Buyers' To Do List

When purchasing a Bed and Breakfast, there are many items which need to be done by the buyer prior to closing. If a buyer does not have the time to do these items, a consultant like Quantum Hospitality can execute the list for you. Have fun!

INN BUYER’S TO DO LIST[1]

1. New Corporation: (Your lawyer should do this)

a. Incorporate new company. If you are taking on the corporate name of the present innkeeper “XYZ Inn, Inc.” then you will need a temporary name to begin with;
b. Obtain Employer Identification Number (EIN) from IRS;
c. Obtain Sales Tax Reseller Number from the State Department of Revenue;

2. License Applications:

a. Local Municipal Licenses. Obtain all local license applications and find out process and timing. Pay particular attention to sequencing and public hearing notice time periods, if any. In some states, if a liquor license is required, the local board must sign off prior to the State, and they will usually bundle the hearing on the local license along with the liquor license hearing.

b. State of Department of Health. Lodging and Eating Establishment License. Each state will have a different name on this license and different requirements. In Maine, for example, the license application is made to the Department of Health Engineering and will likely trigger a health code examination by the State if one has not been done recently.

In another state, for example, the process involves several departments and issues, most of which are encompassed in the inspection by Labor and Industries. The issues involved include a review of the compliance of the property with various environmental and safety code issues, including the status of the septic and water systems ( if public water and sewer are not available to the property), and the compliance of the property with the life and safety codes under the control of the State Fire Marshall’s Office. To confound things further, most inns had to register in the past with the State Department of Health which has a record of the number of allowed rooms (actually the number of “pillows” allowed) and the number of allowed seats in the dining room, in each case as it relates to the water/septic systems that existed at that date. This registration then provides sufficient evidence to “grandfather” the inn from having to comply with current standards at least insofar as the inn remains limited to the amount of pillows and seats as originally registered. If the Inn has changed configuration or you intend to expand the number of rooms seats, then you may be required to comply with modern standards as to the entire inn. This may include a requirement to add a sprinkler system to the inn, which is a very expensive addition, and may have a clear cosmetic impact on the inn.

All said, this is an area that needs immediate attention and may require professional assistance in order to make sure that all of the licenses needed to operate the inn can be received in a timely fashion without undue additional expense. Since you may be dealing with issues of “grand-fathering,” the current innkeeper has concerns that if the deal does not happen (for example due to difficulties in obtaining the total financing required), then what you have done with the various State licensing or inspection agencies may trigger expenses that the innkeeper otherwise would not have had to bear. Thus, the present innkeeper will have some concerns as to how you go about the process, and it may be best to work together to achieve the correct result.

c. Liquor License Application.

If you need a liquor license, in some States the liquor license application must first be approved by the local municipality after newspaper notice to the public and a public hearing. Then the application moves to the State Liquor Licensing Board which conducts its own background investigation, and usually comes out to the site to review the license requirements and liquor laws with the new owners. Since this process can be time consuming and difficult, so start the process as soon as possible. The need is to have the license prior to closing, and usually what the Liquor Licensing Board will do is to take back the current owners’ license and issue a temporary license expiring on the day before the closing, and issue the new license starting on the date of closing.

d. U.S. Bureau of Alcohol, Tobacco and Firearms: If you are going to sell liquor, you will need a Liquor Revenue Stamp Permit which costs $250 per year. You can obtain the form on the Web and it should be sent in as soon as possible as it takes a significant amount of time to get the license back. Most State Liquor Boards will not hold up the State License as long as you can show them a copy of the Permit Application which you sent to BATF.

e. State Unemployment Insurance. This is not a license, however you will need to apply for an employer number with State Unemployment Division, which is usually in the State Labor Department. In most states, they do a very complicated formula each year for each company setting the unemployment tax rate for payroll. While you get a new employer number, in some instances you can take over the unemployment history and balances in the prior innkeeper’s “account.” This may be very favorable for you depending on the number of prior claims that the inn has on its records. In some states, there is a considerable range in contribution rates depending on the prior history, and this investigation should be a part of your due diligence. You will need to supply this information to your payroll processor once your account number and contribution rate have been set.


