What is my Inn worth?
You have worked hard to build your successful bed and breakfast business. You have made great improvements to your inn property and your marketing program is bringing guests through your door. Perhaps you are considering adding more rooms to your bed and breakfast inn, "trading-up" to a full service country inn, or retiring. You want to know what your inn is worth. What is your bed and breakfast inn's market value?
Many factors influence the Market Value of your inn or bed and breakfast property, including:
Prevailing real estate values in your local and regional area
Architecture and physical condition of the property
Condition and quality of furnishings, fixtures and equipment
The size and privacy of Owners' Quarters
Potential for future growth and expansion
Value of your inn's business activity
One of the most important and often least understood factors influencing the market value of your bed and breakfast or inn is the value of your business activity. Measuring an inn's business activity accurately is important because:
It is essential to calculating the total economic benefit of inn ownership.
It affirms the ability of the business to support the cost of ownership. A potential buyer or lender will want to know if the business can service the mortgage debt and provide an adequate income.
Measure your inn's business activity using Net Operating Income – NOI.
The definition of Net Operating Income is:
Gross Income minus Operating Expenses equals NOI
Gross Income includes all sales revenue plus income from investments held by the business.
Operating Expenses include all those expenses necessary to bring in lodging business and provide services and products. Operating expenses do NOT include mortgage payments, depreciation, or owner's compensation. Also not included are discretionary items such as owner's health insurance, charitable donations and certain other legally deductible expenses. These adjustments are referred to as "normalizing the numbers."
By organizing your operating records clearly and figuring your inn 's NOI correctly you will take the first important step in finding your inn's market value.
To calculate the NOI for your inn, start with your income and expense statement for the most recent tax year. (Later, add the data for the two previous tax years.) It is essential that this operating data is accurate and agrees with your tax returns.
Once you determine your inn 's NOI, a number of financial tools can be used to find a value for your inn's business activity. The Capitalization Rate - Cap Rate - provides a straightforward financial benchmark.
Cap Rate is the annualized rate of return an investor would expect to earn on a particular investment assuming it was purchased with cash.
NOI divided by Cap Rate equals Value
In recent years, Cap Rates for bed and breakfast inns have typically ranged between 9% and 12%.
Sample Inn at Cap Rate of 9%
Net Operating Income $45,176
Divided by Cap Rate . 09
Business Activity Value = $501,955
Sample Inn at Cap Rate of 12%
Net Operating Income $45,176
Divided by Cap Rate . 12
Business Activity Value = $376,466
The Sample B&B Inn has a business value range of $376,466 to $501,955
Knowing your inn's business value provides an intelligent starting point to properly value your inn. As described earlier, many other factors have an impact on your inn's market value and all factors need to be taken into account when performing an analysis of your inn's market value. Many inns, especially larger properties, have a market value close to the business value. Typically, smaller bed and breakfast inns have a market value closely tied to real estate value. By finding your inn's NOI and calculating a business value, you will lay the foundation for determining what your inn is worth.