by Peter Scherman of The B&B Team
Last summer The B&B Team received a call from innkeepers who were planning a major expansion to their inn. They had looked at the land, the building, had preliminary drawings from their architect, had spoken with two banks, and were ready to move forward. Here’s how they described their situation.
“It’s like we’re sitting on the bus. The kids are on board. The bags have been stowed below. We’ve got a supply of munchies for the road. We’re headed to Abilene! The driver has just inserted the key into the ignition when suddenly we are struck with this raw fear that we’ve forgotten something. Something very important. But we don’t know what it is.” What should they do? Do they ignore that apprehension and head on down the road? Or do they get off the bus to Abilene?
They have an upscale inn with ten luxurious rooms, fabulous owner’s quarters, unusually large and flexible meeting space, and a gorgeous waterfront location. They’ve been successful, but have an ambitious long-term goal for retirement, and the inn is their ticket.
In order to reach their goal, they figured, they needed to grow their business by adding up to six more rooms, a commercial kitchen, and a spa. Preliminary plans had been drawn up, and an estimate of cost was in hand. There would need to be a bit of land trading to obtain sufficient acreage to be allowed to build the expansion, but that seemed feasible enough. So, if all the plans were laid out, and little remained to be done to secure funding and break ground, why did they call on The B&B Team?
Well, it was that gnawing question (a good instinct, by the way) that maybe there was one more person they should consult with before “heading to Abilene.” They needed to know if they enlarged the inn, would it increase their inn’s value enough to reach their retirement goals, and how long would it take? To answer their question would require a site visit to learn more about their business, property, location, and plans.
What a beautiful spot! What an inn! What a view! There were lots of superlatives to offer for the building and the land and all that these innkeepers had done to enlarge and improve the bed & breakfast they had bought a few years before. We analyzed their cash flow for the past couple of years with the rooms they have and compared their current investment and business value against their expansion plans. The addition was going to be spectacular, no doubt, but it was going to change fundamentally the nature of the property, so we ran some projections.
Despite its large size and many rooms, the configuration of the current bed & breakfast and its location are such that, with some remodeling, one could envision it being purchased as a luxury residence without too much difficulty. That’s not always the case when there are this many rooms, but the amount and distribution of public spaces and the innkeepers’ private quarters as well as their proximity to a high net worth population made it feasible. As a residence, the upper limit of what someone would pay for their inn is governed strictly by marketplace demands and the uniqueness factor. On the other hand, once they added on the new wing with more guest rooms and spa, the likelihood of anyone buying their inn for private use would have evaporated, and they would then need to earn enough with the business to justify a price that would net them what they needed for retirement. If they could reach their income goals, it might be possible to reach their financial goals as well.
The problem was, at their current occupancy rate of around 45%, there was little reason to believe that more rooms would increase their revenues sufficiently to finance the expansion. They certainly weren’t “maxed out.” Even with the spa, it seemed unlikely that the available pool of potential guests and customers would justify the expense. If revenue targets weren’t met, and financing became a burden, it would have been almost impossible to sell their inn for enough to recoup their investment. On the other hand, if they focused their efforts on taking better advantage of what they had, raising their occupancy (to 55%+), revenues, and net income, they could increase the value of their asset and have the luxury of being able to offer it for sale in a few years either as high end residential real estate or a successful inn, whichever would net them the most at that point in time. And, if they grew their business enough that some type of expansion seemed like a good idea to meet demand, then an addition of a different configuration which would provide better revenue opportunities with less capital investment (that’s pronounced debt) would be a better way to go. It could be smaller, with fewer but larger rooms, and the spa could go into already existing space in the main house.
So, with a sigh of relief and renewed purpose these innkeepers got “off the bus to Abilene” and developed a marketing plan to grow their current business without incurring massive additional debt. They are now working on building their mid-week business by tapping the corporate market utilizing their ideal facilities for small to medium size meetings. In time a spa might be in order, but not just yet. We’ll be tracking their success to see how they’re doing, providing advice along the way to help ensure they can retire the way they want to.
These innkeepers said that they expected The B&B Team to validate their expansion concept, just as everyone else had, and instead found that the unvarnished opinion they received was the dose of reality they needed. So, if you’re planning a large capital investment in your inn and feel like you’re ready to pull away from the curb, be sure you’re on the right bus. If you’re not certain, call The B&B Team. We’d love to help you assess your plans and consider alternate routes.