Best Methods for Finding the Ideal Inn

Written by: Howard J. Levitan, Oates & Bredfeldt, LLC

This is one of the most asked questions at every one of Oates & Bredfeldt’s Innkeeping Seminars. How can I find my ideal Inn? The answer is very easy, but counterintuitive. We say simply to “Stop looking at Inns for sale!” Here is why:

Location, location, location is still the golden rule. Searching for an Inn is not like buying a home (it is a business first!). We often hear, “Well, I have moved all over the United States during my business career, I can live anywhere.” Better yet, we often hear prospective innkeepers say “I will know my ideal Inn when I find it.” In order to take control of the process, every prospective Innkeeper needs to first decide clearly what they are looking for in an Inn, and, most importantly, where that Inn is located. Location will dictate the one clear factor in the Inn’s business model, the occupancy rate. While the occupancy rate at Inns will vary depending on the rate charged, or the amenities, or the size and furnishing of the rooms, or especially the hospitality provided, the key factor is location.

If the Inn is in a destination location (each state has only a few true historical destination locations), the occupancy rate will be significantly higher on average than if it is located in the countryside. Thus, occupancy rates at Inns located in destination areas like Stowe, Manchester, and Woodstock, Vermont, or North Conway, NH, or Bar Harbor, Camden, and Kennebunkport, ME can be almost twice the occupancy rates of their counterparts in non-destination areas of the same states. This is a historical factor. People have been vacationing at these locations since travel was made easy by the Industrial Age. They have a recognition factor, and Inns in these types of locations do not need to sell coming there, only how their Inn is differentiated from the other Inns. The Internet and particularly the Search Engines have heightened this effect. People may enter “Boothbay Harbor bed and breakfast” into Google, but few are going to enter “Newcastle bed and breakfast” (where our Inn was located) even though it is only a few miles away. Thus, Inns in non-destination locations need to be at the very top of their electronic marketing game just to hold their own against the destinations. Location is a critical factor, but what about price? The other side of the equation is that with higher occupancy rates, and, potentially, more net cash flow, the Inns in destination locations tend to be very expensive. You need to decide what factors are your ideals!

Creating Your Model Inn. This is the key to success. Take control of the process by clearly defining what you want in an Inn; your ideal “model.” What does it look like (style of architecture), is it full service or bed and breakfast, what kind of food service will you serve, how many rooms (dictates the need for and number of staff), is it a mature business or a start-up, and, most of all, where is the location? The model needs to be as detailed as possible; it is not something that you can just dash off in a few minutes. For couples, one of the most interesting exercises is to do this separately and then compare models. Often, there are clear differences that need to be ironed out before commencing to search. Start the process with a very exhaustive list of exactly what you want in an Inn. You may never find your “ideal” Inn, but at least you now have an objective list of what you are looking for. Put it down in a spreadsheet, so that you can compare all of these factors against each of the Inns that you look at.

Inns for Sale? Looking at Inns for sale all over any region, like New England or the Southeast, or any broad location can be an exercise in frustration. Again, it is not like buying a house. The more you see does not necessarily expand your knowledge of Inns, only of Inns that may be overpriced or have problems. The simple answer is that most very good Inns sell without the general buying public ever being aware that they are for sale. This is a confidential process. Most Innkeepers understand that being for sale may be a “four letter” word. It has an impact on the staff and clearly on the guests coming to visit. If the average life of an innkeeper is about 8 to 10 years, this means that about 10-12 percent of all Inns are for sale at any one time. Not all of these are publicly on the “market” with a broker.

Another very important factor in Inns for Sale is how the offering price may be set. What is the justification for the high asking prices we now routinely see in Inns? Does the Innkeeper decide the price based on anecdotal evidence of what other Inns in the area have sold for, or is it based on some kind of simple rule of thumb like a gross revenue multiplier? Can the Inn support normal commercial financing or does it require more equity in order to cash flow? Does the Inn’s business model have potential for growth, or is it stagnant or are revenues/occupancy falling? All of these are important questions in the process of setting the right price. Searching for an Inn which is ready to be sold, but not yet on the open market, may be the real answer to finding your ideal Inn.

The Tell-tale Signs. The Inn is for sale, but only the Innkeepers may know it. There are always clues. Perhaps it is the chipped paint on the stair treads, or the landscaping that just is not as manicured as it should be. The website has not been updated for a while. The Innkeepers are a bit tired, or you only see them occasionally; the staff is running the Inn. They have been keepers of the Inn for 8 or 9 years, and perhaps they are ready to move on. If the Inn meets your ideal model, or is close to it, why isn’t this situation the perfect solution to your Inn search? Approach them before the Inn goes on the market, and you may be able to get a much more reasonable price. The worst thing that can happen is that you are told that the Inn is not for sale. But even then, you may be able to get a first bite when they are ready to sell.

Create a Search Plan. Take your model, and visit your location. You should have a back-up location which you are keeping an eye on, but not actively searching. Visit your location as often as possible, in different seasons, staying at Inns which are high on your list as meeting your model. Network with the Innkeepers, tell them that you are searching and what is your model. Even if they are not really for sale, they can help you with knowledge of who might be thinking about selling. This is the best way to get first hand facts of what is going on in that location. The Innkeepers may not tell you financial information about their Inns (occupancy rate or average daily rate), but most are quite free with giving you everything they may know about other Inns in town. This networking is really the key to success.

Confidentiality. Remember one thing. If an Inn is not actively on the market, whether it is for sale or not, telling other Innkeepers or people in the community that you are trying to buy a particular Inn is the fastest way to lose a deal. You need to get knowledge, but not by breaching the confidentiality of the Innkeepers. Word spreads quickly in small communities and this can impact the business of the Inn that you may be trying to buy. There will be plenty of time to accomplish the due diligence that you need between the time an offer is accepted and the dates set in the purchase and sales agreement. You need to respect this!

