Here is Part II of my exploration of the world of Twitter. I have been tweeting now for about two weeks, and have about 120 people actually following what I am saying on this incredible social media. It amazes me how fast this has grown for me from a peek at a new marketing channel to a full blown way to spread the word about what we do at Quantum Hospitality. More important, I have found so many really interesting people in the Twitterverse to follow. They are writing short notes (140 characters only) about anything and everything of interest to them. Here are my continuing observations about this exploding device.
In last weeks blog article, I described in general how Twitter works, but the simplicity of sending out very short messages belies the fact that a tremendous amount of information is being spiraled around the Internet in this fashion. By using one of many free services to shorten URLs, Tweeters are including references to blog articles and other websites within their Tweets. Once received, each person, if the information is deemed worthy, can then “Retweet” this information to his or her list of followers with a comment. It is this Retweet phenomenon which is the essence of viral marketing. It keeps the message circulating, growing and growing the number of people who ultimately see it. Just think of the possibilities. Imagine your Special Package description gets Tweeted to your friends (presumably your guests) who then spread the word to all their friends, who then send it to all of their friends, and so on. . . . This is the essence of the concept of Repeats and Referral, the two most important kinds of guests and prospective guests a Bed and Breakfast can have. In essence, the marketing potential of Twitter is endless.
Now, does it work? First, there is an etiquette happening as well. If all that you talk about on Twitter is your business, your Twitter followers (i.e. your “friends”) will likely stop listening to what you say. This is a social media after all! They want to know you as a person as well as a business. Here is where all your Innkeeper hospitality comes into play. You can spend a good deal of time on Twitter talking about what is going on at the Inn. It can be as simple as a description of that fabulous breakfast that you just fed to your guests, a description of one of your best guest rooms, or a short note about what is happening in your neck of the woods this weekend. Pictures work great on Twitter, with a Flicr account and a shortened URL, you can include great photos in your Tweets. Again the marketing potential is limitless. The key is to convey the wonderful ambiance of your Inn in 140 characters. That is the Zen of it all.
So the overall answer to the question “does it work?” is a resounding yes! What amazes me is that there are so many bed and breakfasts out there, but only a relative few have caught on to Twitter. This is a missed opportunity. Right now, it appears that the overwhelming number of people on the Twitter channel are people who are into social media as a business. The bloggers and web developers are all there. Also, you will find every form of self help and technical gurus there, as well as some really smart people who just want to learn about the anything and everything of it all. These people are basically your guests or prospective guests.
So what is the first step after signing up for Twitter? You need to get a following that wants to hear your messages. What better way than to put out the word to your guest list that you are now on Twitter. Put the Twitter link on your website, and send an email notice to your guest list with your Twitter ID. Ask them to follow you. Make sure you have the link in all your marketing pieces and newsletters. Set a goal to get a good number of your guest list into following you on Twitter.
Once you have guests following you on Twitter, you can then have a look at who they are following and who is following them. You can elect to follow anyone who is interesting to you (i.e. a potential guest). If you follow someone, they get an email from Twitter advising them that you are now following them. Usually, they will look you up on Twitter, and if it interests them, they can elect to follow you back. This is the social networking feature of Twitter, and it allows you to expand your friends and make new ones. Many, many Tweople have thousands and thousands of followers on Twitter. It is word of mouth at its highest level.
So my advice is “what are you waiting for?” Get going and Twitter on. . . .
Showing posts with label Buyers' Advice. Show all posts
Showing posts with label Buyers' Advice. Show all posts
Wednesday, March 25, 2009
Thursday, January 08, 2009
Lease Option Folly for Bed & Breakfasts
During these difficult times of recession and the credit crisis, we have been thinking more about the use of Lease Options as a method of transferring Inns and Bed and Breakfasts. There clearly are some advantages for both Sellers and Buyers of Inns by allowing a faster closing period without the necessity of finding hard to secure financing. The universe of potential buyers is greater because the down payment (option price) and the closing costs are lower. Yet, I remain troubled about this method for both Sellers and Buyers. Here are the details.
First let’s describe the concept. The Lease Option is an alternative route to Innkeeping. It has been used over the years when financing gets tight or when the Inn in question is underperforming and cannot achieve normal financing. The way it works is that the Seller/Lessor leases the Inn property and business to the Buyer/Lessee for a five year term, keeping in place the existing financing on the Inn. The Buyer/Lessee pays an option price for the option which is less than a normal deposit for a purchase. The Lease is triple net, and the Lessee pays for all taxes, insurance, and maintenance costs. The rent is set at an amount sufficient for the Seller/Lessor to pay its mortgage on the Inn. In some cases the rent is lower at the beginning to enhance the ability of the Buyer/Lessee to improve the Inn’s business and make the Inn more capable of being financed in the future. In most cases a portion of the rent is also set aside as a credit against the ultimate option price, thus allowing the Buyer/Lessee to build up more “equity” in the Inn over the lease term. The Seller/Lessor retains title to the Inn and all tax incidences, including depreciation. Finally, the Option Price set by the Lease is received by the Seller/Lessee, but is not taxable until either the option is exercised or it expires by time or default.
From the Seller’s standpoint, they are able to get out of the active operation of the Inn and retain the tax benefits of ownership. They receive sufficient sums to continue to pay down their mortgage, and all operating costs are paid by the Buyer/Lessee. The Seller receives sufficient funds at the outset of the option to perhaps put a sufficient deposit on a new house or set aside funds for retirement without immediate tax consequences, but will not have a large payout to say buy a new business. One key point for the Sellers is that they still own the property, and thus, in the event of a default, can get back the Inn business faster than if they had to foreclose a mortgage. Overall, for a Seller that does not have immediate needs for the whole sales price, this looks on its face like a viable alternative, particularly where an outright sale is not possible.
From the buyer’s point of view, again, this looks attractive on its face for those Buyers who want to get into Innkeeping immediately, but lack the resources to make an outright purchase. It is clearly a cheaper route, with less of a down payment, and much lower closing costs (no appraisal or bank fees or transfer taxes). It gives the Buyer five years to develop and improve the business of the Inn, at the same time building up the equity under the lease and, hopefully, improving the overall value of the Inn while the option price remains fixed. However, for both Buyers and Sellers alike, this scheme is both illusory and full of risk.
