The most recent news from the Hospitality Industry is not good for Innkeepers. Hotel REIT giant, LaSalle Properties announced it was cutting 20% from its hotel staffing (mostly run by large hotel management companies) and has rescinded its 2008 guidance to the stock market. LaSalle reported that its Revpar (revenue per available room) decreased by 11.4 % in October; a huge drop! While the Innkeeping Business does not use Revpar as a measurement, it is fundamentally the same as saying that average daily rate and occupancy combined dropped by that amount. LaSalle is an important bell- weather for Inns because it is comprised of mostly luxury and higher-priced hotel properties. For the full story, please see: LaSalle Orders 20% Cut in Hotel Staffing - WSJ.com.
We hear anecdotally that many Inns and Bed and Breakfasts across the Country have had good years in 2008, at least until the end of October. Now is not the time for Innkeepers to rest on their laurels. A sea change is coming, in the form of a recession, the likes of which we have not seen in our lifetimes. This is also not the time to just burrow in fear of what is to come. As we have said many times before, when there is a downturn, those Inns at the top of their game can improve market share as against the competition. A bigger piece of a smaller pie may save the day after all.
So this is the time to be countercyclical and increase your spending on marketing, especially electronic marketing through your website, blog, and by email. Create attractive packages rather than discount, and spend all of that extra time you have due to declining occupancies to come up with creative and imaginative ways to get your repeat and referral guests to the Inn. Most of all, just lowering the price will not work, and may make things worse in the long run (see previous article on Discounting).
Most of all, have heart. The biggest reason that they come back to the Inn is because your have created a refuge and a respite from all of the problems the guests face at home and in the real world. Remember that this is exactly what the guests need in these troubled times, and they will pay you for this experience.
Wednesday, November 19, 2008
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.
Tuesday, November 04, 2008
Running a Bed & Breakfast Inn: Discounting Room Rates Does Not Work!
In troubled times like today, Bed and Breakfast Innkeepers have an overwhelming feeling that the best way through this downturn (say recession!) is to put their room rates on sale. Isn’t that just what the retailers do at Christmas time to survive a bad season? The answer is that discounting in the travel business not only does not work, it creates a pattern of customer behavior that will last for years, even when times are better. Let’s look at the specifics.
Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.
By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?
Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.
Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.
The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.
Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.
The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!
Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.
By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?
Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.
Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.
The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.
Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.
The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!
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.
Monday, June 30, 2008
Optimizing your Bed & Breakfast Inn Business With Metrics
With a clear downturn in the economy facing us, it is really time to put your Inn’s business practices in order. Metrics is the study of measuring past performance so that you can improve your business. The basic concept is that you cannot improve the future without looking at what happened in the past. Simply put, “you can’t control what you can’t measure”(Wikipedia definition of “metrics”).
Probably the most important information that you need to have to improve your business is the detailed results from prior years’ room sales. But not just your occupancy and average daily rate for the prior year! You need to know on a daily basis what your room sales were for prior years. Only through detailed record keeping are you able to compare year to year changes in your Inn’s sales performance in time to do something about it. For example, if you are being impacted by discounting from neighboring Inns, it will likely be too late to do anything about it if you only look at sales data on a monthly basis.
Daily record keeping is not hard, but you have to be organized to do this. Most PMS systems now have a Quickbooks interface which allows you to post room sales on a daily basis. Even if you don’t do this automatically, you can develop a simple Excel Spreadsheet for daily posting, allowing you to balance your sales and payment accounts and then post them in Quickbooks every day. Quickbooks then allows you to run either Year-to-date or Month-to-Date comparison reports with last year. If after the first few days of the month you are falling behind last year’s sales, then you at least are warned that you may have to do something about it to catch up or exceed last year. Even better would be if you had a complete budget for the current year by month showing where you expected to be at that point in time (Quickbooks averages each day within a month for daily analysis). This would help to analyze the data based on past results but having factored in changes in plan made for the current year (such as a rate increase).
Now let’s take the sales analysis one step further. You also should be tracking advanced deposits and advanced reservations on a daily basis. In this way, you can tell a few months out, then a month out and then two weeks out from a given date how your reservations are progressing against the same period last year. Again, this gives you much more ability to change your sales practices to overcome deficits in advanced sales well before it is too late to make a difference. At that point you can decide whether to run rate favorable packages or specials to catch up to last year’s advanced reservations or your current year’s budget plan. In other words, you can attempt to control your own destiny, rather than waiting and watching what happens. Tie this into a program of aggressive email marketing and yield management for rate changes, and you are doing your best to maximize sales.
This is just one example of how you need to use financial data (Metrics) to improve and impact results. Another example is making sure that you are tracking source data for your guests. You need to know income by source (what are the sources of your room sales), but also where are your guests coming from and why are they coming. A lot of this is just asking the right questions when they call (the old “how did you hear about us?” still works well). But in this age of Internet reservations, you must also carefully analyze your web site tracking data and also make sure to analyze the data that is available to you as a subscriber to the various web inn directories. This is all critical information to know who your guest is and then to determine among the many, many options available to reach that exact guest. Why, for example, advertise in the August edition of a popular tourism magazine, when you have 90% occupancy for that month. Likewise, why continue on with certain web directories when your returns from them are below average. Unless you are tracking results you can never answer these questions and improve your bottom line.
