Building Seller/Buyer Trust
Building Seller/Buyer Trust by Scott Bushnell
(Originally published in Vol.24, No.3; Innkeeping Magazine, Professional Association of Innkeepers International)
During the course of executing an exit strategy, an innkeeper wishing to sell his inn may throw up roadblocks or speedbumps that will slow, or even trash, the process to get to the ultimate goal of settlement. It may be done unwittingly, or it may even be done consciously without fully understanding the impact of these decisions. Remember, as a seller, it is important to make the sale as appealing, and its numbers as credible, as possible in order to attract attention from the remarkably small pool of qualified buyers out there. If trust on the buyer's part is jeopardized by sleight of hand with the numbers or the feeling of something being hidden from them, unnecessary delays are inevitable...or worse yet, the deal may be blown.
It all starts early in the exit process with the preparation of the inn's financial records. Typically, QuickBooks is the tool of choice, and having the P & L established in the standard chart of accounts format makes for easy understanding by the buyer and his accountant. In the first couple of years of the 5 year exit plan, numbers accuracy is imperative. Occupancy history, Average Daily Rate (ADR) calculations, monthly and annual profit and loss statements, and the last couple of years of tax returns must all reconcile. Inability to pass this reasonableness test by the buyer and accountant will most certainly raise the red flags. This is also the time to ensure that all personal expenses captured in the business numbers, and unreported cash sales stop...if you are one of those who like to play the sales and income tax dodge ball game. If it is discovered that you are cheating Uncle Sam, it is only a short leap to the conclusion that you will cheat a buyer.
Every buyer will order up an inspection of the inn. It is part of his due diligence duty to ensure he is making an informed decision. George Pettie, a certified inspector and 27 year member of the American Society of Home Inspectors (ASHI), and owner with his wife Linda of the Lake Pointe Inn in Garrett County, MD., claims that the SELLER should engage an inspector for three reasons:
- It demonstrates the seller is offering full disclosure of the condition of the inn. This provides the seller with protection in the event of a claim later.
- A seller inspection provides a report accuracy defense in the event the buyer's inspector overinflates the seriousness of a deficiency.
- A completed report with a correction plan of action, or quotes to correct the deficiencies, prepared in advance, tends to neutralize the complaints of the buyer. It also initiates the negotiation phase of the inspection process.
Hiding physical defects from the buyer, once discovered, will throw a genuine roadblock in the process, and you may lose one of those few precious buyers out there. But offering evidence of a strong commitment to full disclosure will build the trust relationship with the buyer.
Having an accurate inventory of the furniture and fixtures that will transfer is another element that will build trust with a buyer. Removing personal items early in the selling process, before the buyer falls in love with your grandmother's armoire, and having a detailed list of what will remain at the inn will demonstrate to the buyer that there will be no hidden surprises later.
In many inn transfers, there are often pre-paid expenses that may require reimbursement by the buyer at the settlement table. Magazine subscriptions, internet marketing membership fees, website links, and association dues are typical of pre-paid expenses incurred by the seller to be reimbursed by the buyer. Unopened cases of amenities and gift shop inventories are also typically paid for by the buyer if not a part of the total transfer. Having a complete record during the course of the due diligence process will prevent any costly surprises to the buyer. Keeping accurate track of outstanding gift certificates, which the buyer will have to honor and deserves compensation, will offset some of the pre-paid expenses and show a willingness of fair give and take by the seller.
Reflecting back to the days when you, the veteran innkeeper, were looking for an inn...ask yourself...what were the things that got in the way of a smooth transfer? We've all heard the horror stories of an incomplete inspection, numbers that didn't jive, surprises that really angered us. When selling your inn, ensure that the information that you offer accurately represents your inn and its business and does not jeopardize the chances of a timely and financially rewarding transfer.
Copyright, Scott Bushnell, 2006. All rights reserved.