Tax Time means Exit Strategy Time

I hate this time of year when the thought of doing taxes pops into my mind several times a day, especially with all the reminders that bombard me.  H & R Block commercials, 1099’s and statements arriving in the mail, commercials of the scams of companies that can reduce your tax burden with the IRS.  W-2’s showed up yesterday from my payroll service.  AAAACCHHH!

But it is time to also self-reflect on an innkeeper’s plans to exit the Bed & Breakfast scene and understand the TIMING of that exit.  I have been a proponent of the 5 Year Plan to exiting the business, and the first 3 years is to ensure your taxes are clean and clear.  When you are in the due diligence process, the buyer’s representatives and lender will want to see 3 years of taxes…and you will want them looking spiffy!

Marilyn and I were innkeepers and fully understand the emotional pull to reduce income taxes each year.  There is definitely the temptation to expense (instead of capitalize) that new roof or charge up some restaurant visits as inn Travel & Entertainment expenses.  But if you plan on selling your inn within the next 5 years, there are preparations to be taken NOW to ensure the selling price is what your property deserves.

It all boils down to increasing Net Operating Income.  The value of your business activity is based on how much NOI your inn’s performance delivers.  At the “rule-of-thumb” cap rate of 10%, a $10k increase in NOI can result in a $100,000 increase in sale value.  Sacrificing a few short-term tax bucks for the big benefit is well worth the effort!

Here are a few ideas to improve your NOI:

  • Remove personal expenses from inn expenses, such as supplies and food
  • Report all revenues, including cash sales
  • Only pay yourself what you need…but have something in there.  If there is no payroll included in the expense report, a lender will insert some, perhaps too much, and reduce NOI.
  • Consider whether you are overstaffed and can reduce unnecessary payroll labor and associated withholding expenses.
  • Keep depreciation, income taxes, rent you pay yourself and other legitimate expenses in your expense schedule to avoid a buyer’s lender from inserting too-high estimates.
  • Capitalize major renovations and equipment purchases rather than expense them.  Your accountant can help you with appropriate practices.
  • Of course, do NOT let your marketing practices falter.  Keep increasing Occupancy and ADR!

I hate this time of year too.  But thinking ahead and keeping your financial records in order will grease the skids when it is time to exit the business.    Scott

Comments?  Do you have other NOI increasing ideas?

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