Here is the main reason why this method is folly for both buying and selling Inns. The cash-strapped buyer is likely buying an underperforming Inn which usually requires an additional capital infusion of working capital in order to improve the business. Sweat equity is fine in a start-up situation, but does not necessarily work where real hospitality experience is needed to turn around a poorly performing Inn. Most of the Inns which are using lease options are full service Inns which are even more sensitive to needing qualified restaurant experience to improve the dining room parts of the Inn’s business. A new Innkeeper, even one with some restaurant or hospitality experience still has a huge learning curve just to run an Inn, let alone improve the restaurant business. The facts are clear that 50% of new restaurants in the United States fail after 3 years, with a whopping 90% failure rate after 5 years. This makes a lease option of a full service inn even more daunting when the new Innkeepers lack hands on restaurant experience.
Another issue follows directly from the fact that the costs are lower because no financial institution is involved. Without a bank being utilized for financing, there also is no third-party looking at the historical cash flow and tax returns of the Inn business, no independent appraisal of the Inn, and, in some cases, no real due diligence of such things as the structural integrity of the building and systems of the Inn. The simplicity of the transaction belies the fact that protections for the buyer are sometimes overlooked. For example, since no title insurance is needed for a bank, often this basic protection in a sale is not present in a lease option deal. If a title problem is found later in the process, perhaps when the option is being exercised, the buyer may be at risk after it has paid the option price and all of the lease payments. Thus, in reality, almost all of the normal sale due diligence needs to be done for lease options as well, making the cost saving factors perhaps irrelevant. Finally, in our experience, with this relatively unusual form of Inn transfer, Buyers do not always receive the legal protections that they need. For example, since the lease is subordinate to the Owner’s original mortgage, at closing of the lease, the Buyer/Lessee needs to receive a Non-Disturbance Agreement from the Seller/Lessors’s bank in order to protect the lease and the option from a foreclosure which may occur due to other issues of the Seller/Lessor with that bank. This simple legal protection may not always be included in such a deal.
Let’s not forget about the Sellers as well. If the deal fails, they get the pleasure of taking back their Inn, perhaps a long time after they had stopped being Innkeepers. The failure of the option is a hard thing to keep private from the buying public, and the result may be that they have to take back an Inn at a time when it is worse off from a business standpoint. Also, if the markets are as tight as they are today, the seller may really have lost a part of the value of the Inn, and be unable to sell it after such a failure.
What we have really seen in practice in the last five lease option deals in the New England area is the ultimate inability of the Buyers to turn around the operations, and the failure to either continue to make the lease payments or to achieve financing of the option. In those cases, each Buyer lost their option payments and ultimately lost the Inn. In some of the cases the causes were due to unforeseen maintenance issues arising after the lease commenced which stripped the Inns of needed working capital. In others, the new Innkeepers had transition difficulties and basically had little inability to run complex Inn operations including restaurants. In other cases, the importance of increasing web-based internet marketing eluded the new Innkeepers, making profit margins even more difficult to achieve. In some cases, the new Innkeepers just realized after a few years that the Innkeeping life was not to their liking, and they were willing to just walk away with nothing since they had no basic personal liability like what they would have for a mortgage in a purchase scenario. The likelihood, in most cases, is that the failure was a combination of all of the above, plus the post 9/11 weakening of the hospitality market that did them in. While all of these things can affect new Innkeepers who purchased Inns the normal way through financed sales, the fact that the financial institution utilized some independent review of the transaction seems to have had a moderating impact on the risk of failure. Most Buyers when facing the failure of their business will fight hard, and perhaps use other resources (such as a part of retirement funds) to make the Inn successful. In practice, we just do not seem to see that willingness to sacrifice all in a lease option situation.
With today’s tight financing and really slow real estate markets, there will be a lot of pressure on Inn Sellers to utilize lease options to achieve their goals. Likewise, Buyers may be convinced to go forward using these methods where they cannot put down sufficient deposits to achieve normal financing or where such financing is totally unavailable due to the performance of the Inn or the credit crisis. In either case, for the reasons stated above, we feel that using this method is both folly and very risky for both sides. It is highly unlikely that we will be recommending its continued use in our consulting practice.
First let’s describe the concept. The Lease Option is an alternative route to Innkeeping. It has been used over the years when financing gets tight or when the Inn in question is underperforming and cannot achieve normal financing. The way it works is that the Seller/Lessor leases the Inn property and business to the Buyer/Lessee for a five year term, keeping in place the existing financing on the Inn. The Buyer/Lessee pays an option price for the option which is less than a normal deposit for a purchase. The Lease is triple net, and the Lessee pays for all taxes, insurance, and maintenance costs. The rent is set at an amount sufficient for the Seller/Lessor to pay its mortgage on the Inn. In some cases the rent is lower at the beginning to enhance the ability of the Buyer/Lessee to improve the Inn’s business and make the Inn more capable of being financed in the future. In most cases a portion of the rent is also set aside as a credit against the ultimate option price, thus allowing the Buyer/Lessee to build up more “equity” in the Inn over the lease term. The Seller/Lessor retains title to the Inn and all tax incidences, including depreciation. Finally, the Option Price set by the Lease is received by the Seller/Lessee, but is not taxable until either the option is exercised or it expires by time or default.
From the Seller’s standpoint, they are able to get out of the active operation of the Inn and retain the tax benefits of ownership. They receive sufficient sums to continue to pay down their mortgage, and all operating costs are paid by the Buyer/Lessee. The Seller receives sufficient funds at the outset of the option to perhaps put a sufficient deposit on a new house or set aside funds for retirement without immediate tax consequences, but will not have a large payout to say buy a new business. One key point for the Sellers is that they still own the property, and thus, in the event of a default, can get back the Inn business faster than if they had to foreclose a mortgage. Overall, for a Seller that does not have immediate needs for the whole sales price, this looks on its face like a viable alternative, particularly where an outright sale is not possible.
From the buyer’s point of view, again, this looks attractive on its face for those Buyers who want to get into Innkeeping immediately, but lack the resources to make an outright purchase. It is clearly a cheaper route, with less of a down payment, and much lower closing costs (no appraisal or bank fees or transfer taxes). It gives the Buyer five years to develop and improve the business of the Inn, at the same time building up the equity under the lease and, hopefully, improving the overall value of the Inn while the option price remains fixed. However, for both Buyers and Sellers alike, this scheme is both illusory and full of risk.
Here is the main reason why this method is folly for both buying and selling Inns. The cash-strapped buyer is likely buying an underperforming Inn which usually requires an additional capital infusion of working capital in order to improve the business. Sweat equity is fine in a start-up situation, but does not necessarily work where real hospitality experience is needed to turn around a poorly performing Inn. Most of the Inns which are using lease options are full service Inns which are even more sensitive to needing qualified restaurant experience to improve the dining room parts of the Inn’s business. A new Innkeeper, even one with some restaurant or hospitality experience still has a huge learning curve just to run an Inn, let alone improve the restaurant business. The facts are clear that 50% of new restaurants in the United States fail after 3 years, with a whopping 90% failure rate after 5 years. This makes a lease option of a full service inn even more daunting when the new Innkeepers lack hands on restaurant experience.
