As inn consultants, Bill and I answer a lot of different questions from prospective new innkeepers ranging from the buying process to managing guest expectations. But the question of “to buy or not to buy?” is probably the one we deal with the most often. I enjoy talking with a new clients. I like to find out about their interest in a geographic area, their skills, and hobbies and about being financially qualified for this adventure.
I recently had a phone call with a nice gentleman wanting to discuss an inn that he might be interested in buying. He had driven by the property and really thought it was overpriced. But curb appeal is only one of the many aspects to how an inn business is valued. All inns that we work with are viable inn-businesses; all have a cash flow to support their debt service. So I thought it might be helpful to outline some basic concepts of how we value a property. Here are 6 criteria we use to establish a price.
1. It fits a profile.
What does that mean? Is it big or small enough to meet a buyer’s lifestyle, but still viable as an inn business? Do the services (dinner, etc.) it offers require additional support staff, or is it manageable by the owner, even offer the flexibility that one of you could have an outside job.
2. It’s got location.
Is the property located in a travel destination? Is it for midweek business travelers? Does it offer great recreation opportunities: bicycling, tennis, horseback-riding, hiking the mountains, fishing and access to popular local events, festivals, etc.? These factors affect if and how the location alone will sell rooms.
3. Has a decent occupancy.
If you are considering a start-up, it will take about three years to build a viable occupancy (permits, regulation might tie you up for a long time). Sometimes, owners selling their inns have lost the energy to market, or stay on the cutting edge, but what they are selling is a viable inn-business that despite the current setbacks, have adequate numbers to pay its debts.
4. Strong average daily rate.
Don’t get into the business if you don’t know how to be “the best you can be” and feel confident that you can charge for it. Your product has to validate the cost to guests.
5. Strong cash flow to support debt service.
Your cash flow is what you make by selling your rooms. Your expenses need to be in line with that; food costs, staff, insurance, mortgage, association fees, costs of staying competitive (amenities & marketing), etc.
6. Opportunity for future growth.
Every new inn-owner buys with a vision to make that viable inn “more their own.” They build cottages, renovate the owners quarters, add rooms, replace furniture, carpets, art work, etc. All of that builds equity, it is an investment in your future sale of the property.
Now what does that mean to an investor, a financier, an accountant, a banker or individuals who are only interested in looking at inns for a return on their investment? They are quickly discouraged. For them, buying an inn is almost never a viable option. An inn has to be understood as a business, but it is certainly a lifestyle as well!
Surely, establishing value from a “drive-by” alone is not a viable approach. Just as surely, value based strictly on return on investment is also not a viable approach. To be a successful innkeeper you have to have a vision, love the location, love what you have chosen to do, and above all, you must like people, all kinds of people!
Best wishes to all,