Make the Leap of Faith Somewhere...But Not Into Your Inn
Make the Leap of Faith Somewhere…But Not Into Your Inn
By Scott Bushnell
Getting to the edge of the inn-purchasing cliff, not being able to clearly judge the depth of the ravine, and making the purchasing leap anyway, does not have to be as scary as it may seem. Often, the security of a corporate job is comfortable and seemingly risk-free compared to a commitment to the entrepreneurial leap into inn ownership. You can, however, maintain that feeling of security and confidence during this process with thoughtful and planful financial analysis and planning.
Assessing the viability of your selected inn is an important first step in the purchase process. Using the financial and operating information provided by the seller, it is appropriate to confirm the reasonableness of the numbers provided, tailor those figures into the chart of accounts format standard in the industry, create a realistic financial scenario by looking for the opportunities hidden in those numbers, and predicting the viability of the inn. After paying the operating and fixed costs of the inn, is there money left over to pay the mortgage, depreciation impact, taxes due, and reasonable income for the owners?
Once viability is analyzed, a sensitivity analysis can be conducted to see what happens to net operating income (NOI) if occupancy goes up (or down) a couple of percentage points or if the Average Daily Rate (ADR) changes by $10 with a price increase…or $20, or $30.
This analysis becomes increasingly valuable when considering several candidate inns that fit the profile for which you are searching. Understanding the financial condition of the inns and comparing their potential for increasing NOI is a key piece of the purchasing puzzle.
(Copyright, Scott Bushnell, 2006, All Rights Reserved)