Another issue follows directly from the fact that the costs are lower because no financial institution is involved. Without a bank being utilized for financing, there also is no third-party looking at the historical cash flow and tax returns of the Inn business, no independent appraisal of the Inn, and, in some cases, no real due diligence of such things as the structural integrity of the building and systems of the Inn. The simplicity of the transaction belies the fact that protections for the buyer are sometimes overlooked. For example, since no title insurance is needed for a bank, often this basic protection in a sale is not present in a lease option deal. If a title problem is found later in the process, perhaps when the option is being exercised, the buyer may be at risk after it has paid the option price and all of the lease payments. Thus, in reality, almost all of the normal sale due diligence needs to be done for lease options as well, making the cost saving factors perhaps irrelevant. Finally, in our experience, with this relatively unusual form of Inn transfer, Buyers do not always receive the legal protections that they need. For example, since the lease is subordinate to the Owner’s original mortgage, at closing of the lease, the Buyer/Lessee needs to receive a Non-Disturbance Agreement from the Seller/Lessors’s bank in order to protect the lease and the option from a foreclosure which may occur due to other issues of the Seller/Lessor with that bank. This simple legal protection may not always be included in such a deal.
Let’s not forget about the Sellers as well. If the deal fails, they get the pleasure of taking back their Inn, perhaps a long time after they had stopped being Innkeepers. The failure of the option is a hard thing to keep private from the buying public, and the result may be that they have to take back an Inn at a time when it is worse off from a business standpoint. Also, if the markets are as tight as they are today, the seller may really have lost a part of the value of the Inn, and be unable to sell it after such a failure.
What we have really seen in practice in the last five lease option deals in the New England area is the ultimate inability of the Buyers to turn around the operations, and the failure to either continue to make the lease payments or to achieve financing of the option. In those cases, each Buyer lost their option payments and ultimately lost the Inn. In some of the cases the causes were due to unforeseen maintenance issues arising after the lease commenced which stripped the Inns of needed working capital. In others, the new Innkeepers had transition difficulties and basically had little inability to run complex Inn operations including restaurants. In other cases, the importance of increasing web-based internet marketing eluded the new Innkeepers, making profit margins even more difficult to achieve. In some cases, the new Innkeepers just realized after a few years that the Innkeeping life was not to their liking, and they were willing to just walk away with nothing since they had no basic personal liability like what they would have for a mortgage in a purchase scenario. The likelihood, in most cases, is that the failure was a combination of all of the above, plus the post 9/11 weakening of the hospitality market that did them in. While all of these things can affect new Innkeepers who purchased Inns the normal way through financed sales, the fact that the financial institution utilized some independent review of the transaction seems to have had a moderating impact on the risk of failure. Most Buyers when facing the failure of their business will fight hard, and perhaps use other resources (such as a part of retirement funds) to make the Inn successful. In practice, we just do not seem to see that willingness to sacrifice all in a lease option situation.
With today’s tight financing and really slow real estate markets, there will be a lot of pressure on Inn Sellers to utilize lease options to achieve their goals. Likewise, Buyers may be convinced to go forward using these methods where they cannot put down sufficient deposits to achieve normal financing or where such financing is totally unavailable due to the performance of the Inn or the credit crisis. In either case, for the reasons stated above, we feel that using this method is both folly and very risky for both sides. It is highly unlikely that we will be recommending its continued use in our consulting practice.
Wednesday, January 07, 2009
Are you Ready to be an Innkeeper?
Timing is everything. The following questions are meant to make you think about the realities of becoming an Innkeeper and the implications of this lifestyle change for you and your family. Innkeeping is a rewarding profession when it is done at the right time. Here are some things to consider:
- Does your partner share the same interest in Innkeeping?
- How will th is affect your family?
- Social life with friends and family is usually on weekends and holidays. These are the busiest times for an Innkeeper. Will this be an issue for you?
- Are you ready for a lifestyle change?
- Do you have the financial resources to purchase an Inn?
- Are you aware of the time commitment it takes to be an Innkeeper?
- Are you ready to leave the safety net of a weekly pay check?
These questions make for a good conversation with you partner. Keep an open mind and hear what your partner is really saying. If you are both in agreement, go forward and have fun!
Monday, November 17, 2008
Buying A Bed And Breakfast? SBA Loans In Trouble
The SBA Loan Programs in 2008 have shriveled up, and that has caused both buyers and sellers of Inns real problems in making deals happen. The SBA has this week taken steps to make loans available again. Now we have to wait and see if these very important changes will solve this problem. Without this solution, and SBA loans once again being made, the purchase and sale of Bed and Breakfast Inns will continue to be slow and difficult for buyers and sellers alike. Here are the details:
The SBA 7(a) and 504 Loan Programs have for many years provided an excellent source of mortgage lending for the acquisition of Bed and Breakfast Inns across the Country. In fact, these are the programs of choice for many Inn buyers. The SBA 7(a) Program provides a bank or other lender a loan guaranty of 75% of the overall loan. While costs are high and paperwork detailed, this is a good way for banks to be more secure in their lending, especially to borrowers who have not been in the bed and breakfast business before.
The SBA 504 Program, on the other hand, can provide below market interest rates on a portion of the overall secured mortgage loan to acquire an Inn or Bed and Breakfast. The 504 loans between 30% to 40% of the overall package on a second mortgage basis, and a bank or other lender provide takes the top 50%, leaving the buyer putting up 10%-20% equity (most bed and breakfast inn acquisitions will require 20% equity). The SBA portion of the loan is done on a fixed rate 20-year amortization basis, and because certain expenses are included in the interest rate, it actually decreases a bit every five years to maturity. There are some prepayment penalties involved in the SBA portion of the loan, and the costs of securitization and sales of the loans on the market are high (but includable in the loan). However, overall, this financing vehicle has in the past worked very well for Inn buyers. Until now . . . .
Last month we learned in the Wall Street Journal that overall SBA lending was significantly down in Fiscal Year ending 9/30/2008 over FY 2007. The 7(a) loan program was down over 30% from FY 2007, while the 504 Program dropped almost 17%. The reason was two-fold. First, related to the overall Economic Financial Crisis, the interest rate on SBA loans was based on the prime lending rate which has been decreasing as the Fed has sought to reinvigorate the credit markets. Most bank lending today has been based on the LIBOR which is much higher, thus making the SBA loans difficult to sell. Second, there were many issues for packagers of the securities to deal with based on the SBA rules. For more information see the full article SBA-Backed Loans Dry Up - WSJ.com.