In sum, tracking financial results will always be the best way to optimize your Inn business. This is the quickest way to improve your results and to add long-term, sustainable value to your business.
Probably the most important information that you need to have to improve your business is the detailed results from prior years’ room sales. But not just your occupancy and average daily rate for the prior year! You need to know on a daily basis what your room sales were for prior years. Only through detailed record keeping are you able to compare year to year changes in your Inn’s sales performance in time to do something about it. For example, if you are being impacted by discounting from neighboring Inns, it will likely be too late to do anything about it if you only look at sales data on a monthly basis.
Daily record keeping is not hard, but you have to be organized to do this. Most PMS systems now have a Quickbooks interface which allows you to post room sales on a daily basis. Even if you don’t do this automatically, you can develop a simple Excel Spreadsheet for daily posting, allowing you to balance your sales and payment accounts and then post them in Quickbooks every day. Quickbooks then allows you to run either Year-to-date or Month-to-Date comparison reports with last year. If after the first few days of the month you are falling behind last year’s sales, then you at least are warned that you may have to do something about it to catch up or exceed last year. Even better would be if you had a complete budget for the current year by month showing where you expected to be at that point in time (Quickbooks averages each day within a month for daily analysis). This would help to analyze the data based on past results but having factored in changes in plan made for the current year (such as a rate increase).
Now let’s take the sales analysis one step further. You also should be tracking advanced deposits and advanced reservations on a daily basis. In this way, you can tell a few months out, then a month out and then two weeks out from a given date how your reservations are progressing against the same period last year. Again, this gives you much more ability to change your sales practices to overcome deficits in advanced sales well before it is too late to make a difference. At that point you can decide whether to run rate favorable packages or specials to catch up to last year’s advanced reservations or your current year’s budget plan. In other words, you can attempt to control your own destiny, rather than waiting and watching what happens. Tie this into a program of aggressive email marketing and yield management for rate changes, and you are doing your best to maximize sales.
This is just one example of how you need to use financial data (Metrics) to improve and impact results. Another example is making sure that you are tracking source data for your guests. You need to know income by source (what are the sources of your room sales), but also where are your guests coming from and why are they coming. A lot of this is just asking the right questions when they call (the old “how did you hear about us?” still works well). But in this age of Internet reservations, you must also carefully analyze your web site tracking data and also make sure to analyze the data that is available to you as a subscriber to the various web inn directories. This is all critical information to know who your guest is and then to determine among the many, many options available to reach that exact guest. Why, for example, advertise in the August edition of a popular tourism magazine, when you have 90% occupancy for that month. Likewise, why continue on with certain web directories when your returns from them are below average. Unless you are tracking results you can never answer these questions and improve your bottom line.
In sum, tracking financial results will always be the best way to optimize your Inn business. This is the quickest way to improve your results and to add long-term, sustainable value to your business.
Tuesday, June 24, 2008
Inns-for-Sale.com Website Launched
Quantum Hospitality Group is please to announce that we have launched our new national Inns-for-Sale website. As consultants to the Hospitality Industry, we saw the need for a website with cutting edge features for Inns which are for sale. Our new features are easy to use and include a “Compare” feature which allows a side-by-side comparison of multiple Inns. Additionally, we can support up to ten photos of an Inn, versus the normal one photo. Videos are easily uploaded to allow a birds’ eye view of an Inn for those that thrive on instant gratification. And, of course, Google Mapping! Need we say more!
There are three levels which are available. Bronze level allows a free listing with an overview of the Inn. Silver level allows for one photo and many of the features of the website. Gold level gets it all, including ten photos and video!
Owners who are listing their Inns have many exciting features as well. There is no longer the need to wait for a third party to input your listing. This can be performed directly by the individual. Or, if you prefer, there is “Valet Listing Service” where we can input the listing for you. There are over twenty easily identifiable icons which are available that provide a quick reference for an Inn such as Water View, Outdoor Activities, Wine Spectator, and more. One of the features that we like best is the ability for a Broker/listing agent to have a complete database of inquires received on an Inn including date, name, e-mail address, telephone number, and the complete e-mail message. We are sure these features will work well for everyone.
We invite you to visit our website at http://www.inns-for-sale.com/ and either shop for an Inn, or list your current Inn which you are selling!
There are three levels which are available. Bronze level allows a free listing with an overview of the Inn. Silver level allows for one photo and many of the features of the website. Gold level gets it all, including ten photos and video!
Owners who are listing their Inns have many exciting features as well. There is no longer the need to wait for a third party to input your listing. This can be performed directly by the individual. Or, if you prefer, there is “Valet Listing Service” where we can input the listing for you. There are over twenty easily identifiable icons which are available that provide a quick reference for an Inn such as Water View, Outdoor Activities, Wine Spectator, and more. One of the features that we like best is the ability for a Broker/listing agent to have a complete database of inquires received on an Inn including date, name, e-mail address, telephone number, and the complete e-mail message. We are sure these features will work well for everyone.
We invite you to visit our website at http://www.inns-for-sale.com/ and either shop for an Inn, or list your current Inn which you are selling!
Tuesday, May 06, 2008
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.
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.
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