The Rewards of the 5 Year Plan
The Rewards of the 5 Year Plan
By Scott Bushnell
(Originally published in April, 2006; Arrington's Bed & Breakfast Journal)
Seldom, as aspiring innkeepers seek to fulfill their dreams of owning a bed and breakfast inn, does the thought of selling the inn even come to mind. The thought of getting out is so far down the to-do list that it is often not even on the list. But this can be a mistake that will catch up to them later.
The long-term implications of every decision made during the course of an innkeeping career will make the final reward of innkeeping even more satisfying. At the very least, having a concrete and recorded plan beginning with the 5th year before getting out is essential. Since the average innkeeping career is only a couple of years longer than 5 anyway, planning for getting out while you are still getting in is a wise exercise.
The ultimate goal when selling your inn is to maximize the return on your investments made at the purchase and with each capital and operational expenditure made during the course of your innkeeping career. Since the final valuation of your inn at selling time is a combination of both the value of the real estate and the value of the business you have developed, maximizing the combination of the two fits your strategy.
Deciding when your exit will occur isn't always a crystal ball event. Having a grasp of your life goals will certainly steer the decision. If your goal is to make the innkeeping trip a life-long journey ending with passing on the family business to the kids, the timing of your exit may coincide with their ages and readiness. If your goal is to be out of the business by a certain age in order to enjoy travel or the grandchildren, counting backward 5 years will give you a starting point. Be aware that a hot topic of conversation among innkeepers is burnout. Taking care of yourself during the journey, and having a grasp of the danger signals of burnout, will help avoid the unacceptable alternative of wanting out NOW. A hurried and ill-planned exit will result almost certainly in missing the ultimate goal of financial reward.
The First Two Years: In the early years of your 5 year plan, the focus is on preparation...of the inn, of its records, and of its opportunities.
Stepping out of your innkeepers' shoes for a moment and thinking like a buyer will offer some insights helpful with this preparation. Think back to what attracted you to your inn. Your buyers will be doing the same thing as they determine what is typically important to them:
-Profit history and potential usually stated in terms of Occupancy, Average Daily Rate (ADR) and Cash Flow
-Believable and trusted numbers, represented in the accepted chart of account format
-Favorable Market and Trend analysis of the region
-Suitable Owner's Quarters
-Opportunities for additional growth, both physically and profit
-Curb appeal
-Zoning and regulatory irregularities resolved
-Future salability potential
-Inspection points of contention resolved
-Community, schools, cultural stimulation that fill their personal needs
-Reputation, prestige and respect of the inn within the community
Having a critical eye for, and evaluating your readiness in EACH of these criteria, with objective input from respected others, is the beginning of the preparation process. Knowing the shortcomings and building an action plan is only the start. ACTING on the improvement plan needs to happen in the first two years of the 5 year plan. Delay will jeopardize the chances of achieving the ultimate goal...maximizing the financial reward.
Toward the end of the first two year period, as improvements in the plan take shape and become real, it is appropriate to get a professional valuation of the inn and its business. Whether done by a reputable appraiser in the area who is familiar with commercial businesses such as inns, or contracting with a consultant expert in the industry, keep in mind the ultimate goal of maximizing your financial return with a realistic likelihood of achieving that value. Also be prepared for that number to be somewhat lower than what YOU feel it is worth. Innkeepers tend to over-value their inn because of the years of sweat equity and love they have put into the venture.
Year 3 of Your Plan: The third year of your 5 year exit plan is the time to assemble your team. Bringing your accountant into the plan allows for long term planning of your financial outlook. Assessing the tax impact of different financial alternatives will allow for keeping as much of the proceeds in your pocket instead of Uncle Sam's. We all love Uncle Sam but let him get his money elsewhere. Your financial adviser will be very excited to hear of the potential of future investments and can be helpful with your estate planning. Your lawyer will be most helpful with the details of real estate transfers, financing agreements made between the two parties and representing you in negotiations with the buyers' representative.
Those team members are easy to find and to add to your team. The decision to find your marketing partner is often fraught with subjective variables that often distract from the singular goal:
Who can help me find a qualified buyer and help me meet my timetable and financial goals?
Since your timetable is already established by the forward-thinking usefulness of your 5 year plan, and since the value of your inn has already been set with the valuation of your inn at the end of year 2, the remaining decision is finding a partner who can best market your inn and find that qualified buyer.
Qualified means finding a buyer who is willing to commit to the big jump, and able to financially afford the leap. Assessing sincerity in the commitment to move ahead and the financial wherewithal, will avoid the wasted time of those only toying with the dream of inn ownership.
Finding a qualified buyer within a reasonable timeframe, therefore, is the criteria for the selection of a partner to market your inn. You may be able to do this step yourself. You may already have interested parties waiting for you to initiate the dialogue, or you may want to get into the myriad of internet marketing alternatives or publications that offer such a service. This is most likely the lowest cost alternative, but the likelihood of success depends on the breadth of the network within to market. The time an innkeeper has to commit to the effort can also be jeopardized by the busy nature of daily operations.
