2016 The Year of the Entrepreneur/Innkeeper
The phone rings, and we answer… How may I help you? “Well…I would like some information on the So ‘n So Inn you have listed on The B&B Team website”. Thus the conversation starts and the journey begins. “For would-be entrepreneurs, sometimes the hardest part about starting a business is taking that first step.” From a recent article “Why 2016 Is the Year of the Entrepreneur” by Paul Sisolak.
I agree with this statement 100%, and making that call to The B&B Team is a smart first step.
The theme of Mr. Sisolak’s article focuses on the need for fiscal responsibility for the “would-be entrepreneurs.” Tip #1 was the need for creating long term wealth. The article gives great advice on how to conserve spending and create future wealth. The buyers we have worked with that have the strongest buying power have done just that. They are in a position of strength because they have focused on long term financial goals. As a result they have more options in what they can consider to purchase and where!
In The B&B Team’s extensive experience, when we see strong buyers come to us, they come with a good credit score, assets and often times, retirement savings. They have planned and are in control of their financial resources and are now seeking advice on how best to put it to use for their future life as innkeepers.
Aside from the financial (but not underestimating its importance), is the personal side of making that first step.
“2016 is the year to break free from mediocrity and society’s norms. Now is time to quit your 9-5 job and become an entrepreneur. Start becoming the true you and create the lifestyle you are destined for.” Josh Felber, a serial entrepreneur and high performance coach.
Pretty bold statement! Depending on the circumstances, we often suggest that a good position to be in is jobless and homeless! Why? Because you are ready, willing and able.
There must be an excitement and positive anticipation for pursuing any new venture. Focus on that initial excitement and passion; that is what gives you the incentive to move forward. Then ask yourself these initial questions.
- Are you willing to take that chance, believe in yourself and be willing to learn new skills?
- Do you have confidence that your past successes and your ability to create wealth CAN transfer towards a successful entrepreneur/innkeeping career and lifestyle?
The B&B Team can help you decide if innkeeping is the right choice for you. If you have the passion we can help guide you to achieve your financial goals. They both go hand in hand.
After that first phone call, our next piece of advice is to attend one of our “Better Way to Learn innkeeping™” aspiring innkeeper seminars. The wealth of information in our seminars is tremendous. No muffin recipes, just the facts Jack! The kind of information you need to help you make the decision to move forward or…step back.
Take a look at The B&B Team’s 2016 Seminar Schedule and make that first step, your inner would-be entrepreneur is calling you.
Thanks for Listening,
K is for the 5 Keys to a Strong Business at your Bed and Breakfast
Marilyn and I had the good fortune this past weekend to work with 9 excited aspiring innkeepers at our A Better Way to Learn InnkeepingTM seminar held at the Wayside Inn B&B in Ellicott City, Maryland. What a great group! We laughed and networked with Bill and Charlotte Schmickle of the Flag House in Annapolis but the real focus was on the KEYS to a strong business at your inn.
- Location, Location, Location
- Understanding WHO will be coming to your inn
- Wrapping your inn AROUND those guests
- Think Sunday-Thursday
- Being the Best
Each of these Keys can be put on a continuum numbered, say, from 1-10 with 10 being the strongest. Let’s look at each one:
- Location, Location, Location: This has been the buzzword for any real estate purchase but for a Bed & Breakfast EACH word has a separate meaning: The first definition is the Macro-location…is the inn located near major metropolitan areas from which to pull guests? The more population close at hand (gas is getting more expensive!), the higher on the continuum the rating. For the Wayside Inn, being located nicely in the Baltimore-DC corridor, this inn ranks high on this Location…perhaps a 9. The second definition of Location includes the area attractions in that region which will draw guests to the area. And the broader the diversity of attractions (historical, antiquing, entertainment, soft adventures, etc.), the higher the likelihood of drawing folks out of the nearby metropolitan populations. The third definition of Location is the Inn itself…its attractive location in the town, its curb appeal and its accessibility.
- The second KEY is identifying the guests who will be coming to those area attractions…and what their needs would be. If the attraction is an amusement park or college, children will be coming. If there are businesses in the area, corporate travelers have particular needs as well.
