Financial disclosure?

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Redbirds's picture
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Good morning, all:

We have our inn for sale, and have a very interested buyer who has asked to see some financial information.  Before we go to our attorney and our accountant, I thought I might pose the question to the collective wisdom of the group.

What, and when do you provide?  After earnest money is deposited?  Before?

Thanks in advance.

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Anyone care to share any creative financing solutions?

With the interest rates so low on a home mortgage, we had discussed even selling as a private home right now. 

You can buy cheaper than you can build. 

If you were selling your inn right now, what and how would you do it? It is not a high occupancy inn. It is a lovely inn, in a lovely location. Thx.

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Lease to own for a new potential innkeeper?  We considered a couple options like that before we built our inn.

gillumhouse's picture
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As someone with "no dog in the fight" I would worry about someone THINKING they could make a go of it and running my great reputation into the ground before going out. Lots of very deep potholes with that route. If it was me? Outright sale is the only way I would go.

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I would always leave the option of selling as a residence open. If you really want out, then take either kind of offer. However, I am not sure your place would be for the 'average' family. Where as ours, with only 4 bedrooms and nothing that says B & B any more would be a more likely candidate. However that said, I guess I can stop looking because yesterday my hubby says, we are never moving. I am not about to have to set up another workshop let alone move all this stuff out of here. They can roll us out. Or we have an estate sale when we head to assisted livingwink  I now agree. I don't see me packing and moving anything out of here.

Tom
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When people ask about resale, I tell 'em our "house" would be perfect for a rich doctor with several wives and some spoiled teenage children.  Six BR, 9 BA, 800 m2

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Our house is the same deal...we renovated it so that it would be an updated house with plenty of baths and closets, not a truly commercial looking proposition.  And it is not that huge....only 4 bedrooms and about 3200 sq ft.  Smiling   There are a couple of things that are a giveaway that it was a B&B - brass private signs on a couple of doors and deadbolt locks on all the bedroom doors.  hahahahaha......

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gillumhouse's picture
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In my area, getting a comp is difficult - period. We needed an appraisal for a loan and they used comps from 25 miles away that are across the mountain AND in a different County. Plus they came in so low-ball we had to break it into 2 loans. I am the only B & B in my County. The other B & Bs that have been in this County over the years have closed or sold as residences.

My plan, if I live long enough to sell, is to sell for the price of a residence - the business & furnishings are bonus. I will not have space for it when I leave this house and I want it to survive and debt will not help that happen. I am in a different category than JB and others here - I am past prime and kids are grown so I do not need much besides clearing MY debts and enough to buy a small place (or a trailer to put in the trailer court) because I do not want to leave town.

Tom
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If I were buying, I would expect open books.  I would not expect to receive physical copies of sensitive, private business information, but I would expect to be able to sit down with you and see three years of Schedule C and related (Depreciation and amortization) and go over the booking engine data. 

Net profit is a little flexible; seeing what the inn grosses and what are expenses will tell a buyer how his style will match yours.  Last year we spent a bit of $1000 on local wine served to guests.  We got major repeat business from it and sold some wine at retail as well.  Perhaps a buyer for my inn would economize there and run a different style (box wine?), so he needs to see where the money goes.

Breakfast Diva's picture
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Your net profit is one of the key numbers. This is the figure after which you have removed all expenses the business pays for except for mortgages and taxes (there might be something else in there I'm forgetting.

A rule of thumb is if you're selling it as a business and not a lifestyle, each $10,000 is approx $100,000 of selling price, i.e., a business with a net profit of $90,000 could justify an asking price of $900,000. That is if there is no deferred maintenance issues, etc.

 

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Breakfast Diva wrote:

Your net profit is one of the key numbers. This is the figure after which you have removed all expenses the business pays for except for mortgages and taxes (there might be something else in there I'm forgetting.

A rule of thumb is if you're selling it as a business and not a lifestyle, each $10,000 is approx $100,000 of selling price, i.e., a business with a net profit of $90,000 could justify an asking price of $900,000. That is if there is no deferred maintenance issues, etc.

