In addition two programs of the Small Business Administration (SBA) have been beefed up with special terms for businesses like Inns and Bed & Breakfasts. The SBA 7a Loan Guarantee Program will guarantee 95% of a bank’s loan and waive most fees. The SBA 504 Loan Program funds 85 to 90% of an Inn purchase at even lower interest rates, with a significant portion at fixed rates for 20 years.

The banks and the SBA programs are strongly oriented toward the purchase of a going concern and their focus is in the ability of the business to generate cash flow to support the debt service.

Conventional wisdom says that banks are not lending and at some level much larger than the typical Inn business, that is true. But, if the Inn is a viable business, excellent financing is available.

If you are on the cusp of action, this may be an excellent time for making a move.  There is a surfeit of owners ready to sell and local banks ready to lend.  The career you save may be your own.

Bill Oates

So why, you ask would Heide and I fly to Oklahoma City to non-participate in this closing of December 31, 2009?  Since you asked, (Did I hear you?)  I’ll tell you that although all closings are special, this one was especially so. On the one hand were the sellers, Bob and Linda Humphrey, who ten years ago fulfilled their dream and opened the Shiloh Morning Inn, custom-built to their specifications.  Successful immediately, they had the vision to add four freestanding cottages to their original five Inn rooms.

The Inn was successful, gaining many accolades and an invitation to be one of two Select Registry Inns in Oklahoma.  But a year or so ago, Bob and Linda realized they had accomplished their goals and many new developments created challenges they believed others might better handle.  They hired us, Inn Consulting Partners, to manage the sale of Shiloh Morning Inn.

We knew it might not be easy to find future Innkeepers who would want to move to Ardmore, Oklahoma, despite the exemplary condition and track record of the Inn.  We were fortunate that we found a young local couple with the desire, the skills, and the involvement in the community.  With the help of a creative banker at a local bank, we were able to put together a purchase package that fit everyone’s needs.

And now we can tell you why we were there.  At one A.M. on New Year’s Day, David Pfau was serving his wife Jessica a trial breakfast he would later serve to their guests.  She had just returned from the all night market where she bought garnishes for the plates and fresh flowers for the tables.

It is bringing together people like the Humphreys and the Pfaus that after 30 years still send chills of delight down our spines.  As long as we can share these special moments we will spend New Years’ Eve in strange lands.

Inn Partners, inns@innpartners.com www.innpartners.com

Shiloh Morning Inn, www.shilohmorning.com innkeepers@shilohmorning.com

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.

Several excellent educational opportunities are coming up in the first part of 2010 that should be of interest to serious future Innkeepers.  They are as follows:

1. Mid Atlantic Innkeepers Trade Show & Conference January 10-13 at the Homestead in Hot Springs, VA:
2. Inn Consulting Partners Seminar for Future Innkeepers; February 19-21, Arrowhead Inn, Durham, NC
3. Innkeeping Conference and Trade Show, hosted by PAII, March 8-11, 2010, Austin Texas.

Each has its value. The Mid Atlantic Innkeepers Trade Show & Conference and PAII’s Innkeeping Conference and Trade Show are aimed at existing Innkeepers, but the information is applicable to future Innkeepers as well.  The trade shows are a separate and very valuable addition.  The Mid Atlantic show is much smaller, but the trade show is still excellent and the intimacy enables future Innkeepers more opportunity to network with real Innkeepers.

Both shows have a lead-in seminar for “Aspiring” (Read perspiring) Innkeepers.  While informative, they lack a real focus on providing the tools a future Innkeeper really needs.  We are prejudiced but we believe our three day seminar focused on providing the analytical tools and the personal perspective is much more valuable. (Psst.. it is also less expensive!).

We have observed a seemingly logical, but very misplaced belief that the internet, and in particular the listings of Inns for Sale, will somehow provide the insight needed to make a decision that will profoundly affect your future life.  A corollary to this is the belief that if I look at enough Inns for sale, “I will know it when I see it.”

Another danger area for future Innkeepers is the certainty that, in order for it to be mine, I have to build it from scratch, or at least renovate that Victorian monster in my home town.

Whether you are thinking about it or have made the commitment, you need to utilize the information tools that are available to you.  We suggest that one of the Innkeeper conferences, combined with our seminar will take you a long way toward making right decisions about whether to and how to.

By the way, if our February seminar is not convenient, we offer it throughout the year and all over the country.  Check it out at our website, www.innpartners.com.

An Evaluation is a critique of all aspects of an Inn’s operations: marketing, staffing, housekeeping, food service, guest relations, website and web presence, grounds maintenance, and overall condition of the Inn.  It also includes suggestions for improvements as necessary and focuses especially on items to improve the bottom line.

Some Inns, especially those contemplating a transfer, should think about a Valuation.  We do believe most Inns will benefit financially and otherwise is excess of the modest cost of an Evaluation.  Most Innkeepers are too busy running their Inns to pay much attention to events and changes in the larger hospitality business.  That is our job and we bring that knowledge to an Evaluation.

