Wednesday, August 19, 2015
What is THE best way to prepare your inn for sale that affects value?
Other than getting the revenue up as high as possible, there is something to consider before preparing your inn for sale that will greatly affect value.
While maintaining the physical condition of any property (whether commercial or residential) is always important, when it comes to selling a business, the tax return is king. And let's face it, we all prefer to write off as much as we can (legally) to avoid paying income tax! And that's fine, until it comes time for you to sell your lodging property.
It's a classic case of having cake and wanting to eat it too!
Lenders and appraisers look at the prior 3 years' tax returns. They look at both the gross revenue and the net operating income. As important as the gross revenue is, the management of your expenses is almost more important. The value is based on the net income. It's pretty simple: higher net income = higher business value = higher market value/selling price.
So what can you do to make sure that your property could go to market and command the highest price? By showing the highest profit you can for the 3 years prior to going on the market. Or at least 2, with the possibility of providing a current year-to-date P&L that a prospective buyer can review. But lenders will need 3 years of tax returns when they determine what they'll lend a buyer.
Yes, you might have the value in the asset (being the real estate, the land and the FF&E - furniture, fixtures and equipment), but if the buyer's intent is continued use as a lodging property, the value of the business is what the bank will lend against, not the value of the real estate. Having a higher asset value than the business value is still a good thing, but the net operating income from the business still needs to support a buyer's debt service and provide enough remaining cash flow to meet a lender's minimum requirement.
So think about this a couple years sooner than you're thinking of going to the marketplace. Hopefully during your run as an innkeeper you've been able to realize tax benefits available and can let the tables turn to benefit you in the end in terms of value when it's time to sell.
This way, you can have your cake and eat it too!