You have been dreaming for years. Those glossy magazines and snazzy websites with wonderful, historic lodgings, glorious gardens, and inviting rooms are a regular mainstay. Your travels have taken you to places where you were greeted by strangers who treated you like old friends. You slept on feather quilts and abundant pillows, awakening to the aroma of fresh coffee and baked bread, then shared breakfast with others like yourselves: road warriors of the bed & breakfast circuit. You love these quaint and ornate homes, the unfaltering hospitality, the sumptuous meals. After all, entertaining has always been your love, and you think, “We could do this!”
Six months later, you’ve been talking to innkeepers about the Inn-keeping lifestyle, and they told you it wouldn’t be easy. You attended one of those seminars, and they told you it wouldn’t be easy. You’ve been taking stock of what it would mean to quit that job or take early retirement and live on an innkeeper’s “salary,” Now you realize it won’t be easy. But this is Inn-keeping! You’ve always wanted to do this. It can’t be that bad, or why would so many take the plunge?
Good question. It’s a question that all prospective innkeepers must ask themselves. Just for a moment, let’s assume that you have satisfied yourself that you are cut out for Inn-keeping. You would like to be your boss, even if your guests will guide your life. You can still decide to close for a week (if you plan) to take a vacation. You can always be closed on Mondays if you want. You are prepared for the cut in income, figuring you can get by fairly modestly, and besides, you have a little something extra from wise investments or pensions. You’ve been checking out ads on countless websites looking for the perfect bed & breakfast for sale, have received information, and consider yourself actively “in the market.” Well, maybe a couple of years away. That’s OK. It’s better to plan and know what you’re getting into.
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You are serious about buying an inn now and want to make an offer but need to figure out how to finance the purchase. This is where the dream of owning a bed & breakfast can start to slip away unless you’ve done your homework and planned adequately. Because financing is where most contracts fall apart.
A bed & breakfast inn is a hybrid entity. It’s neither a “house” nor a “hotel.” If it were just a house you wanted to buy, a lender would look at your available cash for the down payment and closing costs, would review your income and “other debt,” would work with certain ratios to determine how much of your income could be used to finance a home, and could tell you, within a very narrow range, how much you could afford to pay for a house. No furniture. No business. You keep your job. Of course, that assumes that the home appraises the purchase price and your credit is squeaky clean.
For a hotel or motel, or maybe a convenience store or other business, a lender will look at the company, examine and analyze the cash flow, determine the value based on actual and projected cash flows, and consider how much you can put down initially (they generally want 30% plus with reserves for operating capital, etc., though there are exceptions). If all of this pans out, and you can convince that lender that you know what you’re doing (experience in the same business, hopefully), you might get the loan and be on your way.
But a bed & breakfast? What’s that? It’s a bit large as a home, a significant portion of which will be used for business. This, of course, creates some interesting tax considerations when applying your rollovers, but that’s another story. A bed & breakfast is typically heavily weighted by the real estate component instead of the business component, whereas a convenience store is often just the opposite.
Nevertheless, the dream B&B you’ve found may have a fairly decent cash flow. If it does, there are several avenues you can pursue. The first, and by far the easiest (though hardly the most common), is its owner, or seller, financing.
Like any lender, they will want to know your credit history, see a credit report, have a complete, certified financial statement from you, and be confident that the business’s cash flows will cover debt service and living expenses on top of operations. However, don’t expect many sellers to finance 90% of the deal. Maybe you can buy a house with a 5% or 10% down payment, but it’s unlikely that many innkeepers will finance that much. Keep in mind that, like a bank, security is paramount. You will be purchasing the real estate, the personal property (fixtures, furnishings, etc.) and probably will be paying for intangibles (goodwill). Your initial investment will likely have to cover the intangibles, the personal property, and the substantial real estate portion. That can amount to a sizable outlay. It would help to keep something in reserve for improvements you may want to make and cover you in those slow early months.
Let’s say your seller doesn’t want to finance, and many don’t. They have other plans for their money. If the business is excellent and can be documented (current innkeepers, take note!), the next best bet is often a local bank. Despite strict regulations about lending parameters, many bankers are still interested in local ventures and, especially, real estate. If the loan is “non-conforming,” but there is value in the property and a sufficiently large down payment to protect their investment, money may be forthcoming as a portfolio or “in-house” loan. An introduction to the local banker by the current innkeepers (if they’ve had a good relationship) can be a good way to get started, especially if there’s been any bank financing in the past.
If you intend to acquire a full-service inn with a restaurant, then the Small Business Administration (SBA) may be the best way to go. Several banks and non-bank lenders process SBA loans, some better than others, so shop around. Doug Carleton, an approved SBA lender and member of The B&B Team of Professionals, is one of the best. Remember two things above all else: restaurants have a very high failure rate. Most lenders are leery of making restaurant loans unless you have a track record to demonstrate your expertise. Also, SBA loans can be slow (depending on the bank) and expensive due to the SBA guarantee fees. Hence, you need to be prepared for a process that may take six months and the expenditure of several thousand dollars in surveys, environmental studies, etc. However, the fees can often be financed, and if you are prepared and working with a good lender, the process can be expedited. Some SBA loans are assumable, so be sure to ask if the current owners have an SBA loan and look into its assumability.
Some lenders will extend “no-doc” (no documentation) loans to bank financing. With a 20%-40% down payment on the real estate, they will assume that you won’t walk away from the property, and if you do, their investment will be covered. How you pay for it, in their mind, is your problem. Please note that I said “real estate,” not “bed & breakfast.” That down payment will apply to the real property’s appraised value, and you will have to pay for the personal property and intangibles separately. In the end, there’s still quite a lot of cash going out.