- Wrapping your Inn around those guests’ needs is the next KEY. Room features, amenities and services must satisfy the needs of those identified guests. Business travelers need desks, Wi-Fi, multiple outlets, a forgiving cancellation policy, early breakfasts, and NO advanced deposits.
- The fourth KEY can often be a difficult one…Thinking Sunday through Thursday. Any inn can fill up on the weekend, but that is only 28% of the week…an occupancy not high enough to pay all the bills. Marketing to corporate guests, elder-travelers, quilting and scrap booking groups, or offering discounts to weekenders to encourage them to stay an extra day or two becomes a high priority targeted activity.
- Being the Best. This KEY is what will keep your parking lot full while the inn across the street wonders how you do it. Investigate what the competition is doing (and NOT doing!) and Beat Them! Have the best breakfast in town, offer a welcoming warmth that guests enjoy, and make their experience complete.
This dynamic group of aspiring innkeepers heard this important message and are currently defining the profiles of the inns that are RIGHT for them. Congratulations to all of them as they continue their journey into the world of inn ownership! Scott
T is for Trust…Especially Between an Inn Seller and Buyer
Just yesterday I received a call from an innkeeper with whom I have had a relationship who was considering selling his inn, a 7 room bed and breakfast inn in a nearby state. Just what we do! Thanks for the call! We opened up a dialog about the inn, its size, its location, discussed the process, and then I suggested he send me a copy of his 2010 and 2011 financials. You would have thought I was asking for his FBC (first born child). “I just will not get into the hassles of trying to explain my financials and business with ANYBODY. Just sell my inn!” He was adamant and fixed in his stubbornness.
My antennae went up like a dog’s ears at suppertime. After failing to convince him that this is an important step to understanding the revenue and net operating income of the inn (to help establish its value), we closed our conversation that perhaps the best way to sell his property is as a residence through the local MLS system since a buyer would never be able to get a commercial loan on that property without the bank seeing the financials. He was satisfied with that…I guess.
But the point is trust. I lost trust with him. Was he cheating the IRS and did not want to let anybody discover it? Were his numbers so poor that I would be trying to sell his inn only on its potential? Does he even have records? All kinds of distrustful thoughts went through my head. I hope all them are wrong. If a seller, perhaps even unwittingly, withholds information from a buyer, trust is jeopardized, and with the limited number of buyers and the huge inventory of inns for sale, buyers will look elsewhere. Building Buyer/Seller trust is critical. So how is it done?
Like a good Boy Scout…Be Prepared!
- Having complete and accurate records (including taxes…they will be scrutinized during a buyer’s due diligence period)
- Track occupancy by month from year to year. A buyer wants to see the seasonal nature of the inn (especially to understand what happens in the slow season).
- Have a complete Inclusion/Exclusion list of the furniture and fixtures will transfer with the property and what will go with the sellers.
- For a smaller inn, have a property condition disclosure (available from any real estate agent) prepared. This is required in many states anyway.
- For larger inns, consider a Seller’s Inspection completed BEFORE a buyer’s inspector finds any defects (and they WILL find the problems!), This inspection demonstrates full disclosure of the condition of the inn, provides a report accuracy defense in the event the buyer’s inspector overinflates the seriousness of a deficiency, and leads to a corrective plan to defuse emotions and begin negotiations.
- Keep your gift certificate log current
- Open and honest conversations about marketing, buyer’s opportunities, and full disclosure.
When Marilyn and I were looking for our inn long ago (the Dead Sea was only sick back then), the owner of one of our candidate inns pulled me aside and said “Don’t worry about the numbers, Scott. I put two kids through college on this inn!”. We left never to return. If he was willing to cheat the IRS, he was willing to cheat us.
Innkeepers…think about the “surprises” that made YOU angry when you bought your inn. We’ve all been there. Think like the buyer of your inn. What roadblocks can be removed now to build Trust and not jeopardize the chances of a timely and financially rewarding transfer.
Anybody have any trust surprises when you bought your inn? We would love to hear about them and what could have been done differently. Scott
Calculating Occupancy for a Bed & Breakfast
Occupancy rates are used throughout the bed and breakfast industry to indicate how often rooms are occupied. How occupancy is calculated is a mystery to many current and aspiring innkeepers, but it’s really very simple if you know what the rules are. The first rule is that a year always has 365 days except for certain circumstances, which I’ll explain later.