3. Insurance.

a. Liability and Casualty Insurance and Umbrella Coverage. This is a real source of concern because of the relatively tight insurance market today. The first line of inquiry is to find out who writes the existing policies on the inn, as that may be the quickest source of insurance. These policies are complex, and you need to get a really good insurance professional to analyze the coverage and to advise you as to the correct types of coverage and amounts. If you are going to go out for bid on a policy or switch to another company or agent, you should start working on this as soon as possible. For full service inns, the liquor liability coverage is particularly difficult to obtain, especially if you have no hospitality industry experience. Pay particular attention to Business Interruption Insurance to provide adequate cash flow of continuing expenses (like the debt service) if you are out of business for any length of time due to a casualty. This is essential coverage for an inn.

b. Workers Compensation. Unfortunately, there is little competition in this area in most states, and the rates are usually pretty fixed. You will have to arrange for a new policy effective when you take over.

c. Health Insurance. This is important because you and your family need to obtain this coverage as part of the group that your new company will set up. This insurance is usually available (albeit from a dwindling number of sources) and is very expensive in most states. The important things to remember are that not all of your employees will be covered. For example, you can set the plan up to cover only full time employees or part time employees with over say 30 hours of work a week. This will usually eliminate most of the employees except for an assistant innkeeper and the chef (if you are full service), and probably can exclude any seasonal workers. The plan usually requires you to offer it to all qualified employees, but does not require that you pay for all of the coverage. For example you could offer to pay for single coverage to your employees (or a set percentage of this) and they can pay for the balance of the cost of family coverage). You need to talk directly to the health insurance company to get all of the options available.

4. Banks.

a. Bank Accounts. You should set up a main business account as soon as possible with the bank you are getting financing from. You should get a book of checks (using the temporary name of the new corporation if you are doing it this way) so that you have checks in the correct name to cover license applications and other expenses necessary prior to closing. Usually, you will be setting up your banking relationship with the bank providing your financing. Remember that as a part of the negotiations for obtaining a loan, you should also look into the bank’s costs regarding bank accounts and other charges. Business accounts are usually non-interest bearing, and you will be charged a certain amount on each item deposited and each check written, plus a monthly reporting charge. These bank charges may be reduced by the amount of money you leave in the accounts. Since you will be taking deposit money into the account, and the balances will build up during your busy season, you may want to also set up a money market or sweep account to enable you to earn interest on these balances. Some banks have Web Banking which will allow you to manage this process by enabling transfers from accounts to be handled instantly on the web. This is an area that you need to investigate.

b. Order Pre-Printed Checks. If you are going to use Quickbooks, you should order pre-printed checks and envelopes from them using your new bank account number and routing information for that bank.

c. Merchant Accounts. This is the credit card processing for the inn. Usually your financing bank will want this business, but you need to make sure they are competitive. Talk to the processor about obtaining a hotel software application on the credit card machine for the inn. This allows you to swipe the card on check-in and get a pre-authorization of the card for the estimated final bill. Most processors have a three tiered system of rates based on the rates charged them by VISA and Mastercard. The first tier rate (usually under 2%) is charged for swiped cards. The middle tier is for credit transactions where you do not have the card present, i.e. telephone charges for deposits (usually about 2.5-2.75%) which may make up a substantial part of your business. The third tier is for business cards and is usually above 3%. Some banks have a blended rate for all tiers at around 1.95%. This is the most favorable and should be sought after. Watch out for hidden charges like monthly fees, per item charges, and chargeback charges. Also, most banks will give you the supplies (tapes and ink ribbons) for free, but some processors charge you for this.

In any event, you may want to shop around for the best processor package for you. Sometimes the state or national innkeeper associations like Maine Innkeepers, PAII and Select Registry have credit card processing deals which are offered by so-called preferred providers. You need to do your homework on this one, since the cost is significant each year (around 2.5% of gross income). Mastercard and VISA are the real culprits, as they set the rates charged to the Banks, so there isn’t a whole lot of competition. Also, make sure you find out if the existing machines are owned or leased by the innkeepers. If they are leased then they will go back to the processor, and you will have to buy or lease your own machines. This is an additional expense.

