Due Diligence: What did you miss?

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myschae

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Hello,

My husband and I are in the process of building a plan to transition over from corporate (non-hospitality) over to buying a bed and breakfast. We are in a preliminary evaluation for one now and we will be travelling for on onsite visit within a couple of weeks. Meanwhile, I'm trying to learn everything I can about how best to evaluate the business and do proper diligence.

When you were setting up your business or evaluating a purchase, what due diligence are you SO glad you did do and was there anything you wished you'd done?

Thank you for your help!
 

gillumhouse

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I was a start-up so have no advise.
 

GoodScout

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- Review the financials with a fine tooth comb, and expect exaggerated numbers for occupancy, ADR, etc. Filed tax returns are better than Quickbook P&Ls.
- Be very, very specific with your inclusion/exclusion list. Take pictures. Our sellers sold their place with all the furnishings and everything on the wall included, and then literally went out and cleaned out the good stuff and replaced it with cheap things bought at the Christmas Tree Shop. We had photographic evidence of this but decided rather than spend our time in a long lawsuit looking backwards, we'd just eat it and look forward. But make sure you're very clear about what's included in your sale and what's not.
- Don't look at other B&Bs, inns and hotels in the area as your only competition. Short-term rentals are your real competition, and if you have too many of them in the market you're considering, walk away.
- You have to like three things about the B&B you're considering: The town that's going to become your new town, the home itself that will become your home, and the business itself. If one of those three don't work for you, the whole deal won't work.
- Customers. The customer database and the sellers' relationship with them has to be transferred to you, preferably through an existing booking/CRM system.
- Non-Compete - Include a non-complete clause. Specify a certain period of time and radius where the sellers can't turn around and open a new operation. Most sellers are ready to be done with the business, but be sure.
 
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gillumhouse

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I just thought of one that has come up here - look for gift certificates outstanding, and look at deposits CAREFULLY. Any gift certificate money should be in an escrow account.
 

TheBeachHouse

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We missed where they painted the floor around the bed leaving a big unpainted spot in the center of the room, and where they painted around a wall mirror and then took the mirror with them leaving a giant unpainted spot on a main wall.

Be sure to address website and phone number ownership and transfer. Our P.O. used the business phone as her personal phone and had intended to keep it.
 

Morticia

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Oh my yes! The painting around things! When we moved the area rugs we found the floor underneath wasn’t finished. Also check behind pictures for holes in the walls. Lift up throw rugs, look for damage.

Agree with GS to take lots of pictures and get that exclusion list nailed down. We think the appliances were replaced after we signed a contract.
 
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myschae

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- Review the financials with a fine tooth comb, and expect exaggerated numbers for occupancy, ADR, etc. Filed tax returns are better than Quickbook P&Ls.
- Be very, very specific with your inclusion/exclusion list. Take pictures. Our sellers sold their place with all the furnishings and everything on the wall included, and then literally went out and cleaned out the good stuff and replaced it with cheap things bought at the Christmas Tree Shop. We had photographic evidence of this but decided rather than spend our time in a long lawsuit looking backwards, we'd just eat it and look forward. But make sure you're very clear about what's included in your sale and what's not.
- Don't look at other B&Bs, inns and hotels in the area as your only competition. Short-term rentals are your real competition, and if you have too many of them in the market you're considering, walk away.
- You have to like three things about the B&B you're considering: The town that's going to become your new town, the home itself that will become your home, and the business itself. If one of those three don't work for you, the whole deal won't work.
- Customers. The customer database and the sellers' relationship with them has to be transferred to you, preferably through an existing booking/CRM system.
- Non-Compete - Include a non-complete clause. Specify a certain period of time and radius where the sellers can't turn around and open a new operation. Most sellers are ready to be done with the business, but be sure.
Thank you so much. I've added all of these onto my list. We're building all the must haves and we both remind ourselves that we're not ready to say YES if we're too excited to say NO. We want to be optimistic about going in a new direction while being realistic about the downsides. It is hard though. Thank you for the reminder.
 

GoodScout

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It's good that you're going in and looking at everything involved in the lifestyle and business. As you look at properties, you'll find two types of sellers: Those who've been doing it for 15-25 years and are ready to retire, and those who've only owned their B&B for 2 or 3 years, and realized they made a terrible mistake.

Those like you who go in with their eyes open usually end up in the former category.
 

Morticia

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It's good that you're going in and looking at everything involved in the lifestyle and business. As you look at properties, you'll find two types of sellers: Those who've been doing it for 15-25 years and are ready to retire, and those who've only owned their B&B for 2 or 3 years, and realized they made a terrible mistake.

Those like you who go in with their eyes open usually end up in the former category.
We’re in the former, we bought from the latter. Unfortunately, we weren’t as careful as we should have been in the negotiating stage.
 

FHI2426

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It's good that you're going in and looking at everything involved in the lifestyle and business. As you look at properties, you'll find two types of sellers: Those who've been doing it for 15-25 years and are ready to retire, and those who've only owned their B&B for 2 or 3 years, and realized they made a terrible mistake.

