Gross and Net

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What do you think it means when someone asks you this question? For your business, and you are for sale...for example.

What is your gross and net?

(Am I wrong in thinking the net is none of your business, or is that just being weird? I mean the net depends on our mortgage etc right?) Isn't gross the only figure we can share really. Sure we have things we pay for to get to the bottom line, but that is what WE pay for, example WE clean all the rooms, WE do all the yard work, WE etc etc...

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Joey Camb's picture
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I think as well I would make them sign a non disclosure think that would put off some lookie lous as we call them.

Its a bit different in the UK as a lot of the larger B&B's 8 beds or more are limited companies and you have to send in all your accounts to the government and anyone can see them anyway so secrecy is a bit moot.

they do this to protect other assets ie in one case his parents have put in money, if it failed it could take all the parents assets - so yet definitely prevent that! another lady has serviced apartments part owned by her brother which means if her B&B failed at least she would have those assets and protect the brother as well - you have to think about all these things.

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OnTheShore's picture
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No one wants to reveal enough information that would allow you to figure out the highly personal detail of just how much money they were making (or not making) in the business...

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Harborfields wrote:

No one wants to reveal enough information that would allow you to figure out the highly personal detail of just how much money they were making (or not making) in the business...

That's the thing though, selling a business is a business transaction. It is not personal. Yes, we put our hearts and souls into running our B&B's and care personally about what we do, but unless we're doing this for the lifestyle, it's business.

It truly surprises me to hear the way it works otherwise in some markets.

And I heartily agree the buyer needs to be proven serious first.

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happyjacks wrote:

Harborfields wrote:

No one wants to reveal enough information that would allow you to figure out the highly personal detail of just how much money they were making (or not making) in the business...

That's the thing though, selling a business is a business transaction. It is not personal. Yes, we put our hearts and souls into running our B&B's and care personally about what we do, but unless we're doing this for the lifestyle, it's business.

It truly surprises me to hear the way it works otherwise in some markets.

And I heartily agree the buyer needs to be proven serious first.

One of the places here in town was refused access to tax returns. That's one way of checking the gross receipts and write offs. The owners said there was personal and other business info on their tax forms so no way would they hand them over.

When we asked for tax returns here we found that the sellers had been adding the lodging tax into the the gross receipts. Sigh. That was about a $10,000 correction in gross.

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Harborfields wrote:

No one wants to reveal enough information that would allow you to figure out the highly personal detail of just how much money they were making (or not making) in the business...

Right, a fishing expedition...

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When it was clear we were serious buyers, we were given an expense sheet including oil, electicity, food, phone, supplies, services (lawn, etc.)   just expenses related to running the business.  Mortgage is the buyer's problem.  So is home insurance.

 

But it is reasonable to ask how much it takes to run the house and business.

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TheBeachHouse wrote:

When it was clear we were serious buyers, we were given an expense sheet including oil, electicity, food, phone, supplies, services (lawn, etc.)   just expenses related to running the business.  Mortgage is the buyer's problem.  So is home insurance.

 

But it is reasonable to ask how much it takes to run the house and business.

I have all this info readily available and I do provide it. I have it broken down by month, annually and for each year we have been in business. 

I just don't think giving a "NET" figure is accurate for the next person who buys the inn. The past owners hired everything out, we don't. So our NET and their NET is totally different.  I guess for me when I am asked the super deep details and I don't know you from jack, it always puts me off. 

When I say this, I have had four or five of late ask for everything including the kitchen sink, and not even have a deposit to purchase a B&B. So I wanted your thoughts. We are transparent, we want this business to succeed, we were lied to and figures were falsified AND that was under the guise of a B&B broker. So don't trust THEM as far as you can throw them. (I say this one behalf of THREE innkeepers here on this forum who had this same experience). crying

So absolutely get as much information as possible. But prove you are serious first...

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Joey Bloggs wrote:

 

So absolutely get as much information as possible. But prove you are serious first...

That's the nub right there.

OnTheShore's picture
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One factor that might make a difference is in what legal form your business is organized, e.g. some type of corporate entity vs. a sole proprietorship.

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I disagree. Gross means nothing without net. It's true that net is dependent upon how one runs the business, but so is gross. Gross revenue can vary wildly between identical properties depending on how the business is run -- depending on how the expenses are incurred.

Any investment property and business I have ever purchased or even looked at seriously, I've always seen a pro forma first, ie a breakdown of income and expenses. I would never buy a business without it.

Operating expenses only, though. Do not include mortgage payments, capital expenses, or owner's draw.

