Bushnell & Bushnell Blog » Viability of an Inn

Tax Time means Exit Strategy Time

Scott — Thu, 21 Jan 2010 15:55:58 +0000

I hate this time of year when the thought of doing taxes pops into my mind several times a day, especially with all the reminders that bombard me. H & R Block commercials, 1099’s and statements arriving in the mail, commercials of the scams of companies that can reduce your tax burden with the IRS. W-2’s showed up yesterday from my payroll service. AAAACCHHH!

But it is time to also self-reflect on an innkeeper’s plans to exit the Bed & Breakfast scene and understand the TIMING of that exit. I have been a proponent of the 5 Year Plan to exiting the business, and the first 3 years is to ensure your taxes are clean and clear. When you are in the due diligence process, the buyer’s representatives and lender will want to see 3 years of taxes…and you will want them looking spiffy!

Marilyn and I were innkeepers and fully understand the emotional pull to reduce income taxes each year. There is definitely the temptation to expense (instead of capitalize) that new roof or charge up some restaurant visits as inn Travel & Entertainment expenses. But if you plan on selling your inn within the next 5 years, there are preparations to be taken NOW to ensure the selling price is what your property deserves.

It all boils down to increasing Net Operating Income. The value of your business activity is based on how much NOI your inn’s performance delivers. At the “rule-of-thumb” cap rate of 10%, a $10k increase in NOI can result in a $100,000 increase in sale value. Sacrificing a few short-term tax bucks for the big benefit is well worth the effort!

Here are a few ideas to improve your NOI:

Remove personal expenses from inn expenses, such as supplies and food
Report all revenues, including cash sales
Only pay yourself what you need…but have something in there. If there is no payroll included in the expense report, a lender will insert some, perhaps too much, and reduce NOI.
Consider whether you are overstaffed and can reduce unnecessary payroll labor and associated withholding expenses.
Keep depreciation, income taxes, rent you pay yourself and other legitimate expenses in your expense schedule to avoid a buyer’s lender from inserting too-high estimates.
Capitalize major renovations and equipment purchases rather than expense them. Your accountant can help you with appropriate practices.
Of course, do NOT let your marketing practices falter. Keep increasing Occupancy and ADR!

I hate this time of year too. But thinking ahead and keeping your financial records in order will grease the skids when it is time to exit the business. Scott

Comments? Do you have other NOI increasing ideas?

Viable Inn vs. Lifestyle Inn…a tough question

Scott — Thu, 20 Aug 2009 21:48:12 +0000

Is a VIABLE Inn or a LIFESTYLE Inn Best for you?

As an aspiring innkeeper, one of the more difficult decisions to be made is viability vs. lifestyle. A viable inn, usually an inn with 8 or 9 guest rooms or more, is one that has enough cash flow to pay not only the operating expenses, but the debt service (mortgage) as well. A lifestyle inn is usually a smaller inn, perhaps even very busy and popular, but does not have enough cash flow to pay the mortgage.

One Choice is Not BETTER than the other! They BOTH can offer the Rewards of Inn Ownership!

The BIG QUESTION becomes “Do You Need to Make Money?”

If the answer is YES, then viability of an inn becomes a priority for your search and part of your inn profile.

If the answer is NO, then a lifestyle inn may be just the ticket…the joys of inn ownership at a smaller inn.

Financial considerations for a lifestyle inn include the size of the down payment and whether there is outside resources to help pay the bills. A smaller inn typically does not require much staffing which helps keep expenses down, and, if someone is working outside of the inn, the need to pay for health insurance and other corporate benefits may not pose a expense burden. And the rewards can be very satisfying! The inn may even make enough to pay the usual household bills (utilities, phone, food, insurance, etc.) and ease the pain of the mortgage.

A good example of a lifestyle inn is The Limestone Inn, currently for sale at $595,000.