Now we learn that the SBA has finally taken action to solve some of these problems. As of November 13, 2008, the SBA lending programs will now be pegged to LIBOR, and the SBA has also by regulation fixed other technical issues in the securitization and sale of the SBA loans. For the full story, please see: Independent Street : SBA Amends Lending Program to Help Small-Business Borrowers.
The SBA 7(a) and 504 Loan Programs have for many years provided an excellent source of mortgage lending for the acquisition of Bed and Breakfast Inns across the Country. In fact, these are the programs of choice for many Inn buyers. The SBA 7(a) Program provides a bank or other lender a loan guaranty of 75% of the overall loan. While costs are high and paperwork detailed, this is a good way for banks to be more secure in their lending, especially to borrowers who have not been in the bed and breakfast business before.
The SBA 504 Program, on the other hand, can provide below market interest rates on a portion of the overall secured mortgage loan to acquire an Inn or Bed and Breakfast. The 504 loans between 30% to 40% of the overall package on a second mortgage basis, and a bank or other lender provide takes the top 50%, leaving the buyer putting up 10%-20% equity (most bed and breakfast inn acquisitions will require 20% equity). The SBA portion of the loan is done on a fixed rate 20-year amortization basis, and because certain expenses are included in the interest rate, it actually decreases a bit every five years to maturity. There are some prepayment penalties involved in the SBA portion of the loan, and the costs of securitization and sales of the loans on the market are high (but includable in the loan). However, overall, this financing vehicle has in the past worked very well for Inn buyers. Until now . . . .
Last month we learned in the Wall Street Journal that overall SBA lending was significantly down in Fiscal Year ending 9/30/2008 over FY 2007. The 7(a) loan program was down over 30% from FY 2007, while the 504 Program dropped almost 17%. The reason was two-fold. First, related to the overall Economic Financial Crisis, the interest rate on SBA loans was based on the prime lending rate which has been decreasing as the Fed has sought to reinvigorate the credit markets. Most bank lending today has been based on the LIBOR which is much higher, thus making the SBA loans difficult to sell. Second, there were many issues for packagers of the securities to deal with based on the SBA rules. For more information see the full article SBA-Backed Loans Dry Up - WSJ.com.
Now we learn that the SBA has finally taken action to solve some of these problems. As of November 13, 2008, the SBA lending programs will now be pegged to LIBOR, and the SBA has also by regulation fixed other technical issues in the securitization and sale of the SBA loans. For the full story, please see: Independent Street : SBA Amends Lending Program to Help Small-Business Borrowers.
Thursday, October 09, 2008
Buying a Bed and Breakfast in Uncertain Times
In several previous postings on our Blog, we have looked at various ways that Sellers can improve the performance of Country Inns and Bed and Breakfast Inns. All of this was done from the Sellers’ standpoint in order to add value to the sales price. In this Article, we are going to look at these issues from the Buyers’ standpoint. The central question is whether the economic meltdown of recent days provides real opportunities for Inn Buyers to obtain significant bargains? In other words, is the timing right for Buyers to buy Inns?
Here is the gloom: Clearly the Global Economic Crisis has been severely impacted by the lack of available credit. It is likewise certain that real estate prices will take a long period to recover. If banks are unable or unwilling to loan money to businesses, how can Inn purchases be financed in the near term? If Buyers are unable to sell their primary asset, their homes, they are just not going to be able to purchase an Inn.
Yet these are generalizations about the National and Global economy that are not always specifically true in every location in the Country. While we continually hear how much trouble the National and Regional Banks are in, many local banks which have been conservative in their lending practices seem to be weathering the storm. They continue to say that they have money to loan to creditworthy borrowers for good projects. This is especially true when Banks utilize the various SBA Programs which provide them with even greater security for lending to small businesses.
Thus, the immediate answer is that we believe the times may be right for Buyers who are ready and able to purchase Inns, provided that they buy at the right price. While the bottom of the Inn market has not yet been reached, some Sellers have recognized that they either have to wait for a long time to sell or they need to make significant price reductions in order to attract Buyers. Sellers may also have to offer some degree of subordinated seller financing if they want to achieve the highest value for their Inns. The key answer for both Sellers and Buyers is to find a way to price Inns fairly based on reasonable and objective business standards in order to be able to attract lenders to provide reasonable financing.
Credit standards at most banks have tightened considerably. It is clear that borrowers need to have squeaky clean credit records and high personal credit scores in order just to get the banks to talk to them. Likewise, the availability of SBA loans is entirely dependant on the credit worthiness of the particular Inn business. This means that (1) the loan-to-value ratio will be more in the 70% to 75% range today (requiring more money down by Buyers), and (2) the historic Net Cash Flow (earnings before interest, taxes, depreciation, amortization and owners’ salaries) of the Inn must be able to cover the principle and interest payments of the new loan by at least 1.25 to 1.30 times (the “Debt Coverage Ratio”).
With those very conservative lending criteria in mind, we are basically talking about Buyers buying only Inns that are performing well in today’s business climate as opposed to those Inns that have struggled in the past to achieve profitability. While many Buyers fall in love with the beautiful Country Inn or Bed and Breakfast which could be turned around to reach profitability by their hard efforts, most banks today are not going to lend on potential earnings. The banks only want to look at the past profitability, and what are the risks that, if the economy continues to slow even more than at present, how will the Buyers be able to keep the loans current?
Whether the economic slow-down will impact tourism in the long run is a key factor in all of this decision-making as to timing. It is clear that it will have an impact in the short-term, but what will next summer bring? Predicting flat or somewhat decreased sales seems too optimistic in today’s economy. We believe that sales may decrease next year by a factor of 5% to 10% as against the current year. This must be factored into the Buyers’ pricing and business plan.
In conclusion, ready and able Buyers may find this is an opportune time to buy historically well performing Inns and Bed and Breakfasts at realistic prices. The need is to search out the good opportunities from the very many non-performing Inns on the market today, negotiate the right price along with credit enhancements such as Seller financing, and take advantage of local banks with help from the SBA programs.
Here is the gloom: Clearly the Global Economic Crisis has been severely impacted by the lack of available credit. It is likewise certain that real estate prices will take a long period to recover. If banks are unable or unwilling to loan money to businesses, how can Inn purchases be financed in the near term? If Buyers are unable to sell their primary asset, their homes, they are just not going to be able to purchase an Inn.