To calculate occupancy you need two essential pieces of information: (1) how many guest rooms does the bed and breakfast have, and (2) how many room nights did the inn sell? A room night is any one room occupied for one night. If a guest stays for three nights, there were three room nights sold.
The first calculation is to determine how many room nights were available in the course of a year. If a B&B has 5 rooms, it has 5 x 365 = 1,825 available room nights. Let’s say the B&B sold 976 room nights last year. To calculate the occupancy you need to know what percentage of the available nights were sold. You do that by dividing the rooms nights sold by the room nights available and multiplying by 100 (to get the percentage). 976 ÷ 1,825 = .53 x 100 = 53% occupancy. If an inn has 10 rooms, it had 3,650 available rooms nights. If they sold 1,675 rooms, they had a 46% occupancy (10 x 365 = 3,650 available rooms nights; 1,675 ÷ 3,650 = .46 x 100 = 46%).
There is a tendency to want to make occupancy look better than it is by reducing the number of available rooms nights because of vacations or being “closed.” Most of the time, these are discretionary choices made by an innkeeper, may often be in slower periods of the year, and are not governed by any rules. The problem with this is that as soon as an innkeeper does this, one has no way of knowing how to compare their occupancy to someone else’s.
There are only a couple of acceptable exceptions to the 365 day rule. One is where a property is in a seasonal location where virtually all properties close for an extended period (open season is May to October, for example). In this case, the occupancy may be calculated using the days of the season but should indicate that it is a seasonal rate. The other exception would be if a block of rooms are unusable for a period of months due to a fire or major renovation. It is not acceptable to say that because two rooms were repainted and that while they were being painted they were “not in service.” Unless an innkeeper was painting in the midst of their busiest season, it is unlikely that 100% of the rooms would have been sold anyway. The rooms still count in the “available” calculation.
If an innkeeper is putting data on an inns for sale directory, make sure your calculations are correct. And when reading statistics about an inn for sale, aspiring innkeepers should take much of what they read with a grain of salt until the method of calculating occupancy can be verified. If you have questions about this, we at The B&B Team® would be pleased to answer them for you.
An Inn Tune-up for Your Bed and Breakfast
by Peter Scherman
Innkeepers are the best when it comes to delivering a great experience for their guests. Smiles come easily, breakfast is delicious, and the world just looks, well, rosy. Or does it? On the best of days even the best inns, as we well know, aren’t perfect. But if perfection is what you strive for, and if that perfection includes a healthy bottom line, it’s a good idea to tune up your inn just as you would your automobile.
So what’s an Inn Tune-up™? Just as a mechanic goes over your car from end to end, checking fluids and connections, looking for wear, and ensuring that the electronics are functioning at their peak, an Inn Tune-up™ looks at your inn from top to bottom looking for the things that will make your inn run as smoothly as it can, helping you garner rave guest reviews, making you money, and increasing your satisfaction with your Innkeeping lifestyle.
We are all guilty of not seeing the forest for the trees sometimes. It’s human nature. When you live in an environment day after day, it becomes like a second skin. But your guests see it for the first time when they walk across your threshold. And they will often see what you no longer do. Take some time to look for details that, if improved, will improve your guest’s experience and, in turn, increase your revenues and improve your reputation.
Rooms become tired and need to be touched up regularly, annually at the least. How is your style and décor? Is it looking a bit frumpy and old fashioned, or are you updating to stay current with trends? Even Victorian ladies like to look their modern best! Look at all your rooms to see if you have adequate lighting wherever a person might sit or lie to read. Is there adequate space for guests to lay down their “stuff” without moving yours? And is there a place for them to plug in all their “stuff” without moving furniture or unplugging lamps and clocks? Power strips are a simple answer to a big annoyance. Do you still have clock radios or clock/radio/CD players in your rooms? Try changing them out for clock/radio/iPod docking units that look and sound great and meet the contemporary traveler’s expectations. In short, are your rooms thoughtful?
