Inn Consultants and Brokers Since 1993

The B&B Team

Rick Wolf and Peter Scherman (that’s Rick on the left and Peter on the right) are both experienced speakers who have presented on a range of innkeeping related topics at the state, regional, and national level. They gather and analyze research for the Innkeeping industry and welcome the opportunity to share it with others. Contact Us


Archive for the ‘Better Way to Sell Your Inn’ Category

B&B Outdoor Living

February 9th, 2016 by Janet Wolf

Rockland Maine's Berry Manor Inn

Curb appeal-you bet. The Berry Manor Inn, Rockland Maine

Guests love your B&B outdoor living spaces. Right? I know it is February and many innkeepers in the northern climes have stored away their outdoor furniture and put their gardens to rest, but it is never too early to start thinking about spring. Touch up paint on the ‘ol rockers and window boxes or… maybe a fresh new design entirely. Read the following and you may get inspired.

Selling Secret #1: The first impression is the only impression No matter how good the interior of your home looks, buyers have already judged your home before they walk through the door. You never have a second chance to make a first impression. It’s important to make people feel warm, welcome and safe as they approach the house. Spruce up your home’s exterior with inexpensive shrubs and brightly colored flowers. You can typically get a 100-percent return on the money you put into your home’s curb appeal. Entryways are also important. You use it as a utility space for your coat and keys. But, when you’re selling, make it welcoming by putting in a small bench, a vase of fresh-cut flowers or even some cookies.

This tip is from HGTV about home sales (there are 10 of them, worth a read) but it is great advise for your B&B as well, whether you are planning to sell or not. Your outdoor living spaces throughout your property are prime areas to add inviting character to your Inn. I like to advise innkeepers to think of their porches, patios and balconies as extra rooms, just like their interior rooms. These spaces should be as comfortable, clean and inviting (and inspiring) as your common rooms and guest bedrooms.

Need inspiration? Pinterest is a great place to search for it. The B&B Team has three Pinterest boards devoted to B&B outdoor living  inspirational ideas.

Outdoor Living-Old Manse Inn, Cape Cod

Outdoor Living-Old Manse Inn, Cape Cod-Christian Giannelli Photography

Some examples of success  may also inspire. Brian and Charlie purchased the Old Manse Inn in Brewster on Cape Cod three years ago. Since their purchase they have not only upgraded the guest rooms and common rooms but also their outdoor living spaces. The private deck off their Lewis Bay Light Suite is a great example of that comfortable and inviting outdoor space guests love to experience. Talked to Brian recently and he told me since the redo this room went from 25% occupancy to 38%. Success!

Guests not only want to experience the outdoors but want to see it before they book. You know what’s coming next don’t you? Good professional photography. In our visual media world of today, this is not just a recommendation but a necessity!

Irish Hollow Inn, Galena IL

Irish Hollow Inn, Galena IL

One of my favorite porch photographs from Christian Giannelli, the Irish Hollow Inn in Galena IL. Now this is an outdoor living room with character!

Whether it is adding new updated patio furniture, a fire pit on the back lawn or a secret garden oasis, get inspired and start making memories in your outdoor living spaces. It’s sure to extend the ‘welcome’ along with the value of your B&B.

Thanks for Listening,

Janet Wolf


Love is in the Air

February 13th, 2013 by Janet Wolf

Lemon Curd Mascarpone Ebelskiver (Filled Puffed Pancakes) with Wild Berry Topping - A Perfect Valentine´s Breakfast

Valentine’s Day Breakfast
Lemon Curd Mascarpone Filled Puffed Pancakes with Wild Berry Topping

February is for lovers…such a familiar line for every bed and breakfast that offers a Valentine’s Day special for the entire month or for the Valentine’s Day weekend. Chocolate covered strawberries, champagne and red roses and that special breakfast. Romance and s__ that’s what you sell! But what about love? I find this a good time of year to reflect on love. What and who we love.

