Inn Financing

Obtaining Valuations Prior to Marketing a B & B or Country Inn

PRINTABLE VERSION – Should I Order an Appraisial Prior to Listing My Inn for Sale

 By Rick Newman, Managing Partner of Commercial Capital Network, LLC

All Bed & Breakfasts/Inns are unique by design; in fact, it is that special and unique quality that distinguishes one Bed & Breakfast/Inn from the next. Innkeepers invest their creative energy and capital over time to create a welcoming and hospitable environment that is unique to their community and valued guests. While the charm and ambiance of an inn add to a patron’s experience, such intangibles have only an indirect effect on the actual value. So, how can an innkeeper determine a realistic, fact based asking price before marketing their inn for sale?

A knowledgeable “B&B Industry Specialist Realtor” should be engaged very early on to consult on matters of value and how best to prepare the property itself and prepare financial data prior to offering the inn for sale.  A good number of these Realtors have been innkeepers themselves, and are intimately familiar with their market area.  They can expertly support the initial asking price with their own analysis of the inn’s financial performance, real estate improvements, good will, furniture, fixtures and equipment (FF&E).  It is important for the expert to  consult with innkeeper throughout the process in order to manage their expectations.

I cannot overstate how important it is for an innkeeper to accurately determine the market value of the business prior to making the inn available in the marketplace. Arbitrarily assigning a value to a business and its assets, without collaborative due diligence is imprecise and cannot be a successful approach. In my view, this could lead to a large gap with an appraiser down the road establishing a value of the business and its assets much different than what the innkeeper expected. The innkeeper or their representatives must be able to defend the asking price with proper documentation to establish the value of business assets.  It is also necessary that Profit & Loss (which agree with three years Federal Tax Returns); be reviewed to document the inn’s performance/viability over time.  Any serious “qualified buyer” will require the aforementioned proofs to begin their own due diligence in consultation with their own professionals.

Where the rubber meets the road: Ultimately, a “Bank/Lender Approved Appraiser” will be selected by the lender to establish the value of the business and its assets. In most cases, the “Commercial Value” of a hospitality property will be largely determined by examining comparable sales and financial data for actual closed sales of “Comparable Properties” in the past two years. The bank’s appraiser will make adjustments to account for location, physical amenities, cash flow and so on; but the final and most important determinate of value is the inn’s historical ability to generate income; this value will be referred to as its value as a “Going Concern” or its commercial value.

What happens if the appraised value is determined to be less than the contract sale price?

Answer: The appraised value will be used to determine the actual loan-to-value, rather than the contract price, and the innkeeper’s expectations will not have been met. When a property’s value is determined by the bank’s appraiser to be less than the contract price, the parties to the contract may decide to re-negotiate the sales price and modify the contract. One can imagine the anxiety the parties and their representative’s feel when this happens. The chances of this occurring are significantly reduced with good preparation and collaborative due diligence.