 

That is a 10 cap rate ( net income / price, remove the decimal). In this low interest rate market, you should do better then that. Or at least the residential rental and commercial real estate or more of an 8 cap now. Hopefully this helps us too. Smiling

Edit: I would be using net income in my formula. Income - expenses = net income. That is before mortgage payment. So as if the place was free and clear. 

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Essentially, that means I should pay someone to take the biz off my hands.

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Breakfast Diva wrote:

Your net profit is one of the key numbers. This is the figure after which you have removed all expenses the business pays for except for mortgages and taxes (there might be something else in there I'm forgetting.

A rule of thumb is if you're selling it as a business and not a lifestyle, each $10,000 is approx $100,000 of selling price, i.e., a business with a net profit of $90,000 could justify an asking price of $900,000. That is if there is no deferred maintenance issues, etc.

 

That is the thing, I want to shout it out! No deferred maintenance here. Unlike other inns that are worn out and ready to just walk away, we are operating and doing reno's and maintenance to make it ever better! We continually strive to improve the business in every way! So for that, we would like someone who would really love this old girl...and appreciate that.

Bob O, I am not replying on the other thread, as I was sharing for sale info, and not wanting to get personal there. Hope you understand.

We are now in our 10th year, and i think about all the things we have done here...done RIGHT, not bassackwards like some who have come before us in this inn.  heart

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Basically if selling as a business the business needs to support the mortgage, so whatever that may be after they make a hefty down payment.

That is what they want, no liability if it is an inn.

We may have to sell as a home if we don't get a buyer here, or you will have to clean up our ashes before long... Smiling We lowered our price last night. Although we are willing to negotiate and lower in person, there is a threshold that we are over to bring in lookers for that price range. So we went an ahead and did it. Bit the bullet. 

The so-called investment for us is not an investment after all. Any homes bought between 2004 and 2009 are the ones hardest hit, and some having to even bring money to the table at closing. This from our realtor, who we may list with as a private residence, since the financing is not there for commercial properties at the moment. And has he said NO COMPS for 8 bedroom 8 bath in this area. This was yesterday and I told him "I just said that yesterday! Exactly!"  Which means, the bank needs to do an appraisal and it WILL NOT COME IN as high as we all feel it should, due to the lack in comps.

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Joey Bloggs wrote:

Basically if selling as a business the business needs to support the mortgage, so whatever that may be after they make a hefty down payment.

That is what they want, no liability if it is an inn.

We may have to sell as a home if we don't get a buyer here, or you will have to clean up our ashes before long... Smiling We lowered our price last night. Although we are willing to negotiate and lower in person, there is a threshold that we are over to bring in lookers for that price range. So we went an ahead and did it. Bit the bullet. 

The so-called investment for us is not an investment after all. Any homes bought between 2004 and 2009 are the ones hardest hit, and some having to even bring money to the table at closing. This from our realtor, who we may list with as a private residence, since the financing is not there for commercial properties at the moment. And has he said NO COMPS for 8 bedroom 8 bath in this area. This was yesterday and I told him "I just said that yesterday! Exactly!"  Which means, the bank needs to do an appraisal and it WILL NOT COME IN as high as we all feel it should, due to the lack in comps.

Check with a few banks. I have found that money is now available for commercial loans. 6 months ago everyone was saying thanks for calling. Now I have 3 banks that wanted to talk and one commitment letter. The bigger banks have money for under 4%, 5 year fixed, 25 year amortization. I was pretty happy as just 18 months ago, I got 5.25% on the B&B. 

That would be a commercial mortgage. I do not think they take into account the business. You have to see that from their side also. They don't get to repossess the business. I know on an irregular apprasial they do add value for more size so I think you do get something for those extra baths. 

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My friend have been offered a 15 year fixed at 4.5% for a new mortgage. Of course $4K in closing costs Sad

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As a residence, we just re upped at 3% for 15 years.

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EmptyNest wrote:

My friend have been offered a 15 year fixed at 4.5% for a new mortgage. Of course $4K in closing costs Sad

Commercial? I could do 10 years at 4.7% that is why I opted for 5. 

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Yes business/commercial. No one else around here will do that for them.