I love old things. Old things that have been loved. I love finding old books. We have a small collection that is cherished. I especially love the books that have something left in them by the original owner. Like the original book of Bambi by Austrian author Felix Salten translated into English in 1928 I found in one of our favorite used book stores.  Among its pages was a newspaper article about the young doe located in the Maine woods that became the model for Disney’s animated Bambi.bambi-12[1]


Celia Thaxter in Her Garden by Childe Hassam 1892

Or a recent book of  Celia Thaxter’s poems that I found among a group of musty collections at an antique mall. Celia and her family were innkeepers of the once thriving Appledore Inn on Appledore Island off the coast of Maine. Like many old inns of this era it burned down in 1914. This book contained among it’s pages an old postcard of the Inn and a pressed flower from Celia’s beloved island gardens. I am sure these books were once loved and cherished by their owners. How long had this book been abandoned until I found it?   When Rick and I go through our books from time to time to donate, the old ones stay, they are loved.

I love old houses. Our Inn was a 1813 ship captains home. I know that many of you own or aspire to own old homes that  now welcome guests in their most recent renewed life as bed and breakfasts. Many of these houses have in their past been abandoned and left empty and unloved.  But once they are bought and transformed into bed and breakfasts, the atmosphere becomes lighter, the rooms become fresh and welcoming and the love is apparent and well received by all who enter. The challenge to innkeepers is how to keep that love alive!  All of us at the  The B&B Team visit Inns from time to time that have ‘lost that loving feeling’. It may sound corny but you know what I mean. Something is missing and has left the building. We find it may take some outside eyes to help innkeepers find and rekindle their passion and ‘bring back that loving feeling’. The B&B Team and our ‘Inn Tune-Up’ program loves to play cupid. Take a look at what we offer that may help you bring the spark  back to your relationship with your Inn and your business.

So what do you love? Your family, your husband, wife or partner (old or not!). Love you Rick! Your pets, your cherished collections. Do you love your bed and breakfast/Inn and the business of running it? Hopefully the answer is still yes. The love you feel shows in everything you do in your daily care for your property. It will also show in the value of your Inn. Once you come around to the time to sell, to let go, you want your property to be at its best. You want the next caretaker of your cherished Inn to feel the love and the value you have lovingly created. So keep that love alive. Don’t lose that loving feeling!

Quick side story. We had a guest once ask us if we could ‘guarantee romance’ with his stay at our Inn. Rick answered, “Nope, can’t do that, we can give you a nice room, great bed and all the amenities, the rest is up to you pal!

Thanks for Listening,

Janet Wolf


T is for Trust…Especially Between an Inn Seller and Buyer

January 11th, 2012 by Scott Bushnell

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

Massachusetts and Arkansas B&B’s For Sale are Contrasts in Style

February 18th, 2011 by Peter Scherman

Two Select Registry® bed & breakfasts for sale, one in Arkansas and the other in Massachusetts, offer contrasts in style while demonstrating striking similarities.

In Stockbridge, Massachusetts (recall the James Taylor line, “…from Stockbridge to Boston”), The Inn at Stockbridge is a beautiful, historic 15 room bed and breakfast inn that offers its guests a variety of beautifully appointed guest rooms in three buildings. Enjoying a location that takes full advantage of the Berkshire Mountains, the original colonial style home on almost 12 acres was built in 1906 and boasts 7 guest rooms, spectacular common rooms with porches and terraces, and superb owner’s quarters. Two additional buildings, the “Barn” and the “Cottage House” each have 4 over-sized luxury rooms. Whimsical sculptures dot the yard and add a special uniqueness to each guest’s arrival.

At The Inn at Stockbridge, quality amenities and service, which are the hallmarks of Select Registry inns, are what make it very much like another B&B halfway across the country in Hot Springs, Arkansas.

Hilltop Manor Bed & Breakfast has five guest rooms which, in their own way, couldn’t be more different from those at the Inn at Stockbridge. Owned by a young couple who have brought a contemporary flair to their 7,000+ square foot Craftsman style B&B built in 1890, Hilltop Manor offers 1,000 thread count sheets, large flat screen TV’s, and iPod docks in every room. Sitting on over 5 acres on the edge of Hot Springs and surrounded by National Forest, the B&B can tell the tale of famous Prohibition Era gangsters partying into the night and perhaps escaping into the woods during the frequent police raids. Creative packages provide each visitor the opportunity to customize their stay.