The real timing problem is that the prior owner’s credit card accounts will cease on the morning that you close, usually after they have batched out the bills for the previous evening. You need to arrange for someone from the bank or credit card processing company to reprogram the credit card machines for your new merchant accounts on the afternoon of the closing so that you can start processing deposits and sales for your company that day. Otherwise you will be unable to take any credit cards until you do. If you are buying or leasing new machines, get them programmed in advance so that all you have to do is plug them in and you are set to go.

d. American Express/Discover. If you want to accept either AMEX or Discover Cards you need to set up accounts separately with those companies. The bank or processor can also arrange this and will then program your credit card machines to accept them, but the money flows into your bank accounts on separate schedules and reporting is done to you separately than from the MC/VISA deposits that your bank or processor will be handling for you. The discount rates charged by AMEX are based on volume, and most inns will fall in the base category of 3.50%, although some of the larger inns will only have to pay 3.25%. Since this is a significant amount, you probably should consider accepting AMEX only if you are full service (a lot of people charge dinners on AMEX ). This is not a real hardship since most people with AMEX also have MC or VISA cards.

5. Software Programs/Computer Systems.

a. Computer. You will need to have a really good computer system available. We recommend that you bring this with you during the training period and set it up side-by-side the existing system for that period. That way you can mirror the reservation software inputs and you can set up your bookkeeping system in a similar fashion as the existing systems. Of course, this is only true if you like what the current management is doing. On the date of closing, if you are using the same reservation software, you simply take the updated file and copy it to your system.

We recommend a very fast Pentium 4 with a lot of RAM and storage capacity. WI-FI networks may work, but a hard-wired network is better if you are going to have multiple access points to the reservation software. We would also recommend a really good laser printer with a high capacity output. There is a lot of printing to be done each day. Finally, your office should have a good fax machine on a dedicated line and a good copier. Sometimes the all-in-one machines may be adequate, but you may need flat bed copying which you can’t do on such machines. Finally, a good DSL hookup or other broadband internet access is very important.

b. Software. You should buy Quickbooks Pro[2] if you are going to use this for accounting, and we recommend that you use MS Office Pro as your basic software. The small business package for this also has MS Access included, which is a great data base program which can be used in conjunction with Guest Tracker. Wed also recommend MS Front Page to create HTML for uploading to your website.

With respect to reservation software, we are presently still recommending Guest Tracker. This is an incredibly easy to use system with good capabilities and lots of built-in reports. The BedandBreakfast.com company has just bought Rezovation Software and now also owns Munsenware, the company which developed Guest Tracker. They initially announced that they were going to eventually switch all of the business to their own product “Rezovation” and just let Guest Tracker continue without new updates. The market of happy Guest Tracker users may have convinced them that this is still the preferred product, and hopefully they will continue to support and upgrade this software. We have analyzed Rezovation, and while it has few more bells and whistles, it is not as easy to use as Guest Tracker, and for now is not being recommended by us. Finally, you will need to obtain a license from Guest Tracker or whatever reservation software you choose, and a copy of their software in order to load it on your computer. If you buy Guest Tracker you should also obtain their web module for uploading availability to the web and their annual support.

6. Payroll Processing.

a. ADP. There are several payroll processing companies on a local and national basis. We recommend ADP because they are responsive and you may be able to get a discount through membership in a state or national innkeeper association. We also like the fact that they have a web-based input system which allows you to process the payroll directly to them over the internet and not have to call it in by phone. You should think about having ADP do all of your payroll reporting for Federal and State purposes. You can also elect to do this all yourself through the services provided by Quickbooks, but this is very complicated and usually an innkeeper’s time is best spent on other matters. This is, of course, your choice. You will need to get your employees all set up on your new payroll system, and decide what your pay period will be. We recommend a 2-week pay period which ends on Sundays every other week, and the pay check for that period to be distributed the following Friday. You have to find out what rules apply in your state, as some states require weekly payrolls for certain employees, particularly restaurant workers and housekeepers.

b. On transfer, you will probably have to do new W-4’s and I-9 Forms for all of the employees that are continuing for your company. The forms are down-loadable from the IRS and Justice Department websites. If the inn has foreign workers, remember that they are technically supposed to only work for the applicant, which is the prior innkeeper. You should talk to your lawyer and the foreign employment agency about this.

7. Vendors/Suppliers. Once you have signed the purchase and sales agreement, you should obtain from the innkeeper a listing of all of the vendors/suppliers to the inn, and you will have to make arrangements for new accounts with those of them that require new information. Most of them do not need new account applications, and you will likely just fall right into the account status and terms that have already been negotiated for the inn. The Vendor/Supplier list should include the food suppliers, grocery store accounts, local store accounts, wine, beer and liquor vendors, amenities suppliers, utilities providers, web site provider, telephone service providers, Cable TV, internet providers, and contractors for landscaping, snowplowing, and repairs.