How are your bathrooms? Are they behind the times and worn out? How’s that caulking around the tub? If it isn’t in perfect condition and perfectly white and clean, you should change it. Make sure that grout is free of mildew. It sounds elementary, but we at The B&B Team® see too many tubs that are simply neglected and are less than inviting. Your guests, as you know, form really strong impressions and opinions, and they tell others about it. In fact, cleanliness (or lack thereof) everywhere is the number one complaint of travelers. Look around your B&B with fresh eyes, run your finger along the tops of picture frames, get down on your knees and look under beds, under the cushions, in the drawers, inside lampshades, and be sure that everywhere is spotless and that you have systems in place to ensure they stay that way.
Beyond your rooms, how’s your website? Is it working for you, or are you losing potential guests because of the “three second rule?” Do you know what this rule is? Is your site homemade or more than three or four years old? If so, you probably need a new one. How are the photos? Do you know what your visitor counts and bounce rate are? You should. And if you don’t know how to find that out, ask someone who does.
Your business’s financial health is also essential to its running well. Do you know exactly where you stand week to week, month to month, relative to last year and the year before? How do your occupancy and ADR stand up against industry norms? How are your advance bookings running? Do you track your business using simple accounting tools like QuickBooks Pro, or are you putting all those receipts in a box and just hoping there’s enough money in the bank to pay the bills? You simply must do this the right way!
Innkeepers who really pay attention to their inn, from the physical plant to policies and procedures, from marketing and social media to the latest style trends are those who are doing well. If your B&B business is running a little sluggish, maybe you should give yourself a tune-up. Block out a day or two without guests, take a note pad, and go through your rooms looking for the things that could make them better. Then fix them! Not everything costs a lot: some attention to details, a fresh coat of paint, swapping out a piece or two of furniture can sometimes make a big difference for your guests even as it inspires you to be more enthusiastic.
Tax time is a good time to take stock of the health of your business. Look at your expenses and find out where you could save money and where you might want to increase your budget. Spend some time looking at what others are doing; those “others” should be inns that you admire, maybe even feel a little jealous of. When was the last time you stayed at another inn that wasn’t owned by a friend of yours and that’s really different from your own? How was the style? How were the details? How was the service? Did you learn something new or get a new idea to take home? Get out of your comfort zone and explore. Be a stealer of great ideas!
At The B&B Team® we encourage you to get inspired! Don’t let your inn’s engine run rough; it won’t perform as well, last as long, deliver as much satisfaction, or preserve its value. And if you feel you could benefit from a professional Inn Tune-up™ rather than an oil change in the driveway, we’d love to help you out! We have many clients who have grown their business simply by reaching out for professional assistance. Can we help you?
Refinancing Your Inn — Food For Thought
by Peter Scherman of The B&B Team
When you’re thinking of refinancing to make capital improvements to your inn, there are many questions to ask. In the analysis of finance and construction costs, anticipated revenues, and future value of the tangible assets, one question that is often overlooked is this: How will improving the physical plant impact the future marketability of your inn when you sell?
The resale market for inns can be broken down into three basic categories. First, there are homes from which someone operates a bed & breakfast for fun, some additional income, and tax breaks. Second, there are somewhat larger homes with stronger businesses that generate a significant amount of lodging income, but which have a potential market as a high end residence. And third, there are large B&B’s and full service inns and spas which are strictly businesses and, essentially, commercial property, valued almost entirely for their ability to generate income.
The third category of properties is ideal for refinancing for capital improvements which can enhance their ability to increase revenues — and, therefore, value — and are not addressed here. The first two, however, are. Consider this: you have a lovely three to five guest room B&B in a nice area, make a respectable, if modest, living from the B&B business, and you are at a crossroads. You’d like to earn more and have decided that you are either going to “improve” the property to grow your business, or sell it and buy something larger. Capital investments are generally considered improvements, but they may not improve your chances of selling. The reason is simple. If, for instance, you turned your five bedrooms into eight or ten, or you added a commercial kitchen and a restaurant, both intended to increase your business (which they may well do), you will have fundamentally changed the nature of what you own and caused you to travel down a new path.
