Appeared in our Winter 1999 issue
When the time comes that you are finally ready to sell your B&B, will your B&B be ready to sell? Will a buyer be willing to pay for the potential that you feel your B&B has? B&B owners can’t always predict the future, will your health hold up? How about disability? Will you want to sell your Inn as early as tomorrow?
It is prudent to plan now for the sale of your property which could happen next month or may not take place for years. By that I mean take the steps to keep your property as appealing as possible at all times. Maintain the complete property in as new a condition as possible. There is no quick solution to neglected maintenance. Buyers know the difference between a well maintained property and one that has been given a recent coat of paint. Buyers are more savvy now, they have access to hundreds of B&Bs for sale on the internet, and it is not unusual for a buyer to visit fifteen or more Inns before arriving at a decision as to which Inn to purchase. Clearly, step one is to keep your property appealing.
Step two has to do with the documentation of the financial operation of your Inn. Operating statistics are a must, and buyers want to see at least the three most recent years of income and expenses. The higher your “reported” gross income is, the better off you will be at sale time. The Gross Revenue Multiplier (GRM) is a common calculation used to arrive at the sales price for an Inn. Most Inns we have sold recently have been priced in the four to six multiple range of gross income. As an example if your Inn has a gross income of $100,000, then the sales price should fall in the $400,000 to $600,000 area.
$100,000 x 4 = $400,000; $100,000 x 6 = $600,000.
This is normally a fair price for both the seller and the buyer, as the buyer can then meet mortgage and operating expenses and still have an adequate return on his cash investment. It must be said however that many B&B sales fall outside of this four to six GRM range and the reasons are many. A property which has underutilized buildings or structures or vacant land that can be used for expansion is a good reason as is Historical property, which is always hard to evaluate.
Try keeping your Inn expenses in two categories. One category would include only the very basic property or Inn expenses, which are absolutely essential in the operation on the Inn. These would include property taxes, insurance, basic utilities, advertising, Guest breakfast costs, Inn supplies, bank charges and the like. The second category would include all the other expenses that the IRS tells us we can deduct from our taxable income such as depreciation, all insurance other than property and liability, one time repairs and the necessary supplies, tools, subscriptions, dues, entertainment, convention charges, legal and accounting and the like.
This leads to Income Capitalization. If you have done everything possible to bolster the gross income, then subtracting your category one basic Inn expenses, should leave a very healthy net return before debt. Net income is always divided by a capitalization rate (cap rate) to arrive at market value. The cap rate is a percentage return on investment used in business investments, and can range from a low 6% return to a high of 12% return. As an example, using a gross income of $100,000 again, and assuming that basic Inn expenses are $46,000, this then leave us with a $54,000 net profit. Using a cap rate of 10%, the market value would be $540,000
Gross income $100,000
Less Basic Inn expenses -$ 46,000
Net income $ 54,000
Using a cap rate of 10%, we would then divide the net income by this cap rate to obtain the market value.
$ 54,000 = $ 540,000
In the above example, if the Innkeeper had been under reporting his income by $15,000, then the net income would only be $39,000 which when divided by the same 10% cap rate, yields a low $390,000 market value. A $150,000 potential loss for a possible tax avoidance of approximately $4,500. It’s a no brainer to figure out who loses in this situation! It is enormously advantageous for the Innkeeper to report all income.
Buyers are knowledgeable, and the vast majority of them take one or more aspiring innkeepers seminars before purchasing an Inn. They know which questions to ask and what the financial ratios should be before signing on the dotted line. Buyers are also willing to pay several hundred dollars to obtain the best home inspection report available on your property, which should detail any and all neglected maintenance. If the cost of repair and replacement is too high, and even though this cost is borne by the seller, some buyers are walking away from the deal. They do not want to take on a problem Inn. There are simply too many other Inns to choose from that are in good condition.
So be prepared! Your property, including both the physical and the financial aspects of it, should be ready today, should you decide you would like to sell it tomorrow.
This article is by no means meant to be a substitution for a professional appraisal of a property. Indeed for properties that fall outside of our four to six GRM, we many times recommend that the Inn be appraised before we will attempt to market it.
The B&B and Country Inn Marketplace
Please address article comments to: Claude or Mariette Gagne ~ The B&B and Country Inn MarketPlace
926 Lenoir Rhyne Blvd., SE, Hickory, NC 28602 | Email us
Toll free 877-828-2323, Office: 828-324-7291