Located in State College, PA., only 4 miles from Penn State, the inn enjoys the privacy of being out in the country, but close enough to corporate businesses and the campus to do a strong business. But the inn only has 5 rooms which limits its ability to make enough to pay the full mortgage. But with over $50,000 of revenue for each of the last 3 years, the inn can easily pay its bills with a good size chunk of cash flow left over to take a dent out of the mortgage payment…an ideal lifestyle inn in a great marketing area.

An example of an affordable viable inn is Grape Arbor B & B located in North East, PA. This inn, currently for sale for only $845,000, with 8 rooms, all with private baths, with its 33% occupancy, is large enough to be able to pay the bills AND the mortgage. It is ideally located in the Chautauqua-Lake Erie Wine Trail region within easy reach of the Buffalo, Cleveland, and Pittsburgh marketing areas. Compared with The Limestone Inn, the additional 3 rooms helps bring in the extra revenue to be viable.

Both of these inns offer the rewarding experience of inn ownership. Both are not necessarily huge inns, and may be managed by a single person, with perhaps some part-time staff help, or by a couple. Size of the inn is typically the primary determining factor when considering viability vs. a lifestyle inn, and, when coupled with the marketing location and potential to attract guests to the area attractions, either inn can offer the enjoyable experience of owning your own B & B. Scott

What is the Highest and Best Use of YOUR Property?

Scott — Wed, 15 Jul 2009 14:31:19 +0000

The title phrase above about the highest and best use describes a real estate appraising term often applied to the B & B Valuation process as well. Use is the operative word. Using Wikipedia’s definition, the concept states that the “value of a property is directly related to the use of that property; the highest and best use is the reasonably probable use that produces the highest property value. This use, the Highest and Best Use, may or may not be the current use of the property.” (my emphasis applied)

This affects a LOT of inns. Some inn properties may have a higher property value as an alternate use. A smaller property may have a higher value as a residential property…and many small inns have sold recently as homes.

Some inns are restricted by codes (typically zoning and special use permitting) to provide all of the services they would like to offer…thus restricting revenue and profitability growth. These inns may have higher property value as another use…perhaps an office building or assisted living facility.

Many inns are currently enjoying the highest and best use of the property. It is reasonably likely that these viable inns have the highest property value as currenlty being used as an inn. Their value, therefore, can be established by a properly detailed valuation as a going concern as an inn.

Most innkeepers do not want to hear that their “baby” is worth more with an alternate use. But these economic times are clearing the air about value, and what level of loan to value (LTV) the lenders will support, and a clearer understanding of highest and best use. Scott

The Bed & Breakfast Inn Life Cycle-A Primary Care Consultant’s View

Scott — Wed, 18 Mar 2009 20:19:01 +0000

Vitamins and Medications for an Inn’s

Age-Related Conditions

An Inn, like any retail product or industry, goes through a Life Cycle from infancy to death. It starts as a glimmer in its parents’ eyes, a dream of a lifestyle healthy and productive. It grows with careful nurturing, education, and aspirations, matures into a productive adult, capable of self-sufficiency and satisfaction. Physical and financial ailments will emerge someday, some sooner than later, but eminently all will experience the pain and, without exception, a slow (or sometimes cancerous) downhill slide (or plummet) to demise.

Doctor: “Which do you want to hear first…

the good news or the bad news?”

How cold and ugly a picture…how uncaring to express such a prognosis without apparent feelings or emotions! But without a continued regimen of properly prescribed vitamins, medications, and regular health check-ups, an inn’s health WILL decline. That’s the bad news.

The good news is that there are fountain-of-youth-like medications that can extend an inn’s life expectancy well into the future…perhaps to immortality!

Let’s examine each stage of the Life Cycle to see where YOUR INN resides…

NEWBORN: A start-up inn, whether from the ground up or the conversion of an existing structure, is a difficult and risky time of life. This inn has NO sales yet and is starved for cash flow. It needs basic but regular feedings of vitamins and nutrients (and cash!) to stay alive and start growing.