Breakfast Diva's picture
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at the PAII conference, the expert (this guy knows his stuff) said that because of the lack of comps, they have used comps from out of state. I don't think it happens all the time, but there is precedence.

Madeleine's picture
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That's the spot we're in in re housing prices. Unless the business can support the mortgage (with a hefty downpayment) no one can afford to buy at the price we paid 9 years ago.

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During our search, we asked for a non-disclosure agreement upfront so we could see the basic financials (occupancy for as far back as they could provide, utilities, income by room and special add-ons, property taxes, etc....) so we can see if the income matches the sale price. So far only one place is over-priced. Part of the need for the numbers as soon as possible was to put our business plan together for the loan package (still waiting for the lenders to make up their mind).

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ThuderingWind wrote:

During our search, we asked for a non-disclosure agreement upfront so we could see the basic financials (occupancy for as far back as they could provide, utilities, income by room and special add-ons, property taxes, etc....) so we can see if the income matches the sale price. So far only one place is over-priced. Part of the need for the numbers as soon as possible was to put our business plan together for the loan package (still waiting for the lenders to make up their mind).

Did you ever find a lender willing to loan for a B&B?

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ThuderingWind wrote:

During our search, we asked for a non-disclosure agreement upfront so we could see the basic financials (occupancy for as far back as they could provide, utilities, income by room and special add-ons, property taxes, etc....) so we can see if the income matches the sale price. So far only one place is over-priced. Part of the need for the numbers as soon as possible was to put our business plan together for the loan package (still waiting for the lenders to make up their mind).

Three years is all that is required by a seller. That means a copy of their Tax return, not just their own personal spreadsheet or reports with figures.

The thing with B&B's is there ARE NO COMPARABLES for appraisals, so for example, how much does it cost to ADD a bathroom to a guest room? Do you think the actual value is used in an appraisal, NO.  So for us 8 bedrooms, 8 bathrooms - the nearest appraisals were 5 bedrooms 4 bathrooms. Think about that additional cost for those extra bathrooms! 

A B&B shouldn't be selling on the real estate alone. The business is established, and operational. There is much to think about.

Silverspoon's picture
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Around here the real estate is scarce and more valuable than the business so many B+B/Inns are bought up and converted back to private homes.  I guess it just depends on the location.  The lodging industry here is seasonal, with most of the business generated in 4 months so someone looking to make the finances work by using a bank loan might be in trouble.  Many deals here involve the current owners taking back paper to make up the difference when a B+B is sold as a business.

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Understood. Some properties are being marketed as both a residence AND a B & B. Two we looked at are in this category. Both have clearly defined prices depending on what you are buying (with out without the guest suite furniture, dishes, supplies, etc......).

And just so you are aware, there are lenders who are now asking for more history if the loan is a Commercial or SBA loan. They want to see as much as possible.

Madeleine's picture
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Make sure the buyer can afford the price before handing over anything. Get a signed non-disclosure agreement so they don't go blabbing everything on their FB page.

Once you know they can afford it then you can turn over financials.

We ran into one place that refused to show financials until we made a full price offer. They finally sent us a huge envelope with their checkbook register in it and told us to figure it out for ourselves.

10 years later the same people still own the joint so THEY weren't serious sellers.

Breakfast Diva's picture
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I agree with JB. Make sure the people are qualified buyers. Your agent will be of help with that. Then you can give them ALL the numbers. Without all the info, a buyer can't make an informed decision on whether it's a good investment.

You should also have your inventory/exclusion list available to them.

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If you are for sale you need to have all this ready to roll, including a full list of conveyances, you may be surprised how much ALL OF THAT adds up to, and will help with your sale price.

You can have a non disclosure statement that they sign before getting the info. The finances will make every bit of difference whether a buyer is interested. No one will give you earnest money without seeing the financials.

PS Redbird can you add an "I" to the title of this thread, please. Thx

Redbirds's picture
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07/26/2008

Thanks for all of the good advice.  We're proceeding with the gathering of documents, having our attorney prepare the non-disclosure and non-compete clause, etc.

I added the "I" missing from "Financial" - typing too quickly.sad

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