If you would like more details, contact Bill at bill@innpartners.com or 802.257.2360.

Eagles Mere Inn is a 19 room inn with fine dining for guests and the general public.  The town of Eagles Mere is an exquisite Victorian era summer resort built around a pristine lake.  Developed around the turn of the 20^th century, time has had a very soft touch.

The Inn has a very busy summer/fall season but its proximity to Washington and Philadelphia make it a year ’round getaway destination.   Barbie, with the assistance of chef/innkeeper Toby Diltz, looks forward to greeting you at the Eagles Mere Inn.

Bill Oates and Heide Bredfeldt are always ready to help if you are contemplating an ownership change.  You can contact us at inns@innpartners.com or at 802.257.2360.

For Ed and Jen it was an opportunity to run and eventually buy a larger Inn than an outright purchase would have allowed. An option payment gave them an exclusive right for five years to purchase the Inn.

As the five year date loomed, the economy was not cooperating. However, with compromise from both sides, a local bank and an SBA 504 loan, the deal was struck.

Three Mountain Inn is a 15 room village Inn. In addition to the rooms the Inn provides fine dining to guests and the general public. The Inn is a member of the prestigious Select Registry; Distinguished Inn of North America. AAA has bestowed a rare 4 diamond rating to the restaurant; one of only seven in Vermont.

Check out this fine Inn (and make a reservation) at www.threemountaininn.com. To learn more about lease options and/or Small Business Administration loan opportunities, contact Bill Oates at bill@innpartners.com or by phone at 802.257.2360 (toll free at 877.957.2360).

]]> http://innpartners.com/blog/creative-financing/feed.html http://innpartners.com/blog/make-the-unlikely-happen.html http://innpartners.com/blog/make-the-unlikely-happen.html#comments Fri, 17 Jul 2009 01:59:40 +0000 Bill Oates http://innpartners.com/blog/make-the-unlikely-happen.html Just two weeks ago Michael Converse and Patrick Wadsworth became the Innkeepers and operators of the Ravenwood Castle Inn in New Plymouth, Ohio.  This is an Inn in the Hocking Hills area of Ohio, a strong regional tourist destination for a wide area of mid Western population centers.  The main Inn building is an authentic 1991 Castle, with restaurant, common areas, Innkeeper quarters and 7 guest rooms.  The castle village has 8 year-round cottages and there are 7 seasonal accommodations appealing to families.

Patrick and Michael attended our “How to” seminar for future Innkeepers thinking their resources limited them to a five or six room Bed and Breakfast.
Indeed their resources were limited, and what they did have was illiquid in today’s market. However, what they had in abundance was a desire to have an Inn and the business skills and service acumen to make them successful.

What to do?

The seminar helped them to understand that a six room Inn rarely was a viable business.  They realized they needed a larger Inn.  But their resources appeared to remove them further from the reality of having an Inn.  Still, they made the trip to Brattleboro to talk to Heide and me, to make plans for some future purchase.  It just happened that Bill and Heide had a transfer client in Ohio, just about an hour from their base in Columbus.  We knew they had the ability and seemed to have the desire.

Fortunately, the owner was able to forgo any upfront payment and after a couple of meetings with Michael and Patrick, felt comfortable with them taking over the Inn.  The result?  Michael and Patrick entered into a five year lease with an option to purchase at a fixed price. The monthly payments will include a sum to be credited to the eventual purchase of the Inn.  Currently the cash flow from the business will supply the necessary cash to meet the monthly payments, but Michael will continue in his job, based in Columbus, as insurance.

We are proud of the role we played in arranging this transfer.  However, the real message for Future Innkeepers is that desire coupled with some creative thinking can make the unlikely happen.  If you have that flame in your gut, get moving. Perhaps we can also help you.

Hurry up, for Web 4.0 cannot be far away.  I think I have found a hint of it in the latest buzzword: (defined as seeing the word used three times).  The word is personalization and it can have a profound impact on the products we develop for the next generation of guests.

Most of us have grasped the importance of “packaging” as an effective tool.  But our potential guests are beginning to reject the standard off-the-shelf package.  They want a unique experience built around their specific desires.

This is not about heroic efforts to fulfill outrageous demands.  It is rather putting the guest in the center of the experience.  A few well-directed inquiries in advance of arrival often goes a long way in defining that particular guest (or usually couple’s) desires.

Fortunately, Inns are well suited to provide the personalization of the guest experience.  We have the ability due to our size and interrelationships in our communities to put together unique experiences for our guests.  Personalization almost by definition requires an interactive relationship between Innkeepers and guest.

Bill Oates

This dilemma is compounded by the number of Inns currently on the market. Hilary Jones, owner of the Inn consulting firm Inngenium, reports that there were 931 Inns actively for sale on the internet in early 2008. Given that many small Inns are marketed through residential listings, the real number is undoubtedly over 1,000! While what follows is mostly oriented toward sellers, creative thinking on the part of buyers will prove a valuable tool in finding and buying an appropriate Inn or Bed and Breakfast.