While both of these B&B’s are incredibly different, they share a lot in common. They are both members of Select Registry®; they are both upscale lodging establishments that offer their guests a high-end lodging experience; both cater to the needs of their guests in a very personalized way; both enjoy a country setting with convenient access to in-town amenities like restaurants, museums, and entertainment; both are very profitable businesses; and both are represented for sale by The B&B Team®.

Hilltop Manor Bed & Breakfast is available for $995,000, and The Inn at Stockbridge is offered for $2,750,000. Different? Yes. Great value? Double yes! It’s one of the reasons why we at The B&B Team® love what we do because we work with some of the best inns in the country!

The 3 Keys to Real Estate

October 29th, 2010 by Janet Wolf

Location Location Location#1 Location. #2 Location. #3 Location.  Somethings never change, and this old adage is just as true today as it was years ago. The phrase that has become a real estate mantra may have first been coined in 1926 in an ad in the Chicago Tribune expounding the virtues of properties located in Rogers Park. Another version attributes the turn of phrase to British real estate tycoon Lord Harold Samuel. Whenever or whoever used these words first is solely of historical interest. The real importance of the trinity lies in the fact that value is central to a property’s location and has been for years.

In the case of  the Lincolnville Beach (Maine) Oceanfront Inn and Restaurant, its location is superb, but the fact that this offering is comprised of 3 (another trinity!) separate parcels of land make this offering even more enticing and attractive to a buyer, investor or…?

This offering represents the Best of Coastal Maine! There aren’t many commercial offerings today with 400 feet of true water frontage. Positioned between the ocean and Coastal Route 1, this is a one of a kind property featuring 1.2+/- acres of prime oceanfront land. The 3 separate parcels of land, 4 buildings, 250 feet of high visibility US Route 1 frontage and ocean breezes is available today for the discerning Investor, Developer, Restaurateur or Innkeeper.

This is a true Oceanfront commercial property with the location x 3 in the charming mid coast Maine village of Lincolnville Beach on Penobscot Bay. The mid coast of Maine is known as the ‘Jewel of the Maine Coast’ and Lincolnville as the ‘Heart of the Maine Coast’, a great description for a grand location and exceptional opportunity. Think of another oceanfront property once upon a time…of a fellow named Peter Minuit who once looked upon the ‘island of Manhattes’…and may have thought…’location, location, location’.

Maybe this opportunity is your opportunity to enjoy the great real estate trinity of location x 3 and parcels x 3!

Rick Wolf

Value vs. Price…There is a Difference!

July 27th, 2010 by Peter Scherman

by Rick Wolf of The B&B Team In a highly competitive environment, we in the Bed and Breakfast / Country Inn Industry are faced with the dilemma of how to compete while maintaining the integrity of our business and our Inn’s reputation. Most assuredly, how we price our rooms and services has a huge impact on our bottom line; however it is a topic worth discussing. Let’s take a look at how value and price enter into this equation.

Value is defined as worth or importance; the adequate or satisfactory return on or recompense for something. Things have value, or are of value, or are valued.

Price is defined as cost of something bought or sold; to state or fix the exact price that a customer or consumer must pay for something. Things have a price that may or may not have value.

As Innkeepers, we are always striving to find that perfect balance of the highest level of hospitality, service, and amenities while offering our guests the best possible rates and for us, at the lowest possible price. Quite a daunting task!

Quality has a price, but the price is either one of value or not. If there is value in the eyes of the guest, then there is inherent quality. Simply because the price is low (or cheap), may not be an indicator of value. Yes, we all have made expenditures and commented that the price was really inexpensive and how we were truly amazed at the value we really did receive for our dollar. Why? Because we received good value and quality.

For the most part, we understand the concept of “no free lunch”, “no free rides”, or “something for nothing”. Human nature cautions us when it seems to be “too good to be true” that it usually is” too good to be true! While there are no absolutes, when we see the above, we are often confronted with an experience of disappointment and one that is, most likely lacking in value and quality too.

In conclusion, providing value, and even better, added value, for the price is a far better position for any business to stake out, position themselves and then own that business model. Anyone can be cheap but this is an indefensible marketing position, because only one can be the cheapest. When price becomes the driving force, everyone loses! This is not a position to build a brand or level of service or hospitality on.