Those like you who go in with their eyes open usually end up in the former category.
I would suggest there is a 3rd group (like us) who do this as second career/gap to retirement - we didnt buy until late 50"s love it, but only plan 4 to 7 years and dont want to wait too long until we're burned out/too old.... so call us "mid-termer's"
 

JimBoone

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Those who've only owned their B&B for 2 or 3 years, and realized they made a terrible mistake.
What are your thoughts on why some innkeepers would see the business as a mistake? Too confining, too much business, too much work or too much debt, too little business, over their heads?
 

Country Girl

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I started my B&B 24 years ago so I wasn't buying from a previous owner. The one thing I strongly recommend that you look at is the amount of time you will be spending working at your B&B/Inn, especially during peak times, and plan time off and/or hire help accordingly. Owning a beautiful home on a beautiful property that everyone else is enjoying except for you will make you unhappy very quickly. Even if you plan to work from 5:00 a.m. to 8:00 p.m., plan a few hours off in the middle of the day where you can spend time doing what you want. Plan vacations away from your work and/or close the business when you want to have friends and family over and enjoy the space and property yourselves. This has worked wonders for me!
 

myschae

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I just thought of one that has come up here - look for gift certificates outstanding, and look at deposits CAREFULLY. Any gift certificate money should be in an escrow account.
Good thought; those would roll into accounts payables that are outstanding values. Thank you.
 

myschae

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What are your thoughts on why some innkeepers would see the business as a mistake? Too confining, too much business, too much work or too much debt, too little business, over their heads?
I, too, am interested in this question. My husband and I just received our vaccines yesterday (him 2nd, me 1st) so are recovering a bit today. I asked him "What do we do if we decide we hate it?" Optimistic, as always, he doesn't think we will but I'm like: what if, deep down, we hat e people? We don't hate people but I would be interested to hear about what type of things people considered mistakes. One I didn't think of that's already been mentioned was trying to rent the rooms out too much vs. maybe raising prices a little and giving ourselves a break. I've already started some speculative spreadsheets.
 

myschae

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I would suggest there is a 3rd group (like us) who do this as second career/gap to retirement - we didnt buy until late 50"s love it, but only plan 4 to 7 years and dont want to wait too long until we're burned out/too old.... so call us "mid-termer's"
I like this idea, too. So is your exit plan to set it up for an easy sale when the time comes or step away and investment/manage?
 

myschae

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We’re in the former, we bought from the latter. Unfortunately, we weren’t as careful as we should have been in the negotiating stage.
What do you wish you'd negotiated harder for? Furnishings? More consideration for future repairs? Guest list information?
 

GoodScout

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Those who regretted it usually had fallen into what we call the "Newhart Syndrome:" They think it would be fun to be the innkeeper, to bake muffins and chat up the guests. They don't realize the job entails calls in the middle of the night, plunging toilets, constantly fixing things, and in many cases working for 90-120 days straight without a day off. Plus having strangers in your house can be extremely stressful. My advice for those who want to be innkeepers is always the same: Find an innkeeper who needs someone to "inn-sit" for them for a week or two while they go on vacation. After a week or so of running an inn during the slow season, if you aren't enjoying it then you know it's not right for you.
 

Tamelon

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I would suggest there is a 3rd group (like us) who do this as second career/gap to retirement - we didnt buy until late 50"s love it, but only plan 4 to 7 years and dont want to wait too long until we're burned out/too old.... so call us "mid-termer's"
Definitely in this third group with a 10 year plan. Never intended it to be any longer, and may in fact make it more like seven years.
 

Morticia

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What do you wish you'd negotiated harder for? Furnishings? More consideration for future repairs? Guest list information?
We paid too much. So wish we knew that the owners wanted OUT, like yesterday! Emotionally they had already moved on. They had purchased their new home and started moving into it. They had been cruising already and there was a lot of deferred maintenance.
 

Morticia

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What are your thoughts on why some innkeepers would see the business as a mistake? Too confining, too much business, too much work or too much debt, too little business, over their heads?
The people we purchased from had what GS calls ‘Newhart Syndrome.’ It was all fun and games and chatting with ‘new friends.’ A few guests told us they never saw the owners except at breakfast, while the owners told us they talked with everyone all the time.

Repeat guests said the owners locked themselves in their apartment at 7pm and they (the guests) were on their own at that point. Many of the repeats were in the habit of using the kitchen to make themselves dinner. The owners said they were always available and stayed up talking with the guests till late and no one was allowed in the kitchen.

It was obvious to us the guests were telling more of the truth. One repeat guest came into the kitchen in the morning and tried shoving me out of the way saying I didn’t know how he liked his breakfast.

So, we think it was a case of letting the guests run the show and they didn’t know how to recapture control. We lost quite a bit of their repeat business because we didn’t allow a lot of what the guests had been doing.

We were invited to a gathering after we bought the place that included the PO. He was so incredibly rude to his wife that I had no idea why they were still married. (Calling her fat and saying now that she didn’t have muffins to sample everyday she might lose weight and be attractive again.) While they were doing the training with us he called Gomez an asshole. To our guests! We cut the training short. Better to fumble along and make mistakes than have that attitude ruining our business!
 
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