Buying A Bed And Breakfast Inn

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Posted on February 3, 2009 by Peter Siegel, MBA

Buying A Bed And Breakfast Inn

Many owners of a bed and breakfast business--or the "country inn" variation in which dinner is also provided to guests--report that they thoroughly enjoy their enterprise, even though it might involve more hours of labor than they'd expected.

Owners and brokers advise that prospective buyers for this kind of enterprise spend some time in the area where a purchase candidate has been identified, to make sure the locale--including its weather and amenities--seem agreeable. Also important is that a prospective buyer is prepared for the amount of work involved, and has some understanding about the financial part of the business.

HOW MUCH PROFIT TO EXPECT

While there is little information, readily accessible to the public, regarding net earnings generated by this type of resort property, there are some revealing statistics posted by a key trade group representing owners in the industry. According to the PAII (Professional Association of Innkeepers International), an average sized inn features eight rooms, each offered at daily rates averaging $166.00, and experiencing--in the 2006/2007 period--43% occupancy.

Using these figures and doing the math produces a total of about $200,000. That's what the owner of an eight-unit inn can expect the property to generate in annual revenues, if its numbers line up with the average enterprise in this business. Industry standards place labor costs--not including the work of the owners--at 10% to 15% of gross, while "cost of goods" items--supplies and food included--account for about 20%, and overhead (utilities, maintenance, insurance, taxes, advertising and marketing, phone and internet, professional services and related costs) adds up to about 30% to 35% of gross.

Based on these calculations, the owners (note that B&B properties almost always are owned and operated by a couple) of this hypothetical, but average business would receive about $68,000, perhaps as much as $80,000 a year in return for their financial investment and hard work. Part of this sum, incidentally, will be allocated for depreciation and amortization, service of any debt incurred to purchase the business, and taxes paid on the net income.

It's unlikely the prospective buyer will encounter an offering with numbers that exactly match this financial model. But the information and percentages presented here might be useful references when analyzing a bed and breakfast or country inn for purchase.

QUESTIONS TO ASK

And this analysis might serve to remind buyers of the key questions that should be asked, such as: Number of rooms, average daily rate, occupancy level and amount of expenses in each category.

Considering the slowdown in the economy, a purchaser also wants to know, when analyzing a business, what marketing efforts are being pursued, or can be instituted, in an effort to minimize the loss of business as consumers cut back on travel and related spending. Is the property able to accommodate wedding parties and other celebrations? Is this capability promoted aggressively? What about providing a meeting venue and lodging for members of business, social and religious groups?

The ability to expand beyond the travel market can be an important marketing advantage for B&Bs and country inns in this economy.

PRICING

With the majority of properties in this business accommodating guests in eight or fewer rooms, it is the real estate that represents the major value driver. An appraisal of the property and furnishings is the basis in determining the correct price for a modest-sized B&B. The amount added for the business varies between $25,000 and $75,000, depending on the location and profitability of the enterprise.

Pricing of larger facilities is a function of income, with a factor of between 5.0 and 6.0 multiplied by annual gross revenue to arrive at a value. The higher multiple applies to properties in excellent condition and sold with seller financing for 10% or 20% of the purchase price.

Small business buyers wanting to maximize the return on the investment of their money and time may do better with a convenience store or fast food business. But if part of that return is measured by the proximity to tall pines or clear blue lakes, a bed and breakfast inn might be the right choice.