When the B&B industry was entering its growth phase about 25 years ago, few innkeepers entering the business thought about how they would get out. Reasons for that lack of planning include thinking they’d be innkeepers forever and believing there would be a line of potential innkeepers waiting to buy their operating B&B. Instead, what we find today are buyers savvier and better educated than they were 25 years ago, at a time when there’s a glut on the market, despite, or because of a continued rise in prices.
So if you are going to sell your B&B, what’s your strategy for today’s market going to be?
Your strategy should include lining up the documents you need and ensuring your property improvements are up to snuff. The standard documents that most consultants recommend, and many buyers request, include tax returns, income and expense books, and occupancy rate reports. It is important that your cash flow supports your selling price.
One important improvement is a quality owner’s quarters. Another property issue is a well maintained inn, inside and out. Two elements of a strategy that are often overlooked include 1) having (and following) a marketing plan that you are using and one the buyer can benefit from, and 2) an expansion plan that shows how you and the buyer can grow the business and the income. And there are miscellaneous documents that support your asking price that are important to share.
Let’s look at these inclusions one by one.
- Tax Returns that include the last three years of filed business tax returns available to serious buyers to peruse and share with their accountant and/or consultant. Three years are useful for observing the business’s trends. The tax returns confirm your statements of income and expenses as well. I’ve seen deals fail because of the lack of tax returns. They are easy to provide; make them available!
- Income and Expenses Books that include the last three years of books, and year-to-date P&L (profit and loss) for serious buyers who want to see how you spend your money to help them understand the business you are selling. Separate your personal and business expenses, showing the buyer the complete financial picture. And don’t be stupid by having two sets of books! Aside from possibly getting in trouble with the IRS, it damages your credibility and reduces the price you can get when you sell.
- Occupancy Rate Reports are important to some buyers because they think it provides a better picture of the business. Occupancy is not, in the majority of cases, the number of rented beds or pillows. Occupancy is the number of rented guestrooms (and is calculated by dividing that number by the number of available guestrooms). To me, occupancy is a barometer for how the business is doing compared to itself and to other lodging properties in the area.
- Owner’s Quarters illustrates one of the big differences between B&Bs 25 years ago and today. Twenty-five years ago it wasn’t uncommon for the owners to live in the basement, attic or in a spare guestroom. It was the rare innkeeper who gave themselves space and privacy by having an apartment in or adjacent to the inn, or even totally away from the inn. That might have been an adequate approach while the business was young and growing, but by the time it’s busy and established, the owners need to have quality, private space. Today’s buyers demand that space. Lack of quality owner’s quarters will induce a lower price in the offer, if an offer is even forthcoming. It’s generally a buyer’s market now, so all things being anywhere near equal between two prospective purchases, a buyer will generally select the inn with better owner’s quarters. Treat yourself well now so that you can be better prepared to serve your guests and to attract quality buyers.
- Well Maintained Property starts with fresh paint, which goes a long way in keeping a property looking good. Having a spot-free B&B makes a good impression; clean thoroughly or replace the stained surface(s) before putting the inn on the market. The garden should be trimmed and weeded, nonessential equipment and worn decorations or furniture should be removed, and dirt swept and washed away. The roof, fence, parking surface, stairs, shutters and doors should all be repaired. If the surface items are in bad shape, it makes the buyer wonder what condition the structure itself is in. That concern
usually brings the price down. The irony of making this an element of “show condition” for your exit strategy is that for daily operations you should keep the inn looking top-notch; it shouldn’t be left until the sale, but often is.
- Cash Flow needs to be strong, showing good income and well managed expenses to impress a buyer, and for pricing the inn. Well managed expenses means spending enough to keep each “department” operating smoothly without wasting money and spending enough money in other “departments” to keep operations moving forward. Your marketing plan is designed to maximize your income by creating business when it isn’t usual. Show how well you have built income and managed expenses to attract your buyer.
- Marketing Plans show a blueprint for success. This document details how, when and where you will get the word out about your B&B and the experience your guests will have. Innkeepers who develop and work their marketing plan are more successful, even in bad times, than those who don’t make one, much less work it. This is a valuable tool for you to be able to pass onto your buyer — a great exit strategy element.
- Expansion Plans show how, when your B&B hits 75-80% occupancy, you anticipate keeping the business growing. When rates are at their maximum for what the market will bear, there are no more rooms to rent, and occupancy is about to peak, what is your action plan so that you can increase your income; how can the buyer recoup his investment? This is a great document to have for serious buyers.
- Miscellaneous information should be gathered from various documents to show to buyers that will impress them with your planning and business acumen. Use your imagination to expand the following list of details to include in your exit strategy for a complete presentation of your inn business:
- maintenance records
- a list of improvements
- a list of vendors
- your operations manuals
- copies of your permits and licences
- your guest database (have you been collecting email addresses along with other information about your guests?)
A well thought out exit strategy will pave the way for a quick, smooth sale. You won’t have to wonder how to extricate yourself from the situation you got yourself into if you have a thorough exit strategy that makes a buyer eager to buy your business.