So what is a seller to do? What most are doing is listing the property at a price that has no basis in reality and leaving it in the hands of a broker to languish among the hoards of other Inns for sale. The most important first step in a successful transfer process is to price the Bed & Breakfast or Inn correctly. We strongly urge anyone contemplating a sale in the foreseeable future to have a comprehensive Valuation done by a professional consultant. That Valuation will not only help you to price your Inn correctly in the marketplace, it will also identify areas, physical and financial, to be improved to enhance the sale prospects down the road. This is not an appraisal, which might be too oriented toward the real estate side than the business activity. While Valuation is a specialty of Inn Consulting Partners, there are other consultants qualified to provide a valid Valuation.

Properly priced Inns will have a strong leg up in the market, but it is a crowded environment. It is again important to get the proper professional help to position the Inn correctly in the market place and to qualify and motivate interested buyers. It is also important to have a USP (Unique Selling Proposition). For some fortunate few that may be a location in a strong destination location or on a coast. (Oceans preferred.)

For most, the USP will be providing incentives in the form of terms of purchase. Most Innkeepers, when they contemplate a sale, initially assume they will be paid out in full. In truth, in most sales the owners play some part in the financing. Let us look at some of those scenarios:

1. Secondary or Subordinated Owner Financing.

   In this case, the primary financing is with a bank, but because of limited resources for down payment, or a historic cash flow that is short of full coverage of the projected debt service, there is a gap between bank financing and down payment. The owners then pick up that slack, usually in the 10 to 15% range of the purchase price. Because this financing is usually related to weak cash flow, the terms of the owner financing are often very favorable in the first few years. For instance, there might be a moratorium on payback for up to 6 months, and/or interest only at a favorable rate for the first 2 or 3 years. Owners usually provide a 20-year payout term but with a full payout in 7 years. The risk is high, but the reward is that the Inn is sold. With proper help in qualifying the buyer, the risk is acceptable.

2. Primary Owner Financing.

   This option is used far less often than it could be. If you have a viable business, it is properly priced, and the buyer is qualified, there is a very favorable balance between risk and reward. A good investment will provide sellers with an excellent return and a regular income. It will also provide some tax advantage, in that the gain will not be taxed until the money is actually received. Most people are not aware that, if the current mortgage is less than say 50% of value, it does not have to be paid off in the sale. The seller still owes a note to the current mortgagee, and that note is still secured by the Inn. This is really a three cornered deal. The Seller is the mortgage and note holder with the buyer. The seller in turn owes the bank and the bank still has the security of the Inn to guarantee the note to the seller, who no longer owns the Inn. The buyer must agree to this arrangement, and since it enables them to buy the Inn, it is happily agreed to. I believe that if owners who are in a position to do the financing chose to do so, we would see more Inn sales. But look to the next possibility to create even more sale opportunities.

3. Purchase of buyer’s home by seller.

   Most Inn buyers come to the table with the equity in their home as the principal source of cash for down payment and working capital. But in today’s housing market, many homes are hard to sell or temporarily so depressed in price that it does not make sense to sell. Consider this scenario. The buyer wants to buy but wants a contingency on the sale of their house. The seller whose mortgage is currently very low will, upon sale, have a significant amount of cash with no need to reinvest in a house or a business. So the Seller buys the Buyer’s house (maybe even at a premium over current value), rents it out (or lives in it) until the market rebounds, which we know will happen eventually. I suggest the possibility of a premium, because at the other end the buyer will be so thankful for the largesse of the Seller that they will not negotiate the price of the Inn.

Lest you think this is Bill gone beyond the pale, this reminds me of a situation several years ago. (After thirty years, I have lots of situations.) A couple had a contract to purchase an Inn on Cape Cod. Everything was set, including the financing, but the couple did not have enough available funds to meet the down payment requirements. They did have a condominium in Hawaii that was caught in a market glut due to a recession in Japan. After much discussion, the Sellers bought the Buyers’ condominium in Hawaii, providing the Buyers with the funds they needed to complete the purchase. The Sellers put the condo in a rental pool, actually used it themselves for a couple of vacations, and sold it when the market turned up. (And the market will turn up eventually.) There was little or no loss on the transaction. Sellers did not have to do financing, the Inn was sold in a timely manner, and the gesture was grand enough that the buyers did not bicker about the price. The downside risk was much less than other solutions and the Inn was sold.

There are many other creative solutions, no doubt many more than I have thought of. Without elaboration, there is the possibility of a lease with option, and one I have not been party to, but seems logical. That is to sell the business and its assets, but retain ownership of the real estate. This could also include an option to purchase in the future. There are currently over a thousand Inns and Bed and Breakfasts openly on the market and a very limited pool of understandably nervous Wannabes. It is clear that just going into that market without any hooks puts you in a pool with a 20-year inventory.

While the above has been addressed primarily to sellers, a smart buyer may want to initiate the ideas outlined above to inspire creative approaches and a sale that might otherwise not happen. A final word. This is so important that it might behoove you to get professional help in examining these options. (You know; professional drivers, closed course, do not try it yourself!)