Buying An Inn - A Life Decision

The description of a hospitality business means many things to different people. It incorporates fast food restaurants, regional and national chain restaurants, and of course "mom & pop" operations. It also describes lodging facilities as diverse as national chain hotels, ski lodges, motels, resorts, country inns and bed & breakfasts.

While all of the above facilities are found in Vermont, some of the most sought after and romanticized properties are country inns and B&B's. There are many factors that keep the inn brokerage business alive and well. Thanks goes to the Bob Newhart Show, the large number of tourists that visit Vermont who dream of living here, the downsizing of corporate America and the thriving economy and low interest rates.

What makes the country inn or B&B acquisition unique is that it incorporates three very important yet distinct aspects of an innkeepers life. First, it creates a new life style for the innkeepers and their family. The typical work day begins with the innkeeper up early overseeing breakfast. During the day, handling personnel, purchasing food and supplies, marketing, repairs/maintenance and finance issues are the norm. Attending to guests throughout the evening hours either as perhaps a chef or bartender in a full service inn or making dinner reservations for guests at local restaurants in the case of a B&B rounds out the day. The demands of being "on call" seven days per week can certainly challenge even a long time business professional who use to having layers of staff between them and their public or clientele.

Working with a spouse full time, 24 hours a day is perhaps the most challenging for new innkeepers. Many spouses have been working away from the home for years and are not accustom to interacting or getting a second opinion on "their" business decisions. While many innkeepers extol the virtues of raising children in the "country", there is always the issue of moving them out of familiar schools and away from long time friends. It is critical for buyers to include family members in the search process and to make children feel integral to the decision making.

The next aspect of purchasing a hospitality property is that the buyers are purchasing a new home. Many first time inn buyers have lived in large homes that easily accommodate their families. Finding an inn that can accommodate a family's needs without interfering with the operation and business of the inn is very critical to the innkeeper's happiness. One of the important factors of purchasing the "right" inn is to be sure that it suits the family both in look, size, location and community style. The correct amenities are also critical and include sports facilities (tennis, golf, skiing), academic considerations (special needs, advanced placement, sports programs), social and cultural considerations (libraries, theater, museums) and any medical or transportation requirements.

The third aspect of purchasing the inn is arguably the business side of the property. The ability to find the right lifestyle and the right home is only successful if the inn will support the cash flow needs of the purchaser including operating expenses, living expenses, mortgage/debt service and a net operating income to compensate them for their initial investment.

Most lending institutions expect a property to carry a debt coverage ratio (net operating income to the annualized yearly mortgage) of between 1.25 and 1.5 times. This is assuming a down payment which represents between 20% to 30% of the actual purchase price. The buyers should also have funds set aside for the rather substantial closing costs and 3 to 6 months of anticipated operating expenses.

Successful inns with a good on going business generally sell on a price per guest room of between $75,000.00 and $125,000.00. Bed & Breakfasts inns may sell for an average of around 4.0 times gross sales while full service dinner inns may sell for an average of 2.0 to 2.5 times gross sales. While these averages can be used for a quick test of a property's asking price to the income statement, many other factors can be used to determine the desirability of the property and hence, the asking price. These factors can include the amount of land, the condition of the property, the location and other improvements located on the property.

The search process can be of varying length but generally lasts between 6 months and a year once a primary residence has been sold (if necessary). Many buyers use the proceeds from this sale to provide for their down payment and working capital. While it is important for these buyers to become educated in the marketplace, often the process of searching for an inn to purchase is started before they can actually move forward. Sellers must be advised of this scenario early on as many buyers are not willing to sell the family home until they have found their perfect inn. It is not uncommon for the first or second buyers that look at the property to ultimately end up purchasing it, although most seller's are advised that the process for them can take between 1 and 2 years.

After identifying potential properties, it is important for the buyers to begin assembling their "team" to assist in the purchase of the inn or B&B. The members of this team can include a hospitality business broker (either as a buyer representative working exclusively for the buyer's interests or a seller's representative who has already identified properties that are available for purchase), bankers/mortgage brokers, an attorney, an accountant, and a building inspector/engineer who understands both structural and systems concerns (particularly septic and water issues). Fortunately in Vermont, there are several of these professionals in each discipline who are familiar with hospitality properties and their unique attributes. Buyers would be well served seeking them out and enlisting their assistance in the acquisition process. The State of Vermont Departments of Health, Liquor Control, Environmental Conservation and Labor and Industry can also be of invaluable assistance to the buyer. All of these agencies have personnel well versed in hospitality properties and their requirements as they pertain to the public's safety and comfort. VEDA (Vermont Economic Development Authority) and the US. Small Business Administration have also been extremely cooperative in helping buyers with development of business plans, financing options and economic assistance.

While any real estate transaction can be challenging, the sale of the inn or B&B which provides the successful new innkeeper a home, a lifestyle and a business simultaneously is unique. The sale of these properties and their new owner's desire to enhance the guest's experience either through improved services, upgraded facilities or increased capacity only serves to improve the nature of tourism and the economy of the State.