As part of the acquisition, you will be reviewing all of the various pre-paid services and expenses of the Inn for reimbursement on a pro-rata basis to the existing innkeepers. Most of these are marketing expenses that are paid for a particular period of time in the future, and thus need to be adjusted at closing. You should pay attention here to the various providers of these services and make sure that you are aware of when they renew each year so that you can manage this process on an on-going basis.

8. Website and Internet Directories. You should get in contact with the webmaster for the inns website and discuss those changes necessary due to your purchase of the inn (removing the pictures of the old innkeepers is highly recommended!). At that time you can discuss the overall quality of the website and get his ideas on what can be done to improve the site. If the site is an older one, you may just consider building a whole new site with all of the modern capabilities and with up-to-date photography. What you ultimately need is an attractive, easy to navigate site with lots of pictures and information, all of which you should be able to change or modify right from your own computer. The cost of such a site is presently running about $10,000 depending on the level of photography and the glitz factor of the site.

You will need to make certain that you can get full ownership of the existing website and the e-mail addresses which direct e-mail to the inn. They should then be redirected from your website directly to your own internet mail provider.

As to all of the various web directories that the inn currently belongs to, like bedandbreakfast.com, bbonline.com., The Innkeeper.com, Select Registry, etc., you will need to obtain from the current innkeeper the log in names and passwords so that you can access the sites and make appropriate changes to the information on these sites following the purchase of the Inn. Without the passwords, you will not be able to do this easily.

Finally, you should engage a competent professional to review the web-based marketing strategy of the inn, particularly the key words in the website, the web directories that the inn belongs to, and any pay-for-play advertising that the inn is doing. This is an important part of your overall marketing strategy, so pay attention here!

As you can see there is a significant amount of things which need to be done once the P&S is agreed to and before you close. Quantum Hospitality has a program available for purchasers to assist you in the transition planning and start-up of your new business. Give us a call for more information.

[1] This is a generic listing of the typical things that Buyers need to attend to before the acquisition is completed. The hiring of competent professionals (lawyer and accountant) are critical first steps and should be done immediately on acceptance of the Letter of Intent. Each State will have different requirements so have your professionals look at this To Do List and make appropriate changes. Many of these items will have to wait until you have a signed Purchase and Sales Agreement, rather than just a letter of intent, because the current owner will not want you talking to the government, its suppliers and other parties until a written contract for sale has been signed.
[2] If you are using Quickbooks, you will need to finalize with your accountant the chart of accounts to run the business. We can give you a copy of our Chart of Accounts which we highly recommend. Do not under any circumstances use a Chart of Accounts where the expenses are listed alphabetically. You need to list your expenses in categories that make sense from a business standpoint so that you can manage them consistently from year to year.

Blogging Your Way to a Successful Bed and Breakfast

At a recent meeting of Innkeepers, we had a discussion of Blogs, and, particularly, why would an Innkeeper spend the time to create and keep up a good blog? The answer is kind of simple. Do you want to have a successful website or do you want to continue to struggle for visibility on the search engines?

One key to success with Google, Yahoo, and the other search engines is to continually have fresh content on your Inn’s website. Having a Blog on your website allows you to constantly change the content, and particularly the links to and from the site, with new and relevant material. Remember, that for Google and the other search engines, the more relevant the material is to your website, the better. Thus, writing about all of the things to do and see in your Inn’s area, about the great restaurants, about the special events happening around you, all contribute to higher visibility in the eyes of the search engines. They also contribute directly to heads in beds!

At the PAII Conference this March, we heard many really great presentations on Web 2.0 and, particularly, Consumer Generated Media like TripAdvisor. You can play games with TripAdvisor to try to bury bad reviews or create your own reviews, but this will eventually come back to haunt you. Most Inns urge their guests to write their own reviews on TripAdvisor. Better than this is to open a dialogue with your guests via your own Blog. You can clearly respond to TripAdvisor via a Managers Comment, but why not explain yourself in detail on your own Blog. Ask for and respond to your guests’ concerns directly. It is much more powerful for your own website to be the place that guest concerns and critiques can be dealt with openly and without defensiveness on your part.