A consultant to market your inn is another alternative. Armed with a large sphere of influence of networking alternatives within the inn community is certainly a major strength of using an industry consultant, although a consultant may not know the local market personally and, although familiar with financing avenues, may not know the local banking alternatives. The fees for the services of a consultant may vary depending on the complexity of the transactions.
A local realtor/broker knows the region and the local financing market, and if the business value of the inn is minimal, may be able to successfully sell the property in the residential market. Their sphere of influence within to market is worthy of investigation to understand how they intend to seek qualified buyers. Keeping the transaction discreet in the local area is critical to avoid loss of employees and guests and must be a topic of expectation setting as well between the innkeeper and a local realtor. The fees may be negotiable depending on the size of the selling price.
Remember the goal when assessing the selection of your marketing partner...Who has the likelihood of success in finding a qualified buyer and still meet my timetable and financial goals? That's your partner.
Years 4 and 5: This can be the period of time loaded with ups and downs! You will most likely feel just about every emotion a human can endure! There will be excitement, disappointment, anger, hope, frustration, fear, and ultimately joy. You know what? The buyer is going through the same set of emotions! Both parties are best advised to keep the common goal of getting to closing in mind as each endures the roller coaster of anticipation.
For the seller, this is a time to return to the focus of keeping the inn in salable condition and continuing to grow the business while your marketing partner does his thing. Your marketing partner will need your financials (in the standard format), marketing materials such as brochures, regional marketing materials, and pictures of the inn, and the past two years of tax returns. Each month, provide your marketing partner with updated financial information as it develops.
This is also the time to take an inventory of the inn, all of its furniture, fixtures, decorations and items in each room. A complete list of what will transfer, and what won't, will be needed as soon as a buyer is located so get this ready early. This is also the time to remove any items that will not transfer. Keep trust with a potential buyer high by presenting exactly what will transfer. Your lawyer, accountant, and your marketing consultant need this list as well.
This is a difficult time when making capital and operational expenditure decisions. By all means make those decisions to move forward on those expenses that affect the attractiveness and curb appeal and the systems of the inn. If the water heater is on its last legs, replace it. If the dryer breaks down, fix it or get a new one. These kinds of problems will be detected in the buyer's inspection, anyway, and to avoid negotiating hassles later, take care of them now. Keep a list of these new repairs and appliances to impress a potential buyer and give a copy to your marketing partner to assess whether the valuation of the inn needs to be adjusted. Making large capital expenditures such as room additions or bathroom renovations will effect the valuation of the inn and you may not get the return for your investments in the short amount of time before settlement. Talk to your accountant and marketing partners before you jump on these actions. At the very least, you may wish to share your opportunity plan to the buyer for their consideration.
There is some sound thought of hiring a seller's inspector to evaluate the condition of the inn before a buyer's inspector comes in and jumps on every defect whether justified or not. Every buyer will hire an inspector, who will, by their very mission, uncover every dust bunny under every bed. Having an inspection list already in hand, with costs and ideas of dealing with the gigs, defuses the fiery debate potential and steers the effort to the more constructive negotiations.
Local inspections by the health department, code enforcement agency and fire department will also provide you with a list of details for correction or negotiation. Forego any surprises which might jeopardize the deal by having these inspections done in year four of your plan.
Then the action begins! Your marketing partner will call with a potential buyer. Typically a qualified buyer will spend a complimentary weekend at your inn to get a feel for the property and its personality. You will want to spend a couple of hours with them with a tour and answering questions. Talk to your marketing partner as to how deep into the details you should go and for advice on what information to share is appropriate. If you have employees, it may be difficult during this stage to maintain confidentiality.
Once there is a qualified buyer interested in your property, and a letter of intent is received, the due diligence required to make informed decisions begins. Remember that the buyers are not familiar with your operation and, if newcomers to the industry, may even ask questions having little to do with the deal such as cancellation policies and employees. This is the opportunity to build trust and a relationship which will extend beyond the settlement date.
For a smooth transition during this period of time, stay focused on the common goal of both buyer and seller...to get to settlement.
Although your 5 year plan is well thought out and executed, it will most certainly NOT happen on the last day of year 5. Depending on the success of your marketing partner and the real estate market at the time, it may move forward at lightning speed or drag out for what seems to be forever. Have your contingency plans in place. If it happens quickly, how will this affect your personal priorities? Will you have a place to move to? What about the kids' school? You will be happy you planned for this pleasant, but unexpected, eventuality before the lightning struck. The converse is worth considering as well. If your sale drags out beyond your expectations, you may wish to reconsider your marketing partner's capability or approach to the effort. You may need to take additional steps hiring additional help to alleviate your feelings of burnout. Planning for this unexpected disappointment will also prevent the undesirable alternative of lowering the fair selling price of the inn unnecessarily.
You've heard the adage "Plan your work and work your plan". You are most likely making the biggest investment decision of your life when you opt to exit the inn business. This planning work will reap deserved rewards that will put the satisfactory touches on your hard-earned career as an innkeeper.
Copyright, Scott Bushnell, 2006. All rights reserved.