Yet these are generalizations about the National and Global economy that are not always specifically true in every location in the Country. While we continually hear how much trouble the National and Regional Banks are in, many local banks which have been conservative in their lending practices seem to be weathering the storm. They continue to say that they have money to loan to creditworthy borrowers for good projects. This is especially true when Banks utilize the various SBA Programs which provide them with even greater security for lending to small businesses.
Thus, the immediate answer is that we believe the times may be right for Buyers who are ready and able to purchase Inns, provided that they buy at the right price. While the bottom of the Inn market has not yet been reached, some Sellers have recognized that they either have to wait for a long time to sell or they need to make significant price reductions in order to attract Buyers. Sellers may also have to offer some degree of subordinated seller financing if they want to achieve the highest value for their Inns. The key answer for both Sellers and Buyers is to find a way to price Inns fairly based on reasonable and objective business standards in order to be able to attract lenders to provide reasonable financing.
Credit standards at most banks have tightened considerably. It is clear that borrowers need to have squeaky clean credit records and high personal credit scores in order just to get the banks to talk to them. Likewise, the availability of SBA loans is entirely dependant on the credit worthiness of the particular Inn business. This means that (1) the loan-to-value ratio will be more in the 70% to 75% range today (requiring more money down by Buyers), and (2) the historic Net Cash Flow (earnings before interest, taxes, depreciation, amortization and owners’ salaries) of the Inn must be able to cover the principle and interest payments of the new loan by at least 1.25 to 1.30 times (the “Debt Coverage Ratio”).
With those very conservative lending criteria in mind, we are basically talking about Buyers buying only Inns that are performing well in today’s business climate as opposed to those Inns that have struggled in the past to achieve profitability. While many Buyers fall in love with the beautiful Country Inn or Bed and Breakfast which could be turned around to reach profitability by their hard efforts, most banks today are not going to lend on potential earnings. The banks only want to look at the past profitability, and what are the risks that, if the economy continues to slow even more than at present, how will the Buyers be able to keep the loans current?
Whether the economic slow-down will impact tourism in the long run is a key factor in all of this decision-making as to timing. It is clear that it will have an impact in the short-term, but what will next summer bring? Predicting flat or somewhat decreased sales seems too optimistic in today’s economy. We believe that sales may decrease next year by a factor of 5% to 10% as against the current year. This must be factored into the Buyers’ pricing and business plan.
In conclusion, ready and able Buyers may find this is an opportune time to buy historically well performing Inns and Bed and Breakfasts at realistic prices. The need is to search out the good opportunities from the very many non-performing Inns on the market today, negotiate the right price along with credit enhancements such as Seller financing, and take advantage of local banks with help from the SBA programs.
Wednesday, April 02, 2008
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.
Friday, March 16, 2007
How to Know if the Price of an Inn is Right?
This article will appear in the next PAII Newsletter for Aspiring Innkeepers.
Of all the questions that we are asked during our Innkeeping Seminars and in our consulting practice, the most important, and most frequent, one is "How can I know if the price for an inn is the right one?"
First, some general background. Most aspiring innkeepers have previous experience in buying real estate, mostly for their own residence. They understand the concept of comparative market analysis (CMA) in which they, or a real estate professional, compare what they want in a home to many, many houses on the market or recently sold. The problem is that inn businesses are really unique combinations of assets, and there may be very few true comparables from which to get price data with respect to recent sales in a given area. An inn is a very different bundle of assets than a house. It is a combination of real estate (i.e., land, buildings and, most importantly, location), furniture, fixtures and equipment (because most inns are sold on a turnkey basis), and, most of all, the financial capabilities of the inn and its good will. Financial capabilities include both the historic cash flow of the inn after expenses, but more importantly, the projected cash flow from operations in the near term. What you are really buying when you purchase an inn is not what it did in the past, but for better or worse, what will it generate in terms of cash flow in the next few years after the purchase. Good will, on the other hand, is a bit more amorphous, and may include some specific assets like the website, URL, phone numbers, guest list, etc., but also its name and the general reputation of the inn to the public.
Financial Analysis: In determining what to pay for your "ideal" inn, the first and most important analysis that has to be done is to review what the historic cash flow of the inn has been, and to compare that data to other similar inns. If you have expressed serious interest in purchasing an inn on the market, you need to see the financial history of the inn for at least the last three years, including occupancy records, detailed profit and loss statements, and in some cases, tax returns for that period. (You may have to sign a confidentiality agreement to get access to this information.)
Once you have the data, you need to develop a reference point for the expenses of the inn to determine which ones will continue in the future and which ones reflect one time occurrences (like specific renovations or maintenance expenses). Some expenses are attributable to lifestyle or personal choices of the current owners (e.g., if they pay for an expensive car through the inn or have decreased their active participation in day-to-day activities, and more staff is hired to cover for them). PAII’s Industry Study of Operations and Finance is an invaluable source of financial data which can be used to compare the financial income and expenses from a given inn to industry-wide data which is broken down by several different categories (e.g., by region, size, average daily rate, location, etc.) By comparing each individual expense account in an inn's financial data against the appropriate industry averages contained in the PAII study, an aspiring innkeeper can identify those areas of expenses as either personal in nature to the owners of the inn or as unexpected and therefore need further explanation. Once this comparison is done, you can then project what this inn might produce in revenue under your management, and more importantly, what the Net Cash Flow (NCF) would be in future years. For purposes of this article, NCF would be the net income of the inn after all expenses but before interest, taxes, depreciation, amortization, and owner compensation (thus an "EBITDA" calculation).
Rules of Thumb: Most aspiring innkeepers who have been out in the market looking at inns have already heard about the so-called "Rules of Thumb" that industry professionals use to track and compare inn sales. These include, specifically, both Price per Guest Room and Gross Revenue Multiplier (GRM). At each PAII Convention (you should absolutely be going to these if you are really serious about becoming an innkeeper) there is a seminar given by inn brokers, inn consultants, and appraisers from around the country called "Valuations From the Four Corners" which details the inns sold during the last year by region, showing the sales price, price per room, gross annual revenue, GRM, and revenue per room. These seminars will be invaluable to you in determining the correct price to pay for an inn.
Here is a look at some Rules of Thumb: Price per Guest Room simply divides the sale price of an inn by the number of guest rooms. This very simple number tells an aspiring innkeeper very little about the nature of the business of the inn. It is only one of many variables that affect price, and likely the least precise and most unreliable of all of the measures of success. In the 2006 PAII Industry Study, the average national price per room was $125,242. Regional data was also available, and varied widely depending on location. Our own Oates & Bredfeldt data for mostly Northeastern U.S. inn sales showed average Price per Room of $126,498 for bed and breakfast inns.