Your new property with ten guest rooms and/or a small restaurant (or other business requiring a physical change to the property) may no longer be attractive as a home in the residential market where people pay a price based on the supply and demand for housing in an area. Market factors may have caused the value to be much higher as a residence than could be supported by any lodging income after improvements. The residential market is very broad and, in recent years, home values have increased dramatically with no reduction in demand for these homes. However, with your new, “improved” property, you now have to generate enough income to support your investment plus add revenue-based value, as you have now converted your residential real estate to commercial, with the commensurate change in valuation approaches. You may or may not be able to grow the revenues sufficiently – even if it is enough to pay back the loan – to increase the value beyond what it may have been previously. You will have certainly narrowed the pool of potential buyers when the day comes to sell. But if you do your homework and know what your goals are, growing your inn may be the best business decision you’ll ever make.
To help with the “go, no-go” decision when contemplating a major capital improvement, consider hiring an experienced inn consultant to help you assess the potential return on investment, both from a cash flow as well as a marketability standpoint.
Inn Financing Without Tears
by Peter Scherman of The B&B Team
You have been dreaming for years. Those glossy magazines and snazzy web sites with those wonderful, historic lodgings, glorious gardens, and inviting rooms are a regular mainstay. Your travels have taken you to places where you were greeted by strangers who treated you like old friends. You slept on feather quilts and abundant pillows, awakening to the aroma of fresh coffee and baked breads, then shared breakfast with others like yourselves: road warriors of the bed & breakfast circuit. You just love these quaint and ornate homes, the unfaltering hospitality, the sumptuous meals. After all, entertaining has always been a love of yours and you think, “We could do this!”
Cut to six months later: you’ve been talking to innkeepers about the Innkeeping lifestyle, and they told you it wouldn’t be easy. You attended one of those seminars, and they told you it wouldn’t be easy. You’ve been taking stock of what it would really mean to quit that job or take early retirement and live on an innkeeper’s “salary,” and now you realize it won’t be easy. But this is Innkeeping! You’ve always wanted to do this. It can’t be that bad, or why would so many take the plunge?
Good question. It’s a question that all prospective innkeepers must ask themselves. Just for a moment, let’s assume that you have satisfied yourself that you are, indeed, cut out for Innkeeping. You would like to be your own boss, even if your life will be guided by your guests. You can still decide to close for a week (if you plan ahead) to take a vacation. You can always be closed on Mondays if you want. You are prepared for the cut in income, figuring you can get by fairly modestly, and besides, you have a little something extra from wise investments or pensions. You’ve been checking out ads on countless web sites looking for the perfect bed & breakfast for sale, have actually received information and consider yourself to be actively “in the market.” Well, maybe a couple of years away. That’s OK. It’s better to plan ahead and know what you’re getting into.
You are really serious about buying an inn now, and you want to make an offer but need to figure out exactly how to finance the purchase. This is where the dream of owning a bed & breakfast can start to slip away unless you’ve done your homework and planned adequately. Because financing is where most contracts fall apart.
A bed & breakfast inn is a hybrid entity. Alas, it’s neither a “house” nor a “hotel.” If it were just a house you wanted to buy, a lender would look at your available cash for down payment and closing costs, would review your income and “other debt,” would work with certain ratios to determine how much of your income could be used to finance a home, and could tell you, within a very narrow range, how much you could afford to pay for a house. No furniture. No business. You keep your job. That assumes, of course, that the house appraises out for the purchase price and your credit is squeaky clean.
For a hotel or motel, or maybe a convenience store or other business, a lender will look at the business, will examine and analyze the cash flow, will determine the value based on actual and projected cash flows, will consider how much you can put down initially (they generally want 30% plus with reserves for operating capital, etc., though there are exceptions). If all of this pans out, and you can convince that lender that you know what you’re doing (past experience in the same business, hopefully) you might get the loan and be on your way.
But a bed & breakfast? What’s that? It’s a bit large as a home, a significant portion of which will be used for business. This, of course, creates some interesting tax considerations when applying your rollovers, but that’s another story. A bed & breakfast is typically very heavily weighted by the real estate component as opposed to the business component, where that convenience store is often just the opposite. Nevertheless, the dream B&B you’ve found may, in fact, have a fairly decent cash flow. If it does, there are a number of avenues you can pursue. The first, and by far the easiest (though hardly the most common), is owner, or seller, financing.
