In these troubled times, it is natural to lower the risk factor in any important financial decision. For future Innkeepers who choose to seek out going concern Inns for purchase, it is a wise choice. A going concern has a history and that history will inform us of what that Inn’s capabilities are. That being said, it is important to remember that the past is a guide to the future. As prospective Innkeepers, we are buying the future. The past has important information for us, but it does not always tell the whole story.
Let me give an example. A and B are similar Bed and Breakfast Inns. Both have sales of $300,000.00. But A has a net profit of $150,000 while B has only $50,000. If you only measure value by bottom line, A is worth 3 times B. What we will not know from the bottom line is that in A, an owner couple both work very hard and are possibly not spending enough on maintenance to keep the property in excellent condition over the long haul. The long time owners of B, on the other hand, have a very small mortgage and have grandchildren in distant places whom they visit regularly. They have staffed the Inn to relieve themselves of operational duties. Their payroll may be double that of A’s. Also they have a rigorous maintenance program to keep the inn and all its systems in tip top shape. Further investigation might show significantly higher vehicle and travel expenses for B. In truth B may be a better buy than A, especially if the long term low mortgage owners of B are willing to participate in the financing.
The important message for future Innkeepers is the need to understand normal income and cost numbers for room income and, if appropriate, for food and beverage service as well. Until that understanding is in place, one is not ready to make an informed decision about purchase of an existing facility. This why we spend so much time in our seminar for future Innkeepers on standard cost analysis.
While our discussion above relates to going concerns, it is even more important in a conversion or build to understand the ratio of income and expense, mainly because there is no history to guide us.
Buying an Inn, or starting one, is a major life decision. That decision should not be made until one is comfortable with the financial history and can project it with confidence into the future that will be theirs.
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