It is a far stronger and superbly defensible position to be the provider of quality, service and hospitality, with value. Tie this in with authenticity, your legacy and promise and you have created a brand marketing position with ground rules you own. Take the high road and let everyone else chase you; the standard bearer of a quality experience that offers true value, customer satisfaction and the ultimate measure of success for any brand…repeat and profitable business!

Anatomy of an Inn Sale

July 27th, 2010 by Peter Scherman

by Peter Scherman of The B&B Team

Competitive athletes share an above-average understanding of the human body and how it works. They rely upon this understanding to prepare for their events by knowing how to stay healthy, increase their strength, and hone their skills to come out a winner. The athlete learns that her body is not just skin and muscle, but dozens of organs that must work together perfectly. She relies upon her own abilities as well as the expertise of doctors, trainers, nutritionists, coaches, referees, and enthusiastic fans. That athlete is you, the innkeeper.

The decision to sell your inn is rather like deciding to take up competitive running, except that in this race, the dash for the finish line must be in tandem with your competitor, the buyer, who is more a running partner than opponent, though it may not always seem that way. It’s called “win-win” racing!

Once the decision is made, you must decide if sprinting, cross country, or a marathon is your preferred race. Like the runner whose finish line is a ribbon across the track, the finish line in the inn sale race is simple: the transfer of ownership from one person or entity to another. If you were running a race, you’d need to think about distance, grade, curves, course surface, timing and pacing, conditioning, and the competition. In selling an inn there is the property itself; the furniture, fixtures, and equipment; there are pricing and marketing, showings to prospective purchasers, offer and acceptance, contracts and side agreements, inspections, loan applications and approvals, income and inventory verifications, and, finally, an exchange of money and title. What happens when one of them fails? Like the human body, can the sale become stressed, ill, or even die? For anyone who has experienced a troublesome or lost sale, the answer is obvious.

After deciding to race (sell), the next step might be to consult a doctor (inn broker or consultant) for a physical to assess the overall health of the business and to help establish a price. Your trainer (again, the broker) can then advise on what conditioning you need before running (preparing the property, inventory, financial records, etc.). Lastly, your coach (hmm, who could that be?) will show you how to make it to the finish line without serious injury (a closed sale at an acceptable price). That broker may also have to act as referee along the way. This is your team.

After making the commitment to sell, listening to the doctor’s advice on pricing is critical. Pricing is very prone to illness, as people without experience often try to perform one of the most critical operations of the entire sale process. Instead of starting off their race in good trim, stretched, and warmed up, they begin with a price that, far too often, if not obese, is at least overweight. Just as poor diet and lack of exercise can lead to health problems and poor performance, an inflated price sets the stage for a prolonged illness, er, inn sale. You might end up in a grueling marathon when all you wanted was a quick sprint or a nice cross country jog.

Let’s assume that the innkeeper has done all the right things, is in good shape, knows the length of the race and how to train for it, and the inn is now for sale at the right price. Heart and lungs are good, brain is in synch. Now comes the time to train (market the property), toning the muscles to look buff (making repairs), taking professional pictures to show off in the best light, and packaging the presentation in one of those spandex suits (comprehensive prospectus). After all, when a prospective buyer takes in all that visual stimulus, you want him to come knocking. But here’s the next area of potential weakness.

Can you really go running with everyone who shows up at your door, prospectus in hand, wanting to preview the track? Is your prospective running partner in your league, or is he maybe a bit too thin to make the cut? In other words, do you know if he can afford your inn? Many inn sales experience leg cramps when, after negotiating a contract and expectations are high on both sides, the buyer is unable to complete the course, usually because he cannot get a loan. How frustrating it is to have the finish line in sight, only to trip on a rough spot at the last minute that, if you’d prepped the course ahead of time, could have been avoided. This disappointment often has a deleterious effect on the heart (crestfallen) and the knees (badly scraped). The remedy is pre-qualification. Unless you are comfortable asking your fellow runner (buyer) if he wore enough deodorant (has enough cash) to avoid being smelly after the race (we’ll just leave that one alone), prequalification is often best performed by the referee, who is used to making tough calls and knows it is part of the job. Got to love those referees!