Another Rule of Thumb is the Gross Revenue Multiplier (GRM) which is a calculation of an inn's ability to produce revenue as a factor of its value. Oates & Bredfeldt data (mostly from the Northeast) for the period 2002-2006 showed a GRM of about 4.47 times. Surprisingly, data presented by Michael Yovino-Young, a very knowledgeable appraiser from California, showed GRM approaching, and in some cases exceeding, six times earnings. The most important thing to ask about all of the data behind a GRM is what does the gross income from any business tell you about its profitability and future earnings? This is an interesting statistic to look at or keep in the back of your mind, but it is no substitute for a detailed review of the financial history of an inn.
Capitalization of Income: This approach to valuation is at the heart of most financial analysis of businesses as going concerns, and is one of the three methods used in every real estate appraisal. It basically takes the historic cash flow from the business and projects what it is likely to do over the near term future. This develops a net cash flow (NCF) for the future as a stream of income. The concept is that the value of a business is the present value of the net income that it will generate over the foreseeable future. The present value is represented by a mathematical computation based on a capitalization rate or "Cap Rate" that is a reflection of the relative risk of investing money in that type of business. Thus, the formula is to divide the NCF by the Cap Rate to find the value. By way of example, if the NCF of a business were $500,000 and the Cap Rate were 10%, under a capitalization of income method, the value of the business would be $5,000,000. The lower the Cap Rate, the higher the value. Historically, Cap Rates for inns have ranged from 9% to 11%, but there have been recent data, particularly from California, that seems to indicate that underlying real estate value can impact the Cap Rate by lowering it, and thus creating higher values. The one thing that this approach does not provide is to determine what is the correct Cap Rate for a given area or particular inn. This is a subjective conclusion that must be made based the relative risk of the investment and the present cost of capital. Thus, you would need to look at not only the consistency of the historic NCF of the inn, but also current interest rates on commercial financing, and comparable investment returns on similar businesses. While the ranges help, determining where you fall within such a range is more difficult, and in some cases may require professional assistance.
Debt Coverage Test: This is another way of looking at price and value. This methodology looks at the historic or projected NCF of a business and determines how much of that NCF is necessary each year to pay the debt service on a normal commercial mortgage on the property and how much above the debt service is available for uncertain future events or owner compensation. Most commercial mortgages are offered at a loan/value ratio of 75% (i.e., the borrower is investing 25% equity) with debt service calculated on a 20 year amortization with usually a fixed rate of interest for the first 5 years of the loan. Using the NCF projected from the inn, an aspiring innkeeper can then determine what the annual debt service on the loan would be and to what extent the NCF exceeds that debt service. The ratio is usually given as a percentage with the formula equal to the NCF/Debt Service. Thus, if the NCF was $130,000 and the annual debt service on the loan was $100,000, the Debt Service Coverage Ratio would be $130,000/$100,000 or 1.3 times. Most financial institutions when underwriting a commercial loan will be looking for at least 1.20 to 1.25 times coverage, meaning that there is a cushion in the NCF equal to at least 20% to 25% of the debt service available for unforeseen events or return to the owners. In looking at the Debt Coverage of an inn, you can therefore determine whether the inn "cash flows" or has sufficient earnings to pay a normal mortgage, and if there is excess cash flow, what kind of return does it provide an owner based on the amount of money invested in the inn business (i.e., the down payment, closing costs, renovations, and working capital invested in the inn). This is a method of making sure that you are investing in a sound business that will succeed over the future.
Conclusion: While all of this seems daunting to many aspiring innkeepers, it is very important to understand that an inn is a business that needs to be carefully analyzed before any price negotiation or offer is made. For those who feel uncomfortable doing this type of financial analysis themselves, there are inn professionals (i.e., consultants, brokers, accountants, and appraisers) who can provide fee-based assistance to aspiring innkeepers in reviewing, analyzing, and comparing this financial data in order to come up with the right price to pay for an inn.
Of all the questions that we are asked during our Innkeeping Seminars and in our consulting practice, the most important, and most frequent, one is "How can I know if the price for an inn is the right one?"
First, some general background. Most aspiring innkeepers have previous experience in buying real estate, mostly for their own residence. They understand the concept of comparative market analysis (CMA) in which they, or a real estate professional, compare what they want in a home to many, many houses on the market or recently sold. The problem is that inn businesses are really unique combinations of assets, and there may be very few true comparables from which to get price data with respect to recent sales in a given area. An inn is a very different bundle of assets than a house. It is a combination of real estate (i.e., land, buildings and, most importantly, location), furniture, fixtures and equipment (because most inns are sold on a turnkey basis), and, most of all, the financial capabilities of the inn and its good will. Financial capabilities include both the historic cash flow of the inn after expenses, but more importantly, the projected cash flow from operations in the near term. What you are really buying when you purchase an inn is not what it did in the past, but for better or worse, what will it generate in terms of cash flow in the next few years after the purchase. Good will, on the other hand, is a bit more amorphous, and may include some specific assets like the website, URL, phone numbers, guest list, etc., but also its name and the general reputation of the inn to the public.
Financial Analysis: In determining what to pay for your "ideal" inn, the first and most important analysis that has to be done is to review what the historic cash flow of the inn has been, and to compare that data to other similar inns. If you have expressed serious interest in purchasing an inn on the market, you need to see the financial history of the inn for at least the last three years, including occupancy records, detailed profit and loss statements, and in some cases, tax returns for that period. (You may have to sign a confidentiality agreement to get access to this information.)
Once you have the data, you need to develop a reference point for the expenses of the inn to determine which ones will continue in the future and which ones reflect one time occurrences (like specific renovations or maintenance expenses). Some expenses are attributable to lifestyle or personal choices of the current owners (e.g., if they pay for an expensive car through the inn or have decreased their active participation in day-to-day activities, and more staff is hired to cover for them). PAII’s Industry Study of Operations and Finance is an invaluable source of financial data which can be used to compare the financial income and expenses from a given inn to industry-wide data which is broken down by several different categories (e.g., by region, size, average daily rate, location, etc.) By comparing each individual expense account in an inn's financial data against the appropriate industry averages contained in the PAII study, an aspiring innkeeper can identify those areas of expenses as either personal in nature to the owners of the inn or as unexpected and therefore need further explanation. Once this comparison is done, you can then project what this inn might produce in revenue under your management, and more importantly, what the Net Cash Flow (NCF) would be in future years. For purposes of this article, NCF would be the net income of the inn after all expenses but before interest, taxes, depreciation, amortization, and owner compensation (thus an "EBITDA" calculation).
