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Bed & Breakfast For Sale - Writing a Business Plan

A business plan is a critical preparatory step that can mean the difference between success and failure.

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Bed and Breakfast For Sale Articles >> Financing

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Residential Loans vs. Commercial Loans

When you sell, if you have three or four rooms, there is a possibility that your buyer might be able to get a residential mortgage because of the ease of turning the house back into a residence (alternative use, in lenders’ terms). A residential mortgage is usually based largely on the value of the real estate and the borrower’s ability to pay the mortgage from his/her personal income. This would dramatically simplify your sale because the primary information the lender needs for a residential loan is the value of the property and the borrower’s income. The income from the B&B is not considered.

If you have been running your B&B as a profit-making venture and have five rooms or more, then your buyer is probably going to be required to get a commercial loan (SBA or conventional). A commercial loan is more complex than a simple residential loan. For a commercial loan, a lender needs a great deal more information because the business and its ability to generate enough cash flow to support a loan are what will be analyzed.

BUILDING A GOOD Sales Package

Building a good sales package can help facilitate the commercial loan process and possibly speed up your sale. Put together a sales/lender package now while you have plenty of time to collect, correct and enhance information about your B&B.

Start by asking yourself some questions: Has your property changed any since you bought it (renovations, more rooms, etc.)?; Was it a “lifestyle” purchase that turned into a business?; Have you added any lines of business, such as weddings or business meetings?; Do you cater to a different kind of traveler now?; Have demand-generators in your market area changed?; Has your competition changed? With these questions in mind, here is a suggested outline of a sales package that would be very useful to a lender.

Identification Of The Property

Give a detailed description of the property. You should include the size of the inn, size of the property, number of rooms, legal description (deed book and page number). Don't forget to include a plat. Photographs can be of great value to the lender. When a buyer applies for a loan to purchase your property, usually the lender will know nothing about the property other than what is in the loan application, and may even be halfway across the country. The lender may go to your web site where you probably have some pictures, but this is not very effective. By having a portfolio of pictures of your property you can highlight features that are not on your web site. You may have some spectacular views, or you may have a magnificent property that is on the National Register of Historic Places. You are selling your buyer, but you are also selling the lender.

Market Area Analysis

Highlight any important facets of the area economy that influence real estate values. For example, is the area growing, stable or declining? Why? This can affect the general value of your property apart from its value as a business. If the area is stable, or even declining in some way, it’s better to deal with it up front and show why it has not had a negative effect on your business. Local economic development offices are frequently a good source of this type of information.

Neighborhood Description

The “neighborhood description” can cover a fairly broad area with a B&B, depending on the location. What is nearby that attracts people to your area, and therefore, your B&B? In many cases, it is something very specific, like water, or mountains, or birds, or a nearby college. Eco-tourism, for example, is becoming big business. This information is extremely important to your package because it is probably what will continue to draw travelers to the inn for your buyer. Lenders and the SBA know that many times when a business changes hands, a business that was successful under one owner is not automatically as successful under a new owner. What draws people to your area is not likely to change. For that reason, the lender can feel a higher degree of confidence that a change of ownership will have a minimum effect on why people come to the area and to your B&B.

Lodging Trends And Market Analysis

You should include an analysis of local hotel/motel supply and demand if at all possible. This is not necessarily easy to do, but between chamber of commerce and tourism bureaus (both local and state) and the Internet, you should be able to piece together a picture of how well the lodging market is doing in your area. Even though it may not have any impact on your specific property, it does give a lender an idea of the desirability of the lodging market in general. If the hotel market is strong, that could make a lender feel more favorably disposed toward your inn. The converse is also true.

Discuss your competition. What other lodging choices, both B&B and hotel, do visitors have in your area? Competition within the B&B industry could be an issue that is going to become more of a factor in the future in buying and lending decisions. In some states there are already a large number of B&Bs and country inns, offering more choices than ever for prospective travelers. For example, if a lender discovers that there could be forty-plus B&Bs and inns in Charleston, S.C., or close to five hundred inns in Maine, or well over four hundred in Texas, he might become a little more interested in how you deal with the competition in your area. This is before even taking into account the additional competition from hotels and motels.

The B&B industry is maturing and becoming more mainstream as a choice for travelers, particularly business travelers and especially women business travelers. As a result, to a lender looking to finance the sale of your property at some point in the future, you may find yourself being looked at as part of the total lodging industry rather than as a unique subset. So it is more important than ever for you to build a strong case now for the continued success of your B&B.

Another thing to consider is whether there is seasonality to your market. Is it a year-round area or highly seasonal? This can have a strong impact on a lender’s feelings about a business, and being able to show how you deal with that will be to your benefit. The buyer’s lender wants the mortgage paid twelve months a year. If you shut down your business for three, you’d better be able to convince the lender (through your buyer) that there will be enough cash flow in the high season to cover the low season.

Financial Information

There are certain financial documents that the buyer’s lender will require from your business.

The last three years’ business tax returns and financial statements (profit and loss and balance sheet) are the primary documents. Your operating statements should also be in lodging industry format (PAII has an excellent chart of accounts) rather than just some general format. An interim profit and loss statement and balance sheet current to within 60 days will also need to be included. Almost as important are three years and current interim of occupancy percentages and ADR’s, with the last twelve months broken down month-by-month. Remember, aside from the beautiful sunsets, mountain views, water views, people, breakfasts etc., you are still in the lodging business. You sell room nights, just like an airline sells seats. If you don’t sell enough room nights to generate sufficient cash flow to support the payments on a buyer’s loan, financing for the buyer may be hard to come by and you may wind up holding a portion of it yourself. The quality and detail of your operating statements could have a direct effect on the price you ultimately get for your property.

Another important point to consider is your salary. Are you taking a salary as owner, and, if so, is it showing as one of the expenses on your profit and loss statement and tax return? If you are not, perhaps because you have outside income, a lender is probably going to impute a salary for the new owner unless the buyer can prove outside income. If that happens, it will come straight off your profit number and have a serious negative effect on your sales price.

For example, suppose you were not showing a salary and the lender decided to impute a $25,000 salary for a new owner, which would lower your reported profit by $25,000. One reason a lender will do this, and it is legitimate, is as a contingency against having to put someone in to run the business if things don’t work out with the new owner. If the cash flow from the business covers this number as well, then the lender is much more comfortable. If an appraiser is using a 10% capitalization rate as part of the appraisal, lowering your profit by $25,000 will lower the value of the inn by $250,000!

The more details a lender has, and the more information about why the business is successful, apart from the numbers they look at, the better the chances for a successful conclusion to your sale - especially if the lender is not from your area.

Selling might be the farthest thing from your mind right now (except on certain days), but it is going to happen eventually. A minimum amount of work now could go a long way toward maximizing the value of your current investment.

Doug Carleton can be reached at: 804-281-5148, or email dcarleton@sbaloanspecialist.com.
Article reprinted with permission from Nation's Best Inns For Sale