the time of the last sale?" Also, capital improvements help justify market value. Capital improvements include room phones and modem lines, jetted tubs and fireplaces, etc. Good maintenance of the property is also a value factor.

Speaking of improvements, "trophy" characteristics are being financed more readily. I translate "trophy" to mean spectacular architectural features that don't necessarily add to the bottom line other than they are something people talk about or help bring guests to the B&Bs door. Examples of "trophy" characteristics include floor to ceiling windows framing a breathtaking mountain view, hand carved mouldings, and custom Italian tiled fireplace fronts. While these features weren't an obvious contribution to the bottom line they did bring guests back and impressed buyers, making it easier for me to sell the B&Bs with those "trophy" characteristics. I urge you to not bank (as it were) on special architectural features adding much value to a B&B property, but its consideration isn't unreasonable either.

My conclusion is that the best way to attain financing for a property is to support the price, as determined by the valuation, by keeping financial records, keeping up with capital improvements, and flaunting "trophy" characteristics (and documenting the effects of the "trophies" on business). Then educate the lender about all of these facts which add value to the property. The education should include "what is" in regards to the B&B's financial history, what other "like" B&Bs have sold for, and what makes the specific property unique. By all means, show the lender what you are going to do to make the business successful but also have documentation supporting the facts that make your business plan viable.




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