From “Ask Kit!”:
Q: Many inn owners quote occupancy rates that seem very high for their area and amenities (especially when trying to sell their business). They seem to making up their own formula. Could you please publish a formula for figuring occupancy that gives a good idea of the actual business that a particular B&B has?.
A: I’d like to think that the inns that are selling have better business than those who aren’t selling, but….
I have a “black-and-white” approach to occupancy rate. And for an existing business it’s not a matter of projecting, it’s a real number — it’s reality. I frankly think that actual income is a better gauge of the inn’s business succes than occupancy rate, but I’ll address your question anyway.
Occupancy rate is calculated by taking the actual number of rooms rented divided by the number of rentable rooms. The time frame can be a week, month, or year — depending on the historic window of time available to you.
Monthly rate of occupancy = total number of rooms occupied for that month divided by the total number of rooms that could be rented out for that month.
Example:
My facility has seven bedrooms.
Maximum occupancy would be 7 rooms x 30 days = 210 rooms (Divide by 28 for February and 31 for Dec. etc.)
If 45 rooms are occupied during a given month, 45 divided by 210 = 21.42%
The rate of occupancy for the year would be the total of all occupancy rates for the year divided by 12.
Some innkeepers out and out lie about their occupancy rates to improve their chance of selling their B&B. This is why prospective buyers need to look at the innkeeper’s financial records. Match the bookkeeping records against the reservations. Look at the gross revenue reported on the quarterly tax returns.
If you’re someone who trusts a person’s word in business and feel no need to verify the accuracy of financial statements and records, I’d like to sell you a prime homestead on the moon.
When during the research phase is it appropriate to ask for financials or detailed occupancy data? The B&B I’m interested in will require a minimum 10-hour drive each way to visit (a 5 – 7 day trip total), but I don’t want to take on that time and expense without additional information. I’ve received a general occupancy rate of 48 – 50% plus gross income and expense figures for last year and the previous year. However, I’ve requested more detailed occupancy figures (monthly) based on the seasonality of the B&B location, but haven’t been able to get those from the broker. I’m wondering if the current owner doesn’t keep records that detailed or the occupancy rate is not actually as stated.
I want to make sure the off season occupancy of near zero (as far as I can tell) is compensated for by a 100% occupancy the remainder of the year. Plus, I want to make sure the occupancy rates justify my interest in the property and the time/expense the next step (business plan) will require.
Other information I’ve seen says I should reciprocate with my own financials as a “sign of good faith” and commitment.
Should I insist on greater detail in the occupancy figures before I commit to a site visit? Will a site visit “prove” my interest? Do I need to provide financial information to “trade” for more in-depth data on this B&B?
I think it’s appropriate to ask for that information once you think the B&B is what you are looking for. There is often resistance with both buyers and sellers (or their representatives) to share financial data, but I think it needs to be a give and take.
Occupancy rate is important, but you may have what you need to determine if it’s a profitable business for you — the gross income. If you can pay the expenses you will have after you take over with the existing income (verified of course), then with the amount of upward potential you have, this may be a good buy for you.
If you haven’t seen the property, you need to see it anyway, if the cash flow covers expenses. A site visit doesn’t prove your interest, but it shows your commitment to determine interest.
There’s much more to an inn’s viability than occupancy rate or income; the inn itself — condition, style, location, and comfort for you. You have to see the total picture to know if it’s truly an inn worth pursuing.
My wife and I are interested in buying a B&B, The B&B’s owner is tired of the business and has not keep up with advertising and marketing. The records are sketchy for sales because she would not answer the phone and follow up with emails. The B&B does have somewhat of a history, is very clean and has good location. How do we project for sales ? Her records for the 1st yr are only for part of the year.
Charlie, you have a more challenging task ahead of you than if you were buying a going concern. If I’m reading your comment correctly the business is only about a year old; if that’s indeed true I hope you aren’t paying much for the business part of the B&B.
Now, you are really asking about how to calculate your income and occupancy rate. I recommend two approaches: 1.) Take the community’s average occupancy rate and use half of that for your first year. If you can’t find or calculate that number use the more conservative rate of 15%, 25% if the area has a high tourist or business traveler base.
Without knowing where you are talking about it’s hard to give much information.