But there’s more! The buyer is qualified and the seller has accepted a reasonable offer. You’re half way around the course when suddenly the buyer stops in his tracks. In a real foot race this would be good, but in this race, you need the buyer to finish with you. Everything seemed to be fine, but the buyer says that he’d like to have that rough patch of track smoothed over (roof repaired, water heater replaced, west wall repainted, etc.). There are some things you are willing to do, but basically you feel the course should be left as is. You’ve been running it for a long time (it’s never been a problem up to now) and the buyer can do all the smoothing he wants AFTER THE RACE!!! This particular situation can have an effect on the stomach and intestines (churning) and the blood pressure (elevated). Often times your doctor can perform a hasty problemectomy so that everyone continuing on the course will be satisfied and able to compete safely. Go, go, go!

What’s this? Now the officials are saying that you’ve cut a corner illegally; that for five years you’ve been operating with six rooms and the rules say you can only have four! The buyer cries foul and wants you disqualified from the race (he wants out completely), or at least penalized (you should reduce the price). If you did, in fact, cheat, the buyer is justified. This is often manifested in the heart (pounding irregularly) and the sweat glands (waking up in a cold one). However, your doctor says that you’re going to be all right if you can show that you didn’t really cheat but only looked like you’d cut a corner. After a hiatus involving several trips to city hall (and lots of deep breathing) you show the officials that those six rooms really are allowed (or perhaps you agree to a modification that will allow five rooms, which the buyer accepts), and you’re back on track. This is very good for the brain and mind (intense feelings of relief bordering on euphoria).

Coming into the home stretch both runners are tracking each other at a comfortable pace. The fans (your grandchildren in Albuquerque) are rooting you on; the referees are satisfied that all runners have complied with the terms; the judges (lenders) have signed off on the home stretch (the loan); the trainers have seen to it that your leg cramp no longer hurts; and, hand-in-hand (it’s just a figure of speech, folks!) with your buyer you cross the finish line exhausted but smiling. The baton has been passed. You are officially crowned “Former Innkeeper” and your running partner can now drop “Aspiring” from his title and add “Proud.”

A casual observer will see two healthy, smiling, breathless and sweating bodies. Only the runners and their teams will know all the pulled muscles and bruises it took to get there. You will always remember that the team of doctor, trainer, coach, and referee was with you every step of the way. Knowing that all those roles have been executed once again, your professional inn broker can now smile and go home for dinner.

Our Inn is For Sale! A Professional’s Perspective

July 27th, 2010 by Peter Scherman

by Peter Scherman of The B&B Team

Inn broker. Consultant. Real estate agent. Is there a difference? Should you care? The answer is yes to both questions, because one day you’ll be selling the inn you may be just thinking of buying today. The function of an inn broker or a consultant is different, and each is distinct from the role of a typical real estate agent. Depending upon your circumstances and your particular need at a given time, you may need one more than the other. Sometimes you can find both inn broker and consultant in the same place, in the same person, and use him (or her) in different ways at different times. Caution should be exercised, however, when hiring any professional in whom you are going to entrust your largest investment.

Your decision about when or if you put your inn up for sale may be influenced by the price you might be able to get in the marketplace. The price you receive could have major tax ramifications that you need to be prepared for. One solution is to call your area real estate agent and ask for a CMA, or comparative market analysis, which will include pricing recommendations. This is the traditional business model for real estate. The risk is that the agent may not tell you what you need to know, but rather what he thinks you want to hear, or that the opinion offered is prepared without the benefit of the proper frame of reference. Worse still, the agent may be totally ignorant about bed & breakfast inns or what is needed to value or market them. It’s amazing how many residential agents who would never dream of trying to sell a hotel or motel will jump at the chance to list a B&B. Expertise in one area does not necessarily carry over into the other.

Another choice is to try to sell the inn yourself. In the absence of an experienced inn broker in your state or market area, this may be better than becoming tied up with an agent who is unable to provide you with the guidance you need or, worse, may make blunders that could cost you not only a sale but business, too. You still need to know what your property will likely sell for, though. And that’s where an inn broker acting in the capacity of consultant can help.

