by Peter Scherman of The B&B Team
Whether you are thinking of buying an inn or already own one, at some point you’ll be involved in a transaction to transfer ownership of that inn. Whether you have a four room B&B or a 25 room full service inn, there are certain common elements that must be considered in determining value. All inns have real estate. They all have personal property (trade fixtures, furnishings); all have revenues, and some have good will.
For most inns, the fundamental value lies in the real estate. Whether that real estate is valued as a residence or as commercial property is a vital distinction, as the methods used for valuing them are different. Residential real estate is valued primarily for its ability to provide a home and shelter, while commercial real estate is valued for its ability to generate a stream of income that can pay for the real estate, specifically the land under the building. Bed & breakfasts often fall somewhere in between.
The majority of smaller B&B’s were once someone’s home. Today they may have a few more baths than they once did, but it’s not hard to see how someone might like to return that B&B to residential use. As the proverbial “real estate bubble” has experienced “froth” (don’t you just love those buzz words?) the past few years, the residential real estate value of many bed & breakfasts has outstripped the business’s ability to pay for itself. As a result, many B&Bs are returning to private use, departing the pool of small lodging rooms. The furnishings are being sold separately or, in the case of second homes, are sometimes included with the house. Measurable good will does not exist.
When these B&B’s are purchased as turnkey operations, it is usually because they generate above average revenue, show good growth potential, or are in locations where the business can still help pay for a valuable investment for people who want to live the innkeeping lifestyle and can afford it.
Larger inns, including almost all full service inns, are a different matter. It’s hard to talk about real estate value when comparing it to what homes are selling for in the area because, in most cases, the property has been improved to a point that there is little or no market for it as a residence. However, the land it sits on may have great value if it is being used for its “highest and best use” or even if it could have another better use in the future.
With these properties, income is king, and the real value will lie in the inn’s ability to generate enough cash flow to pay for itself. The more income, especially net operating income (NOI), the higher the price. The furnishings, fixtures and equipment (FF&E) are part of that ability to generate income and, necessarily, are part of the package. With these properties, good will is increasingly important, and smart investors will pay for it when it’s merited, as it’s a reflection of the quality of the income the inn generates.
When looking at your own inn or considering a purchase, keep these essential components in mind, as it will help explain or justify a given value. Remember that every inn and each marketplace are unique, and sometimes it’s a judgment call as to where the greatest value lies or what the highest and best use of a property is. When in doubt, consult a professional who has experience valuing inns like yours or the one you are contemplating buying.