Finally, remember that hospitality and service is still the basic component of our Bed and Breakfast Industry. Having a Blog creates a new, electronic media to provide this hospitality and service to your guests and prospective guests. What better place than your Blog to show the world what a terrific concierge you are? You know your area better than anyone, and need to be its best ambassador. Don’t wait for the guest to arrive to provide this service. Make it an active part of your web marketing by putting it all on the Blog. Your Inn’s success will depend on it.

Bed and Breakfast Expense/ Income Tracking

The only way to improve your Bed and Breakfast or Inn business is to effectively track where you are today and to make realistic goals for the future of your business. At the 2008 PAII Conference Howard Levitan of Quantum Hospitality Group will be discussing the best methods to track where your business is today and how to increase your profits using metrics and the PAII Industry Study. We hope to see you at the Conference! If you cannot attend, we have provided our slide show presentation:

Bed and Breakfast Expense/ Income Tracking

Marketing Bed and Breakfast With Food

We are pleased to again be speaking at the PAII Conference this year. In one of our presentations Howard Levitan of Quantum Hospitality Group will be discussing how to best market your Inn with food. We hope you will be able to attend the conference, however, if you cannot attend we wanted to be sure to share our slide show presentation with you. We hope to see you at the Conference!

Marketing Your Bed and Breakfast With Food

PAII 2008: "Crisis in the Mortgage Industry and How it affects your Inn"

The Buyer’s Side

Presentation by Howard J. Levitan

1. Are Buyers Ready to Buy? The simple answer is that the majority of the assets available to Buyers when they are seeking to buy their “ideal” Inn are tied up in the equity (?) of their principal residence. If they can’t sell the house at a price that is sufficient, then they aren’t really able to buy an Inn. There are too many horror stories of people buying Inns with bridge loans on their houses who are unable to sell them for love or money.

It seems that the national averages on home sales are broadcast by the media every day. What this data seems to be showing is that the average sales are down by about 30% in most markets. Yet prices are down only by about 10% at the same time. What the pundits seem to take from this is that it is very hard for people to lower the price of the home that they have lived in, taken care of, and improved over the years. It is simply too personal a thing. Home prices simply will not drop significantly unless and until people have their backs to the wall of foreclosure or bankruptcy.

Those people who understand the dynamic are either reducing their prices to the market and getting out at whatever level they can, or, if they are able to, are simply holding on for the market to turn. Buyers of houses on the other hand are bargaining hard and clearly they are winning. The long and short of it is that unless and until the general real estate market recovers, there are going to be less people out there buying Inns.

2. Are Sellers ready to Sell? Arden Dale writes in a compelling article published in the Wall Street Journal on January 8, 2008 that “Want to Sell a Business? You May Not Be Ready.” Ms. Dale goes on to state quite cogently that many small business owners are relying on the ultimate sale of their business for their own personal retirement funds. The author’s thesis is that many small business owners do not have proper financial records, detailed operational documentation, and may not have a very realistic idea about the price for their businesses. He goes on to point out that buyers are much more sophisticated than in the past and are insisting on receiving extensive due diligence materials before agreeing to any purchase. The author’s solution is to start getting the business ready to sell several years in advance, to keep proper books and records, and to improve the operating profitability as much as possible.

Are Inn Sellers any different than home sellers about pricing of their Inns? The simple answer may be that they are unrealistic in what they should expect from the sale of their Inns. The real estate market should not have a tremendous impact on the “value” of an Inn, because if the business is viable and self-sustaining, then the value should be driven by the cash flow of the business rather than by the sales price of the underlying real estate. However, in better times we saw that this was not true about Inns located in strong real estate markets. The sales prices of many Inns were driven up by the strong real estate values around them (particularly in California and other locations like Nantucket where the historic Inns were being converted back to homes or torn down to built fancier houses). So what is happening in weaker real estate markets? The answer is that without strong net cash flows, Inns with marginal businesses are languishing on the market, but asking prices are not coming down. Basically, the same thing is occurring as in the housing market; namely, that sellers are loath to reduce their prices to the market. It is just too personal!