If an innkeeper has owned the inn for a number of years, especially if they converted it into a B&B from a house, they may have experienced a substantial amount of appreciation and have little or no debt. Often these owners are interested in moving on and will consider owner financing as a good investment. Like any lender, they will want to know your credit history, see a credit report, have a complete, certified financial statement from you, and will be confident that the cash flows from the business will cover debt service and living expenses on top of operations. However, don’t expect many sellers to finance 90% of the deal. Maybe you can buy a house with 5% or 10% down payment, but it’s unlikely that many innkeepers will finance that much. Keep in mind that, like a bank, security is paramount. You will be purchasing the real estate, the personal property (fixtures, furnishings, etc.) and probably will be paying for intangibles (good will) as well. Your initial investment will likely have to cover the intangibles, the personal property, and a substantial portion of the real estate. That can amount to a sizable outlay. You need to keep something in reserve for improvements you may want to make and to cover you in those slow early months.
Let’s say your seller doesn’t want to finance, and many don’t. They have other plans for their money. If the business is really solid and can be documented (current innkeepers take note!), the next best bet is often a local bank. Despite strict regulations about lending parameters, many bankers still take an interest in local ventures and, especially, real estate. If the loan is “non-conforming” but there is value in the property and a sufficiently large down payment to protect their investment, money may be forthcoming as a portfolio or “in-house” loan. An introduction to the local banker by the current innkeepers (if they’ve had a good relationship) can be a good way to get started, especially if there’s been any bank financing in the past.
If your intention is to acquire a full service inn with a restaurant, then the Small Business Administration (SBA) may be the best way to go. There are a number of banks and non-bank lenders who process SBA loans, some better than others, so shop around. Doug Carleton, who is an approved SBA lender and member of The B&B Team of Professionals, is one of the best. Remember two things above all else: restaurants have a very high failure rate, and most lenders are leery of making restaurant loans unless you have a track record to demonstrate your expertise. Also, SBA loans can be slow (depending on the bank) and expensive due to the SBA guarantee fees, so you need to be prepared for a process that may take six months and the expenditure of several thousand dollars in surveys, environmental studies, etc. Often times, however, the fees can be financed, and, if you are prepared and working with a good lender, the process can be expedited. Some SBA loans are assumable, so be sure to ask if the current owners have an SBA loan and look into its assumability.
As to bank financing, there are some lenders who will extend “no doc” (no documentation) loans. With 20%-40% down payment on the real estate, they will assume that you won’t walk away from the property, and if you do, their investment will be covered. How you pay for it, in their mind, is your problem. Please note that I said “real estate” not “bed & breakfast.” That down payment will apply to the appraised value of the real property, and you will have to pay for the personal property and intangibles separately. In the end, there’s still quite a lot of cash going out. [NOTE: since this article was written, “no-doc” loans are no longer available.]
You’re starting to feel depressed. You’ve exhausted the banks, the SBA lenders have turned you down, the owner owes too much to finance you (or just wants cash), but you really want to buy and the seller really wants to sell. What to do now? One possibility, and this is usually a last resort, is the use of an investment company that specializes in the purchase of mortgage notes. In reality what happens at closing is that the owner finances the sale. He simultaneously sells the note to an investor (for a discount), the original loan is paid off, the seller goes away with cash, and you own the property but will be making your payments to the new investor who holds the note. The best way to make this arrangement work is to plan ahead with a note investor so that the interest rates, the amounts paid, the size of the discounts, etc. can be juggled to reach a happy medium that works well enough for everyone. In these cases, most likely the buyer will have to pay a bit more, the seller will walk away with a bit less, and the investor will be very happy! But if it works, who’s to complain?
Needless to say, there are many ways to finance a bed & breakfast or country inn, but none of them is without problems. Almost all will require a sizeable capital investment up front. In every case the entire financial picture of the purchaser must be taken into account. Are there other assets? Is there independent income, either from investments or retirement? Will one of the purchasers be working an outside job or telecommuting? If you are working with a knowledgeable inn broker, be prepared to provide enough information that he or she can find a property that has the potential of meeting your personal and financial objectives. In the end, the best advice is to plan ahead, become informed, and be realistic. If you do, you’ll be happily on your way to Innkeeping! Good luck!