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.