3. What about the National Economy or Recession? Clearly, this is going to have an impact on Inn sales as Innkeepers across the country are going to be dealing with a weak tourism market. The “bears” around say that people will not spend as much disposable money for vacations and travel if they are having to pay much more for everything they buy. As most of what people have to purchase is being impacted by the weak dollar and corresponding high oil and gas prices, the squeeze is clearly being felt. Those more bullish say that people will take vacations anyway and that all that a poor economy means is that they will stay a bit closer to home and drive to their holiday spot. National Retail Sales figures do not seem to be going along with the bulls here. Retail sales are down significantly and are shifting again to the discount side. Watching WalMart, the number one retailer, you will see that its sales have grown recently, but in their food and lower cost clothing lines, rather than in the areas of higher fashion that they were trying to grow. The chain restaurants, particularly those which sell non-necessities (like Starbucks) have been particularly hit hard by this “recession.” It is only a matter of time for this to hit the tourism market.

For buyers, this does create somewhat of an opportunity, with the Federal Reserve pushing interest rates back to the really low levels of the past several years. However the real key is to make certain that there is sufficient cushion in the net cash flow of the Inn to weather the likely fall off in the hospitality business caused by an economic recession. So buyers need to be very careful that they look at the reality of the financial performance of an Inn opportunity, that they make absolutely certain that there is sufficient cash flow to get by if things go bad, and that they have good working capital at the outset. Making an emotional “lifestyle” decision is not a very good idea in the immediate future (or perhaps ever!). The best performing and operating Inns will likely still be very attractive at the right price with such low interest rates, but marginal operations simply will not sell at any price.

4. Is Now the Right Time to Buy? Here the answer is clearly a strong “maybe.” For those buyers that have liquidated their homes, they may be able to negotiate good deals for Inns at the right prices, and will clearly benefit from the lower interest rates. As will be shown in other parts of this presentation, they will have some difficulties in securing mortgage financing, as the banks retrench, however, buyers with strong credit and good sized deposits should still be able to secure financing where the cash flow provides good debt service coverage. Many banks will look very hard at the hospitality industry as to whether it is going to be severely impacted by a recession. If the answer is yes, then it will remain harder to get financing.

The bottom line for buyers in regards to timing is that it may not be possible to determine when the market turns. If buyers can find a really good opportunity now, at a good price, then they should go ahead and not look back to see if the market falls even more. Buyers need to remain ever vigilant and always cautious to make sure the Inn business is strong and will weather these difficult times.

Innkeepers Responding to Trip Advisor

We all know about Trip Advisor and what it can do to the travel industry. The ability for guests to post their honest opinions about a property can be valuable. We also have to keep in mind that it is very difficult to please 100% of the people, 100% of the time. However, it seems that Trip Advisor is all too often being manipulated by the owners of the properties to try to bury bad reviews. It is always painful to receive a bad review, but owners have to sit back and “listen” to what your guests are saying.

We went strolling amidst Trip Advisor and started reading reviews. A true telltale sign of an owner trying to bury a bad review is when you see five glowing remarks about the property followed by an unhappy guest rating their experience a “1” or a “2”. This trend continued as we read reviews, five glowing, one bad. All of this being done to push the bad comments below the fold with the hopes that the next potential guest coming to the inn wouldn’t see it. One inn in New England had a review which was written in November. It raved about the wrap around porch with flower baskets and spoke of having breakfast outside. I don’t know about you, but I live in New England and my flowering annuals are long gone and there is no eating breakfast on the porch until next Spring! This was obviously written by the owner of the property who happened to forget what month it was. Another example that I really loved was when the property was referred to by its initials. Guest don’t refer to an inn by its initials, they call it by name.

My only word of advice is to listen to your guests and try to adjust accordingly. By writing contradicting reviews to bury a bad review only reflects badly on you, the owner, as it is easily identified. The service industry is one of the hardest jobs to perform, so do it to the best of your abilities.

ARE YOU READY TO MAXIMIZE YOUR PROFITABILITY?

Arden Dale writes in a compelling article published in the Wall Street Journal on January 8, 2008 that “Want to Sell a Business? You May Not Be Ready.” Ms. Dale goes on to state quite cogently that many small business owners are relying on the ultimate sale of their business for their own personal retirement funds. The author’s thesis is that many small business owners do not have proper financial records, detailed operational documentation, and may not have a very realistic idea about the price for their businesses. She goes on to point out that buyers are much more sophisticated than in the past and are insisting on receiving extensive due diligence materials before agreeing to any purchase. The author’s solution is to start getting the business ready to sell several years in advance, to keep proper books and records, and to improve the operating profitability as much as possible.