A consultant can give you an objective opinion of price (which is not the same as an appraisal). Using experience garnered in the marketplace combined with financial analysis tools as well as a knowledge of taxation issues, real property values, and methods employed specifically in valuing bed & breakfasts and inns, the consultant will have the basis for sound judgments and opinions. If you have a need for professional advice to help you make a decision about a future action, or if you need a third party to help negotiate a complex transaction, you may be able to hire a consultant to provide you with just that service for a fee.

There are many fee-for-service options. For instance, you may be wondering if you should add another room (or two) to the back of the inn; should you upgrade the rooms themselves and charge more; or should you add meal service? What is the potential impact of those changes on future value? Which improvements will be personally gratifying (and may be good for business) but may cost you money down the road? These are very real and potentially very expensive questions if not answered with the best possible advice. A consultant who is knowledgeable about the industry working on a fee-for-service basis can advise you, potentially saving you or even making you thousands of dollars by helping you make prudent decisions. The consultant is there to “guide, not decide.”

But if you are really serious about selling your inn, and you are lucky enough to live in an area that is serviced by a professional, experienced inn broker or consultant, you can get all the services you need under one roof: competent advice on pricing and presentation; exposure in the right places and in the right way (no “For Sale” sign in your front yard!); access to a database of aspiring innkeepers seeking to buy an inn like yours; the ability to sort through the tire kickers to find those who might truly be a good fit for your property; and, perhaps most importantly, the knowledge and experience to craft a workable sales agreement and negotiate the twists and turns before, during, and after the deal is struck. The premium you might pay for a specialist in selling your inn is no different than in any other field of expertise. You don’t hire a GP for brain surgery, and you don’t hire a divorce attorney to litigate a personal injury. And you shouldn’t hire just any real estate agent, no matter how nice or successful, to help you sell your inn.

The Components of Inn Value

July 27th, 2010 by Peter Scherman

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.

What Is An Inn Worth? How Lenders Look at Value

July 27th, 2010 by Peter Scherman

by Doug Carleton of Business Lenders, LLC

How much an inn is worth is always a popular topic in the bed & breakfast industry. To an innkeeper who has invested capital, a number (maybe a lot) of years and, most of all, a tremendous amount of emotional and physical energy, the inn has one value. To a buyer an inn will probably have a different value, and it is not going to be the same for every buyer. A buyer looking for a business who does not need to count on the income from the inn to support them may be willing to pay one price. A buyer looking at an inn purely as a business venture (albeit a very attractive business with interesting clientele) that has to be the sole source of income may have another value.

And there may be a third party interested in a value. If the buyer needs to get a mortgage, a lender is going to establish a value for the inn, and it may be different from either the buyer’s or the seller’s. How a lender arrives at a value for loan purposes is something that can be helpful for both sellers and buyers to understand.

In our industry, there is a segment of inns that contain between one and four rooms. They operate like other inns, but because of their size generally are not considered commercial properties. This has a bearing on how lenders will value them and determine how much they are willing to loan. Properties of up to four rooms will usually be viewed by lenders as residential properties, which simplifies the valuation and loan process considerably. In residential lending, the normal process for a lender to establish a value is to have an appraisal done, against which the lender will usually lend a certain percentage, say 75% or 80% of the appraised value. The buyer of such an inn qualifies for the loan based on their personal income available to pay the loan, just like a house purchase. In this situation, the lender generally doesn’t care how much income the inn earns because it will not usually be enough to support a mortgage. The lender looks purely to the borrower and their income.

Once an inn gets to five rooms and above, it is probably going to become a commercial property for mortgage purposes, and the process of determining how much loan to make becomes much more complex. Now the income from the inn available to service the mortgage becomes the critical factor, both in terms of valuing the inn and in terms of how much a buyer can borrow.

Let’s look first at a commercial mortgage. One of the most important determinants of how much someone can borrow on a mortgage is governed largely by what the debt-coverage ratio will be. The debt-coverage ratio is the ratio between the amount of cash available from the inn to make mortgage payments and the payments themselves. The way to determine the debt-coverage ratio is, first, to determine the net operating income (NOI) of the inn. This is simply the gross income minus operating expenses. The operating expenses are all the expenses, both fixed and variable, that are required to run the inn on a day-to-day basis. The NOI is what is left to pay the debt service, with whatever is left over going to the innkeeper.

