Buying a B and B (Bed and Breakfast) is far more difficult than buying a home, and there are a number of traps for the unwary buyer. If you are considering buying a B and B, I have a few suggestions for you. (I am typing B and B because blogs do not like to optimize “B&B” with the ampersand.)
Buying a B and B
A buyer and client of mine wanted to purchase a B and B in the Sequim area, and he did his homework on what the numbers need to be to justify a price. He knew what B and Bs were valued at based on income and expenses, and the capitalization approach to value. When it came to buying a B&B anywhere in the country, he knew what the basic formulas should be. Yet the problem was that sellers of B and Bs in the area wanted more than the justifiable economic value. After observing and advising B and B owners for two decades, I can say a couple of things about how sellers end up demanding more than a B and B may be worth.
Buying a B and B and Financials
Few who have come to the Olympic Peninsula with the idea of buying a B and B had any prior experience owning and running a B and B. For this large majority of buyers, the idea of owning a B and B had been a dream for a long time, and it began to look more like a fairy tale than a careful financial analysis of a business. As a result, some B and B owners have paid too much for their B and B by large sums, like $200,000 or $300,000. The primary reason they overpay is because they don’t know how to do their due diligence on the financials as well as the marketing, and maintenance. And almost every B and B buyer underestimates the 7 day a week work schedule and stress involved in running a B and B. Too many B and B owners end up operating at a loss as well. For some, their dream turns into a nightmare. And then when they try to sell, they are in trouble, because they overpaid, and their only hope is to get a buyer who buys like they did–on emotion and not careful financial analysis.
But there is another huge trap for the unwary. That trap involves the hidden or undisclosed skeletons in the closet or undisclosed expenses. I won’t get specific here, because this list is lengthy, but this is truly where the latin rule “caveat emptor” or “buyer beware” applies.
By the way, my buyer clients did find a B and B off the Olympic Peninsula, and with professionals who protected them, they discovered the seller was about to leave them with a potential undisclosed nightmare. It was intentional. Fortunately, they were well represented by a good attorney, and they were able to close holding the seller liable for the misrepresentations.
A seller is entitled to every dollar of fair market value, but not a dollar more, and certainly not $200,000 more. So if you are buying a B and B, make sure you do your due diligence, which includes hiring a Realtor who knows how to help you, and perhaps an accountant or an attorney.
Last Updated on April 9, 2015 by Chuck Marunde