Final Thoughts. This is all about taking control of the process. We have taught hundreds of prospective Innkeepers these lessons, and they work. Create a model, create a search plan, and then find your Ideal Inn.

Words of Innkeeping Wisdom

We are always looking for Innkeeping advice from Innkeepers to feature in our newsletter for Future Innkeepers. Do you have a piece of advice you wish you had known BEFORE you were an Innkeeper? Please share it with us.

We have received some great advice since the inception of our Future Innkeeper Newsletter:

“Plan from day one to have some personal time. The days speed by and before you know it it's been weeks of long days and you haven't even taken a walk. If an activity was important to you before you bought the Inn, keep it a priority after purchase, be it exercise, church or just sitting down and reading. Everyone tells you that you'll be busy, but until you experience it you really have no idea how busy you will be." Sarah & Erik Lindblom, Captain Jefferds Inn, Kennebunkport, Maine

"Many years ago, not long after we opened our own Bed & Breakfast, we learned not to call a guest about having left an item when they departed their stay. It didn't take us long to realize that occasionally we would have a couple stay with us who were married, but not to each other. Today when an item is left behind, we hold it in a lost and found "safe place" awaiting their call to let us know they would like the item returned and where to send it." Bonnie & Joe Masslofsky, The Parsonage Inn, St. Michaels, Maryland

“…now that we're here we have strategically set out to change as many light bulbs to the energy efficient coil style as possible. Oh, stop cringing, we still use the pretty ones where it counts, but when they are destined to be left on 24/7 and covered by a shade, we found that our average suite has 15-17 bulbs, and that each bulb is supposed to save around $50, not to mention they last much longer and have virtually ended our having to drop everything when a bulb goes out to go and change it…” Pam Matthews, Montgomery Inn Bed & Breakfast, Versailles, Kentucky

"Find a place that you love so much that every time you come towards the Inn or when you enter the Inn you say to yourself what a GREAT place this is and how grateful you are to be where you are!" Frank & Julie Hanes, Inn at Manchester, Manchester, Vermont

And one of our personal favorites..."Own a couple of good plungers, know where they are located, and try to avoid carrying one through a public space without masking it in something (a garbage bag works, and it catches drips from hitting the floor post-plunge)." Nancy & Bill White, Sudbury Inn, Bethel, Maine

Do you have some Innkeeping advice that a Future Innkeeper should not proceed without? Please comment on this post or email your advice to kim@oatesbredfeldt.com. We look forward to hearing from you!

PAII Conference

We recently attended the 2007 PAII Conference in Myrtle Beach, South Carolina. If you are an Innkeeper or want to become an Innkeeper someday, you should make a point to attend these Conferences. The PAII Conferences and trade shows are not only a great opportunity to network, but they are also a source of inspiration. New products, distributors, and ideas abound. We hope to see you at the next Conference!

If you were not able to attend the most recent PAII Conference, we wanted to share our slideshow presentations with you:

Food and Alcohol Safety Issues for Innkeepers

Exit Strategies for Inns with Restaurants

Creative Electronic Marketing

E-Mail Address Are Important!

Recently we attended a national conference and happened to gather a sizable number of business cards from innkeepers requesting additional information from us. We are always happy to respond and answer questions and to forward additional information. We came back from the conference and started to work on fulfilling the requests. We sat down, separated the requests into piles for similar requests, and then came to a screeching halt! Much to our surprise over 50% of the business cards contained no e-mail addresses! The innkeepers were diligent about furnishing their website addresses, but no e-mail addresses. So off we went to track down the website address and dig through the websites to find their e-mail addresses. Even then, some of the websites didn’t actually list their e-mail address.

So our question today is: do people know how important it is to put an e-mail address on their business cards? By the look of this independent survey, I would say no. In the world of ever changing technology, an e-mail address is as important as a telephone number. So, if you don’t have an e-mail address on your business card, fix it! A guest may just want to drop you an e-mail to say that they had a lovely time at your innor they may have left something that they would like to have forwarded to them. Other situations could include wanting to purchase gift certificates, asking to send a brochure to a friend, asking to share a special recipe, and more! Guests aren’t the only receiver of your business cards. This could include business acquaintances (like us), vendors, local trade people, and more. It is much easier for people to keep a business card versus a brochure.

In closing, we encourage everyone to step back and evaluate your business cards…e-mail addresses are important!

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.

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!

Even a Bed & Breakfast Needs Food Safety Training

It is taken for granted that restaurants have to worry about food service safety, but it doesn’t stop there! Anyone serving any type or quantity of food to the general public should be concerned as well.

It never occurred to me when I owned a bed and breakfast the harm that could be done by simple procedures, such as breaking eggs into a bowl and leaving them on the counter or defrosting frozen food. However, harmful bacteria doesn’t need much time in a warm environment to grow and therefore potentially making your guest sick. Better yet, the proper sanitation of countertops and hands is equally important. We strongly encourage anyone serving food to enroll in a food service safety class, such as ServSafe. This is a nationally recognized organization which is known by all health inspectors nationally. When the health inspector is at your door and things are not going well, you will gain their respect and a few extra points for taking a food service safety class and becoming better informed. So don’t wait! Be proactive and you’ll be surprised by the information you will learn and better understand the goals of health inspectors.

Call or e-mail us and we will assist you in finding a food safety class near you. Just call 207-563-2772 or mailto:rlevitan@oatesbredfeldt.com