To use a simple example, if the NOI is $1,000, and the amount of annual debt service is $700, the debt-coverage ratio is 1.43 ($1,000 divided by $700). If a lender has a requirement that their debt service needs to be covered at least 1.25 times, divide the $1,000 by 1.25, and it gives you $800 available to make mortgage payments. Then, by applying an interest rate and a term, you can determine how much loan a property will support. In the above example, if the loan terms were 7½% for 25 years, the $800 would support a loan of $9,021.

The most important thing to a lender is to feel assured that their loan is going to be paid back. And it is the NOI that is going to be used to make the loan payments. A lender is not going to care how much someone says a property is worth if it does not generate enough cash to pay the mortgage.

Now let’s go back to the NOI and its relationship to value. If an inn is considered a commercial property, a commercial appraisal will be required as part of the loan approval process. In commercial appraising, value is established using a combination of three approaches – the income capitalization approach, the cost approach and the sales comparison approach. In the income capitalization approach, the net operating income (NOI) is converted into a value by means of the capitalization process. To illustrate the capitalization process in the simplest possible way, suppose you are going to buy an investment and you have a rule that you want to earn at least 10% on your invested capital. That 10% is your capitalization rate, which you will use as a means of determining value. If you are offered an investment that has a cash flow (NOI) of $1,000, you would be willing to pay $10,000 for that investment because it would give you a 10% return, or $1,000 a year. Therefore, to you, the value of that investment is $10,000. If an inn has an NOI of $70,000 and the appraiser is using a 10% capitalization rate, the indicated value under the income capitalization approach is $700,000.

In the bed & breakfast industry, the cost approach is the least accurate except in cases of a new construction project, in which case the value established by the cost approach will be the actual cost to build it. For existing inns, the cost approach becomes less reliable or useless. For example, to apply the cost approach in an appraisal of a 1790 brick Federal-style inn would be a waste of time because it would cost a fortune to reproduce faithfully, and would be highly unlikely to be sold as a business at that price.

The sales comparison approach can be more useful, but it has its own built-in set of limitations. The farther apart geographically the sales comparables that an appraiser can find, the less relevant they become. It’s one thing to compare a 56-room Sleep Inn in one state with a 56-room Sleep Inn in an adjacent state because the physical facilities are identical and the room rates are similar because it is a franchise. But to compare a seven-room inn in the mountains of one state with a seven-room inn near the seacoast in an adjacent state, or even the same state, becomes more difficult. Also, the buildings themselves may be dramatically different.

There are two other frequently used valuation techniques in the bed & breakfast industry that are variations of the sales comparison approach. One is the sale price per guestroom. This is simply the sale price divided by the number of rooms. This is a commonly used method in the hotel/motel industry where there are a relatively large number of sales of properties that are essentially the same. Because of this, it is much easier to draw a value conclusion for a hotel or motel property because an appraiser may find ten sales of a comparable market segment property (such as a particular flag motel). But in the bed & breakfast industry, because properties are almost universally so dissimilar, this method leads to a very imprecise measure of value.

The other method used in the industry is the Gross Revenue Multiplier (GRM). This method simply takes the sale price of a property and divides it by the gross revenue of the inn. So, for example, an inn that had gross revenues of $100,000 and sold for $500,000 would have a GRM of 5. The GRM is closely akin to the sale price per room, and suffers from the same limitations.

Establishing a fair and accurate value for an inn is important for anyone either already owning an inn or contemplating a purchase, especially if a mortgage is going to be required by a buyer once an inn is sold. Fortunately, for smaller inns, those of less than five rooms, the process can be relatively simple because the value is usually going to be based on the inn’s value as a single-family residence, and residential appraisals are very straightforward and simple compared to a commercial appraisal. For larger inns that must be valued as commercial properties, there are several different ways to come up with values. But as a starting point, establishing a value as though you were a commercial lender is the most realistic place to start. Apply a capitalization rate of between 9 and 11% to the NOI of the inn, and you will have a very good starting point. Many other factors may ultimately come into play in determining the final value, but a value based on cash available to make loan payments is usually the most accurate and widely used method in the hospitality industry.

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