The Innkeeper's Resource

Innkeepers and Taxes. Are Yours Done Yet?

Every year on April 16 many of breathe a sign of relief that our tax returns are finally filed and (gulp) we've stroked a check to Uncle Sam for what has hopefully been a profitable year. Procrastinators file extensions but still have to pay up. Many innkeepers, especially those with smaller properties, are often pleased that they don't, in fact, have to write a check to the government, because, on paper, they didn't make any (or not enough) money. It's the magic of cost recovery, which is what we call depreciation these days.

Depreciation is a wonderful thing for real estate investors and people who own business equipment. It saves money in the short term. And, if a bed & breakfast has been successful and had a profitable year, the depreciation helps soften the blow at tax time. But there's a danger in obsessing too much about paying (or avoiding) taxes.

Many innkeepers run their business as if avoiding taxes was their reason for existing. You run your food through the business, your car payments, your vacations, your club memberships, and maybe you don't bother to allocate the portion of utilities and property taxes that are not exclusively for business use. And your bottom line looks terrible. Yay! No taxes this year! But guess what? There's a price to be paid when it's time to sell.

Buyers of bed & breakfast businesses, if they are looking for a business and not a hobby and tax shelter (which B&Bs are great for) are scrutinizing financials very closely. Banks are looking even more closely. It isn't going to sell the inn to tell someone that you really do make money if only your personal expenses weren't all run through the business and showing as deductions on your tax return. If you're selling an inn business, and there's value in the business, you must show as healthy a bottom line, net operating income, as possible. This is what creates value, and it's what a buyer can take to a bank.

So, if you plan to sell your bed & breakfast inn in the next 3-5 years, now is the time to clean up your books, take only your allowable deductions, and show as much profit as you actually can. Depreciation will still soften the hit, but look at it this way: If you have to pay taxes, it's only because you actually made money. Yay! (That's a real cheer this time!).

Peter

Online Reviews Impact Bottom Line

There's been a lot of news lately about online reviews, and sometimes it's hard to know how to measure their impact on innkeepers. Well, now we have some great statistics to share. A recent article from TravelMole reported that The Kelsey Group and comScore.com did a joint research project that focused on hotels (lodging), restaurants, travel, and other areas. The impressive bottom line was that people were willing to pay at least 20% more (and up to 99% more) for services (like lodging) that were rated "excellent" (5 stars) versus "good" (4 stars).

Furthermore, the study showed that 24% of Internet users read online reviews before making a purchase decision, and of those, 40% subsequently stayed at the hotel they reviewed online. Hotels ranked the highest of all categories in that 87% said that the reviews had a significant influence on the decision to book a room. More surprising, still, was that a full 97% said that the reviews were accurate!

So, what does this mean for innkeepers? At The B&B Team we've been saying for some time that Travel 2.0 was important for the unique lodging industry. Sure, the studies are looking at hotels, but B&B's and inns are in the lodging category, and we all know that you're being reviewed online, like it or not. So, when was the last time you checked out your reviews? If you're not looking, and if your guests aren't saying nice things about you, and if the experience you offer isn't up to your marketing hype, then you're problably leaving at least 20% of your potential revenue on the table.

To measure that 20% another way, consider this: If your inn could gross 20% more revenue, and your expenses stayed relatively similar to what they are now, that's a LOT more net operating income at the end of the year. And, in the parlance of inn valuation, if we used a 10% capitalization rate, for every $10,000 increase in net operating income, your inn could be worth $100,000 more! Don't believe that social media and online reviews have an impact? Think again!

Peter

This is how marketing is done...

It's always exciting to find inns that really "get it" when it comes to marketing their properties. It's not that there is just one way to do it, but that most successful inns follow one consistent pattern: they all pay a great deal of attention to what is happening: at their inn, in the marketplace, and in trends that will affect them.

I recently did some work at The Folkestone Inn in Bryson City, NC. This is a true country inn, rural, close to Smoky Mountain National Park, the Cherokee Indian Qualla Boundary, and the Nantahala Outdoor Center, to name but a few attractions. At 10 rooms, Folkestone Inn isn't huge, but it's big enough to be a viable business. One of the things that impressed me is the way the owners track their business. They want to know not only what is happening now in real time, but how that compares to last year and the year before. If there's a change, they ask themselves why? What are the leading indicators that would suggest a reason for a change. What should they be doing to anticipate a change or even a recurring event? They have beta tested almost every reservation system to pick the one that works best for them, for the information they want to be able to analyse. They have real time online booking. And they utilize a professional phone service when they are away, even for a few hours, to be sure a human answers the phone whenever possible.

They leave their web work to professionals, but they direct those pro's as to what they want featured, and when. They artfully integrate the style of their inn with the amenities they offer. Scrupulous attention is to paid to the basics like extreme cleanliness and good food. They monitor websites like TripAdvisor to know what people are saying and plan to put those reviews on their own site. In short, they pay attention to the details.

Importantly, they spend their time on the high value tasks which they can do better than anyone and hire the help that is easier to come by (not that great housekeepers are easy to come by, but you know what I mean!). Are they blogging yet? No, but who knows what the future holds once The B&B Team gets our hands on them!

Peter

Furor Over Mortgages Creates Opportunity

The past month has seen some pretty dramatic gyrations in the equity and mortgage markets evidenced by near panic on Wall Street and, no doubt, in some homes. If you're thinking about becoming an innkeeper, we always say that you need to take stock of your assets. They may be less today than a few months ago if the majority of your net worth is in your home, but those assets are still there and will recover.

In the meantime, the basic principles still apply: know what you have, save what you can, keep your total debt levels low and credit scores high, keep learning about the wonderful world of innkeeping, and keep looking for quality bed and breakfasts and inns that make money. That is, if you need to pay the mortgage from the business.

But why is this an opportunity? Well, even though some mortgage money is tighter today than even a month ago, there's another positive benefit for prospective buyers: with the flood of inns for sale and higher interest rates, prices should be coming down. If you find a good property but the price doesn't seem right, don't despair. Study it. Figure out what it's really worth based on what it can honestly support. And then make an appropriate, fair offer. You might be surprised that you'll be able to buy a bed & breakfast for less today than last year.

The truth is that markets always balance themselves out. And, for innkeepers wanting to sell now, you might need to reconsider your price. Our hope at The B&B Team is that this market correction will restore some balance to the country inn marketplace and open the door to even more people becoming innkeepers and more innkeepers exiting gracefully.

Have you had an experience buying or selling recently? Did the outside world affect your transaction? Please share you experience by commenting here.

Peter