Are you interested in selling your B&B or your short term rental business? Or maybe you are interested in buying a place to rent for short term using AirBnB or Booking. This should help you in evaluating the price of your business or the one that you would like to buy. Let’s start step by step
1: I hear you want to buy a bed & breakfast?
B&B owners see this decision as more than just an investment. The most successful in this industry see B&B ownership as a lifestyle choice. How could you ever want to sell your lifestyle? Then again, that’s probably a question you should ask the owner of the B&B you are buying. Maybe you already own a business or perhaps you are in the beginning stages of building your first business. In any case, there is one question to ask yourself, “What is my exit plan?”
It may seem strange to think about selling your business, even before the first bed is made and the first bathroom is cleaned? When we buy stock in a business, our expectation is for the price of that stock to go up. When building or buying a business, most owners expect the same thing. As a B&B owner, your exit plan defines the direction you will be taking your business. As an example: Let’s say you assume that you are building an “investment” or “Nest-egg” that will support your old age? This assumption shows that there is an exit plan already in the back of your mind. Let me share some statistics:
- There are 15 prospective buyers for every business available.
- During the sale, 50% of company sales transactions, fail during the “Due Diligence phase.”
- Only 20% of businesses listed for sale, will ever be sold.
Judging by these statistics, if the goal is a nest egg, 80% of B&B owners will probably have to walk away from the business. To have a “Nest Egg” for old age, you will need an exit plan. The exit plan will make your business more successful. More importantly, it will attract future business buyers.
2: Who is your future buyer?
Probably that buyer is a lot like you. There is a spectrum of B&B buyers. On the one end of the spectrum are those that fell in love with the B&B lifestyle. On the other end, is a buyer looking for a good investment. Your buyer is probably somewhere between these extremes. First, define your buyer. Start by thinking about yourself when you started? Knowing what you knew now, what combination of lifestyle and Investment do you think your buyer will appreciate?
3: Valuing Your Business
Often I am asked; how would I figure out the value of my business? I don’t do business valuations, that is an important specialty. However, there are some “Down and Dirty” calculations that will get you a “ballpark” valuation. The Simplest Method to calculate is,
- Business Value (BV) = EBITDA multiplied by an Industry Multiplier.
What is EBITDA? EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is a way to compare one business against another. It is an attempt to compare Apples to Apples. For our Down & Dirty method use Net Income (after expenses and before taxes) for just the room rentals. Then use this number for EBITDA.
What is the industry multiplier? The multiplier can be complex to explain. Fortunately, there is a down and dirty short cut to estimate the multiplier. The standard for the Hotel industry in the USA today is a multiplier of 9.
Using these estimates if the B&B EBITDA value = $50,000.00 and a multiplier of 9. Our formula looks like this,
- BV = EBITDA ($50,000) X Multiplier (9) = $50,000 X 9 = $450,000 = Business Value
In our example, the value of the business is $450,000. Note: This does not include the value of assets like property equity, beds, cars, computers, sheets, towels, etc. The valuation of any additional assets sold with the B&B is included in the first sales offer. This valuation becomes the number that you can start negotiating for the final price.
The final consideration is the buyer’s risk. The buyer may agree with the Industry multiplier or may decide to raise or lower that multiplier when estimating business value. When considering risk, the buyer will ask questions like,
- Do people come to the B&B because they like the owner(s)? Meaning if the owner was no longer around, would customers stop coming?
- Is the B&B in need of updates and repairs? (The buyer knows that many owners give up on maintenance and upgrades once the decision is made to sell. The buyer knows she/he will need to pay for repairs and updates themselves.)
As a seller realize there are two quick ways to raise business value (BV).
- Make the B&B experience about the renter, not the B&B owners.
- Maintain the B&B facilities and business process down to the day of the sale.
Consider that each repair is risk reduced (or an increase to the multiplier). In our example, a multiplier of 9, meant the business is worth $450,000. As risk increases, the EBITDA value may remain the same while the multiplier could go down. In our example, changing the value from 9 down to 5 means a reduction in our $450,000 Business Valuation, despite the same earnings level, to only $250,000 valuation.How to evaluate a B&B #business business. #airBnB #businessowner : If you want to know how much your #RealEstate #property is #worth this is for you. #realestateinvesting Click To Tweet
Statistically, there are always 15 people looking for what you are selling. Unfortunately, only 1 in 20 Listed businesses receives a sales offer. To be the 1 in 20 means planning your exit. In planning your exit, you will manage your B&B to enable the B&B lifestyle that your buyer is imagining. While at the same time, building a business the buyer will also feel is also a good long-term investment. It is easy to see that keeping earnings high is important to the buyer. Probably more important to the buyer is reducing in buying your B&B. In our example, we saw that reducing the risk, or multiplier by 4 (from 9 to 5), cut the business value and potential sales value by half.
About the author
James Murray helps buyers get more investment value for each dollar they spend. He and his team are experts at developing worker.
productivity. His company Executive Outlier could be described as, “A team of business productivity experts specializing in technology” or “A team of technology experts specializing in business productivity.” Whether you are looking for ways to build your “nest-egg,” or if you want to disrupt the hotel industry, we have a plan for you. If you’d like to discuss ways to increase earnings through improved worker productivity? Check out James at Executive Outliers.