Rules of Thumb: Most aspiring innkeepers who have been out in the market looking at inns have already heard about the so-called "Rules of Thumb" that industry professionals use to track and compare inn sales. These include, specifically, both Price per Guest Room and Gross Revenue Multiplier (GRM). At each PAII Convention (you should absolutely be going to these if you are really serious about becoming an innkeeper) there is a seminar given by inn brokers, inn consultants, and appraisers from around the country called "Valuations From the Four Corners" which details the inns sold during the last year by region, showing the sales price, price per room, gross annual revenue, GRM, and revenue per room. These seminars will be invaluable to you in determining the correct price to pay for an inn.
Here is a look at some Rules of Thumb: Price per Guest Room simply divides the sale price of an inn by the number of guest rooms. This very simple number tells an aspiring innkeeper very little about the nature of the business of the inn. It is only one of many variables that affect price, and likely the least precise and most unreliable of all of the measures of success. In the 2006 PAII Industry Study, the average national price per room was $125,242. Regional data was also available, and varied widely depending on location. Our own Oates & Bredfeldt data for mostly Northeastern U.S. inn sales showed average Price per Room of $126,498 for bed and breakfast inns.
Another Rule of Thumb is the Gross Revenue Multiplier (GRM) which is a calculation of an inn's ability to produce revenue as a factor of its value. Oates & Bredfeldt data (mostly from the Northeast) for the period 2002-2006 showed a GRM of about 4.47 times. Surprisingly, data presented by Michael Yovino-Young, a very knowledgeable appraiser from California, showed GRM approaching, and in some cases exceeding, six times earnings. The most important thing to ask about all of the data behind a GRM is what does the gross income from any business tell you about its profitability and future earnings? This is an interesting statistic to look at or keep in the back of your mind, but it is no substitute for a detailed review of the financial history of an inn.
Capitalization of Income: This approach to valuation is at the heart of most financial analysis of businesses as going concerns, and is one of the three methods used in every real estate appraisal. It basically takes the historic cash flow from the business and projects what it is likely to do over the near term future. This develops a net cash flow (NCF) for the future as a stream of income. The concept is that the value of a business is the present value of the net income that it will generate over the foreseeable future. The present value is represented by a mathematical computation based on a capitalization rate or "Cap Rate" that is a reflection of the relative risk of investing money in that type of business. Thus, the formula is to divide the NCF by the Cap Rate to find the value. By way of example, if the NCF of a business were $500,000 and the Cap Rate were 10%, under a capitalization of income method, the value of the business would be $5,000,000. The lower the Cap Rate, the higher the value. Historically, Cap Rates for inns have ranged from 9% to 11%, but there have been recent data, particularly from California, that seems to indicate that underlying real estate value can impact the Cap Rate by lowering it, and thus creating higher values. The one thing that this approach does not provide is to determine what is the correct Cap Rate for a given area or particular inn. This is a subjective conclusion that must be made based the relative risk of the investment and the present cost of capital. Thus, you would need to look at not only the consistency of the historic NCF of the inn, but also current interest rates on commercial financing, and comparable investment returns on similar businesses. While the ranges help, determining where you fall within such a range is more difficult, and in some cases may require professional assistance.
Debt Coverage Test: This is another way of looking at price and value. This methodology looks at the historic or projected NCF of a business and determines how much of that NCF is necessary each year to pay the debt service on a normal commercial mortgage on the property and how much above the debt service is available for uncertain future events or owner compensation. Most commercial mortgages are offered at a loan/value ratio of 75% (i.e., the borrower is investing 25% equity) with debt service calculated on a 20 year amortization with usually a fixed rate of interest for the first 5 years of the loan. Using the NCF projected from the inn, an aspiring innkeeper can then determine what the annual debt service on the loan would be and to what extent the NCF exceeds that debt service. The ratio is usually given as a percentage with the formula equal to the NCF/Debt Service. Thus, if the NCF was $130,000 and the annual debt service on the loan was $100,000, the Debt Service Coverage Ratio would be $130,000/$100,000 or 1.3 times. Most financial institutions when underwriting a commercial loan will be looking for at least 1.20 to 1.25 times coverage, meaning that there is a cushion in the NCF equal to at least 20% to 25% of the debt service available for unforeseen events or return to the owners. In looking at the Debt Coverage of an inn, you can therefore determine whether the inn "cash flows" or has sufficient earnings to pay a normal mortgage, and if there is excess cash flow, what kind of return does it provide an owner based on the amount of money invested in the inn business (i.e., the down payment, closing costs, renovations, and working capital invested in the inn). This is a method of making sure that you are investing in a sound business that will succeed over the future.
Conclusion: While all of this seems daunting to many aspiring innkeepers, it is very important to understand that an inn is a business that needs to be carefully analyzed before any price negotiation or offer is made. For those who feel uncomfortable doing this type of financial analysis themselves, there are inn professionals (i.e., consultants, brokers, accountants, and appraisers) who can provide fee-based assistance to aspiring innkeepers in reviewing, analyzing, and comparing this financial data in order to come up with the right price to pay for an inn.
Monday, February 12, 2007
The Art of Obtaining Financial Information
It always amazes me when dealing with people looking to purchase an inn. The other day I received an e-mail inquiring on a property valued at $1.8M. The e-mail was simple. It said “This is the type of inn we are interested in. So, if you can pass on to me 3-5 years of financials, I can look them over”. So here is the dilemma. I don’t know who this person is. We have only communicated for a brief time via e-mails and I don’t even know his last name. In addition, I can’t contact him via telephone because he hasn’t shared it with me. I’m not sure of his family status and if he has children, there isn’t room within the current owner’s quarters. I’m not sure if he wants to be in a city, country, or mountains. Most importantly, I don’t have a clue as to his finances! Yet, he totally expects me to quickly disclose very personal information when I know nothing about him.
So here is the real question…If you owned an inn worth $1.8M would you want me to send your financial overview to everyone that inquires? The answer should be no!! When you are at the point of being a “serious buyer”, you should act accordingly. My motto is simple: “Show me yours, and I’ll show you mine!” A buyer that is serious should be ready to share their financial overview. If a buyer isn’t capable of doing this, they are not serious. So my message to all of the future buyers is to prepare a financial statement and be ready to share it on any inn in which you are seeking their financial data. You will now be treated as a serious buyer!
So here is the real question…If you owned an inn worth $1.8M would you want me to send your financial overview to everyone that inquires? The answer should be no!! When you are at the point of being a “serious buyer”, you should act accordingly. My motto is simple: “Show me yours, and I’ll show you mine!” A buyer that is serious should be ready to share their financial overview. If a buyer isn’t capable of doing this, they are not serious. So my message to all of the future buyers is to prepare a financial statement and be ready to share it on any inn in which you are seeking their financial data. You will now be treated as a serious buyer!