Sound familiar? This is what we have been talking about this for years now with our program to Achieve Maximum Profitability at your Inn well before it goes to the market. Looking at the financial condition of an Inn as compared to Inns across the Country is achieved by looking at results compared to other similar Inns. In this regard, one source of information for the smaller Inns would be the PAII Industry Study (2007-2008 utilizing 2006 financial results is the most recent version). Other sources includes our own Quantum Hospitality/Oates & Bredfeldt, LLC Standard Cost Analysis Study. In either case, the concept is to conform your own Inn’s financial performance to the Chart of Accounts set forth in the appropriate study, and to determine on an account-by-account basis whether or not your income and expenses are in line with the average Inns in each such study. I can state, without any doubt, that each time we do such analysis for an Inn, we are able to come up with potential cost savings well in excess of our charges for doing this work. We do in depth reviews of the operations of 30-50 Inns across the Country each year, and there are very few that stand up to this type of rigorous, detailed study. The result is that we are then in a position to suggest operational and expense cost savings which will improve the financial results prior to selling the Inn, irrespective of the process used to market the Inn. This is especially true about the “personal” costs and expenses that seem to always be present in the Profit and Loss Statement of the Inn. A good couple of years before any contemplated sale is a really good time to eliminate these additional costs and show some real profitability and net cash flow in the Inn.

Dale’s point about researching the price for the Inn is also well taken. Most Innkeepers look at what they think another Inn has sold for without first hand knowledge of the financial condition of that Inn. They think that if that Inn down the street sold for $X then their Inn has got to be worth more since it is “better” or “more popular,” etc. Another practice is simply to utilize the various rules of thumb like Gross Revenue Multiplier (see previous Article dated May 17, 2007 called “Best Methods for Finding the Ideal Inn”). Often Innkeepers are told to price their Bed and Breakfast Inns at 5-6 times gross sales, even though the business results do not justify such lofty pricing. The solution is to obtain professional advice as to what your Inn Business is really worth compared to other similar Inns before going to the market.

The point about written operational policies and procedures is another really important one. Two or three weeks training from the prior keepers of the Inn can not teach new Innkeepers what they really need to know in order to maintain the value of their new Inn Business in the first year. Those Inns which have written checklists and policies, training manuals, job descriptions, recipes, and stated practices for all of their operational tasks are simply worth more than Inns that do not have this documentation. Buyers will quickly figure this out in the due diligence process, and may walk or run away from a poorly managed Inn notwithstanding the price.

Finally, a word about where we seem to be on the National economic front, as it may impact the ability of Innkeepers to achieve their goals of selling the Inn. Some commentators have downplayed the impact of the Sub-Prime Mortgage Crisis on business. This, of course, is pure foolishness, and a disservice to those whose dreams can be destroyed by buying Inns at the wrong time or at the wrong price. It is now clear from the daily economic news, the plummeting real estate markets, and the rapidly falling stock market that the Country is at grave risk of a real recession, if we are not already there. This will clearly be felt in the tourism market, and all forms of accommodations across the Nation will be feeling this pinch. The Inn business survived the fall off after 911 by not falling prey to the discounting that the hotel business jumped on. We hope that the greater hospitality business has learned its lesson, but for Innkeepers, this year will clearly be a real challenge.

For Sellers, this is not good news. It will clearly have an impact on the prices that will be achievable for their Inns, especially if results take a down turn for them. It already has impacted time on the market for Inns, especially full service Inns with restaurants. Most Inns are staying on the market for 1-2 years before they are sold, even if they are at the right price. For buyers, this does created somewhat of an opportunity, with the Federal Reserve pushing interest rates back to the really low levels of the past several years, however the real key is to make certain that there is sufficient cushion in the net cash flow of the Inn to weather the likely fall off in the hospitality business caused by an economic recession. So buyers need to be very careful that they look at the reality of the financial performance of an Inn opportunity, that they make absolutely certain that there is sufficient cash flow to get by if things go bad, and that they have good working capital at the outset. Making an emotional “lifestyle” decision is not a very good idea in the immediate future (or perhaps ever!). The best performing and operating Inns will likely still be very attractive at the right price with such low interest rates, but marginal operations simply will not sell at any price. In any event, we will be there to offer help when and where needed.