Incurred expenses only. If you do your own snowplowing, for instance, don't include an expense line for what it would cost if the buyer had to hire that out.

I would also NOT give a detailed breakdown of expenses. Lump amounts for various categories, ie Advertising, Food, Utilities, Property Taxes, etc. 

Wait a minute -- are you just talking about on the public listing? If so, then gross only. If you're talking about an info package for legitimate prospective buyers, then I would expect to see a pro forma with net operating income.

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I think when someone looks at a property, at least some of the folks JB has dealt with, they essentially want complete access to everything. Tell me how much you make and how much you spend. All of it.

Most places we looked at had the pro forma info you mention. We went from there. But, most of them also said, 'We can't tell you how much we spend on food or linens or any of that because you might do things differently.'

All we really wanted to have was a ballpark. Guesstimate what you spend per room on breakfast. Nope, nothing doing. So we relied on industry standards we got from PAII.

There was a housekeeper here, they wouldn't tell us how many hours she worked nor how much she made and they also took all of her personnel records with them. Someone did the lawn and the snowplowing and we had no idea what they were paid -  the workers told us when they showed up, unannounced, to do the work. (How nice to see someone snowplowing the driveway that first weekend we were here!)

We did find out during our training period that we were going to be spending a lot more money. We like to be warm in the winter and have the lights on while we're awake, something they did not do.

During one breakfast they showed us how each guest got one tablespoon of diced ham and no more. There were so many things like this that just annoyed the heck out of me, but yes, there was no way their expenditures were going to be the same as ours.

Still, I can understand when a buyer wants a ballpark.

Madeleine's picture
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Remember the place we looked at where they gave us a year's worth of their checking register and told us to figure it out for ourselves? We did. And there was NO WAY that inn was paying for their expenditures, which were way over what they said their gross was.

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Cambs I CAN give the costs of electric, cabletv, etc. But not a FIGURE that is NET. 

Generic's picture
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They can ask, doesn't mean you have to provide.

Basically gross is what they need. Net depends on too many factors, like your costs of doing business (mortgage, etc). But you should give them figures like fixed costs (electrical, heating) and then let them decide how they are going to spend the money. You can explain to them that costs will vary according to how they decide to run the business. (Which is why I sell the house and not the business, so they can't ask me any of that!)

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Sugar Bear wrote:

They can ask, doesn't mean you have to provide.

Basically gross is what they need. Net depends on too many factors, like your costs of doing business (mortgage, etc). But you should give them figures like fixed costs (electrical, heating) and then let them decide how they are going to spend the money. You can explain to them that costs will vary according to how they decide to run the business. (Which is why I sell the house and not the business, so they can't ask me any of that!)

Well I hope that will work for me when the time comes as I plan to sell for the price of the house and the B & B is a bonus - BUT they have to WANT to do a B & B to get it.

Joey Camb's picture
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see id expect to give my accounts which would break all of that down.

Madeleine's picture
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Yes, gross is all you can tell the prospective buyers. And if they don't get why then you need to educate them as to the points you just mentioned. Newbies do not know these things no matter how much research they think they've done.

If they have questions like: how much do you spend on food or other things that are specific to you then tell them exactly what we were told, 'You do things the way you want, you may spend a lot less or a lot more. The industry standard is...(whatever it is!)'

We were given none of the 'insider' stuff. I might give them an average electricity or heating bill.

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Madeleine wrote:

Yes, gross is all you can tell the prospective buyers. And if they don't get why then you need to educate them as to the points you just mentioned. Newbies do not know these things no matter how much research they think they've done.

If they have questions like: how much do you spend on food or other things that are specific to you then tell them exactly what we were told, 'You do things the way you want, you may spend a lot less or a lot more. The industry standard is...(whatever it is!)'

We were given none of the 'insider' stuff. I might give them an average electricity or heating bill.

 

Even if it is just a house, and not a business, a buyer can still ask how much a seller pays for electricity or oil.  Food and supplies are, of course, a business specific issue.  We asked and were told.  I don't think we would have bought without a business income and expense disclosure.

Madeleine's picture
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Yes, those things. And the taxes. But no one would tell us the rest.

We looked in NY, CT, NH & VT.

We asked. Everyone said we would do things differently.

Some people were way more forthcoming. Telling us what they paid for marketing and what they spent it on. Maybe what they planned to spend on food.

But we didn't get the whole picture from anyone.

That was called due diligence. We had no idea what we were supposed to be checking on!

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