Monday, December 18, 2006
2007 New Year's Resolutions
It is the start of the New Year and this is it! You have decided to finally quit your job in the corporate world and take the plunge into Innkeeping! You are serious, but what to do first? Let’s outline the seven steps to successful Inn ownership in 2007!
1. It is time for a reality check
2. Evaluate your financial situation
3. Define your Inn model and the needs of your family
4. Conduct your search
5. Evaluate the numbers
6. Make an offer
7. Quit the job and close on the Inn!
It is time for a reality check. First, ask yourself if you really want to do it? What impact will it have on the family? Do you really want to work with your significant other 24 hours a day? Can you give up the weekend activities with your friends? Can you adjust to a different lifestyle? Income will be adjusted, can you adapt or will you need a defibrillator? It is okay if you say Innkeeping isn’t for you, but if you are still saying you can deal with these changes, let’s go forward.
Evaluate your financial situation. How much money is in your savings account? What is the capital in your home? How long will it take to liquidate your home? How much money is in your 401K (we don’t really encourage using it, but it is good to have as a back- up plan)? Are there investments that can be liquidated? Will your family be able to assist you in the investment? Finally, look under the mattress and make sure that all monies are accounted for. When this is all tallied, keep in mind that a bank will be asking for about a 25% investment from you when purchasing an Inn. Now you know the price point that you can realistically afford to purchase.
Define your Inn model and the needs of your family. In the Fall, 2005 newsletter (available on our website in newsletter archives), we had an in-depth discussion on building a model. In addition to building a model that works for you, your individual family needs have to be considered as well. Do you have children at home? Are they old enough to be part of the Inn or do you need to have private space away from the Inn? Can you live in a conservative owner’s quarters to begin with and then expand into larger quarters as the time passes? All of these considerations should be incorporated into your model.
Conduct your search. Visit Inns, stay at Inns, speak with Innkeepers, and find an area where you will truly enjoy living. Join Innkeeping associations, network with other people who want to become Innkeepers, and be open to new ideas. This will be a rewarding journey if you approach it with your “eyes wide open”.
Evaluate the numbers! You have found an Inn that meets your needs. The emotions are running high and you need to make an offer before someone else buys it! STOP!! Rein in the emotions and make a logical evaluation of the numbers. Make sure that it all makes sense and hire professionals to assist you. We have been involved with too many Innkeepers who now need assistance because of financial hardships. This could have been avoided if only they had evaluated the Inn prior to purchasing it. SLOW DOWN!
Make an offer. You have poured through the numbers and everything seems to make sense. Make an offer and move forward. This is a stressful time and it is important to have a good working relationship with the Innkeeper who owns the Inn of your dreams. Howard has a saying, “there is a lot between the cup and the lip”, meaning that the offer is only the beginning. There will still be many negotiations as you work through the purchase and sale agreement.
Quit the job and close on The Inn! The offer has been accepted, you have completed the purchase and sale agreement, and the bank has approved your financing. You have waited a long time to do this and have had a good time doing it! Quit the job and don’t look back. It is time for a long overdue lifestyle change. The Inn is in your hands now. Our words of wisdom are to have a good sense of humor, remember that decorating is tax deductible, take at least one full day a week off to enjoy with your partner, and enjoy the new lifestyle. You worked hard to get here and now we want you to enjoy it!
P.S. Burn the suits now because you won't be needing them again! Have Fun!
1. It is time for a reality check
2. Evaluate your financial situation
3. Define your Inn model and the needs of your family
4. Conduct your search
5. Evaluate the numbers
6. Make an offer
7. Quit the job and close on the Inn!
It is time for a reality check. First, ask yourself if you really want to do it? What impact will it have on the family? Do you really want to work with your significant other 24 hours a day? Can you give up the weekend activities with your friends? Can you adjust to a different lifestyle? Income will be adjusted, can you adapt or will you need a defibrillator? It is okay if you say Innkeeping isn’t for you, but if you are still saying you can deal with these changes, let’s go forward.
Evaluate your financial situation. How much money is in your savings account? What is the capital in your home? How long will it take to liquidate your home? How much money is in your 401K (we don’t really encourage using it, but it is good to have as a back- up plan)? Are there investments that can be liquidated? Will your family be able to assist you in the investment? Finally, look under the mattress and make sure that all monies are accounted for. When this is all tallied, keep in mind that a bank will be asking for about a 25% investment from you when purchasing an Inn. Now you know the price point that you can realistically afford to purchase.
Define your Inn model and the needs of your family. In the Fall, 2005 newsletter (available on our website in newsletter archives), we had an in-depth discussion on building a model. In addition to building a model that works for you, your individual family needs have to be considered as well. Do you have children at home? Are they old enough to be part of the Inn or do you need to have private space away from the Inn? Can you live in a conservative owner’s quarters to begin with and then expand into larger quarters as the time passes? All of these considerations should be incorporated into your model.
Conduct your search. Visit Inns, stay at Inns, speak with Innkeepers, and find an area where you will truly enjoy living. Join Innkeeping associations, network with other people who want to become Innkeepers, and be open to new ideas. This will be a rewarding journey if you approach it with your “eyes wide open”.
Evaluate the numbers! You have found an Inn that meets your needs. The emotions are running high and you need to make an offer before someone else buys it! STOP!! Rein in the emotions and make a logical evaluation of the numbers. Make sure that it all makes sense and hire professionals to assist you. We have been involved with too many Innkeepers who now need assistance because of financial hardships. This could have been avoided if only they had evaluated the Inn prior to purchasing it. SLOW DOWN!
Make an offer. You have poured through the numbers and everything seems to make sense. Make an offer and move forward. This is a stressful time and it is important to have a good working relationship with the Innkeeper who owns the Inn of your dreams. Howard has a saying, “there is a lot between the cup and the lip”, meaning that the offer is only the beginning. There will still be many negotiations as you work through the purchase and sale agreement.
Quit the job and close on The Inn! The offer has been accepted, you have completed the purchase and sale agreement, and the bank has approved your financing. You have waited a long time to do this and have had a good time doing it! Quit the job and don’t look back. It is time for a long overdue lifestyle change. The Inn is in your hands now. Our words of wisdom are to have a good sense of humor, remember that decorating is tax deductible, take at least one full day a week off to enjoy with your partner, and enjoy the new lifestyle. You worked hard to get here and now we want you to enjoy it!
P.S. Burn the suits now because you won't be needing them again! Have Fun!
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