Buying a B&B

[StartupDreamer]

Hi everyone,

After 10 long years of working as a contractor within the financial services industry, I've decided to make a change and I'm trying to pursue another business venture.

My first idea is a B&B, and I've spent the past month viewing company accounts, viewing properties, and completing basic due diligence.

Despite having limited experience managing in this area, having spent the majority of my time in hotels & B&B's, I'd say I'm well placed to identify 'what good looks like' and my business model would revolve around fairly basic functionality (only breakfasts & cleaning), limiting startup costs.

I have identified a business that appears to meet my requirements, however there are two key points that I'm struggling with;

1) The vat threshold - this B&B makes a gross income of £110,000, but loses 10.5% in Vat. The others in the area operate under the threshold (almost to the line), resulting in a significant saving. Is there a way of being more efficient with the business, for example splitting it, to minimise exposure to such a significant loss?

2) The price - with a £200k deposit, most lenders would only allow me to borrow £500k. The business is up for £625k leaving quite a gulf. Having never purchased a business before I have little knowledge of available options, however a bit of googling suggests seller financing is common. I'm considering going in with a hybrid of the two, but thought I'd canvas option here first.

Thanks for reading, and all comments are welcome.

 

[profitxchange]

Do not under estimate the work you will need to do to maintain a good B&B. It sounds like a fairly large set up which will need to maintain all sorts of compliance issues. We have family in B&B and they need to employ outside help with a very modest room count - though high occupancy Is there a trade organisation you could get advice from?

 

[Mark T Jones]

A couple of thoughts

If you are trading at the VAT threshold , it leaves no room to expand the business without registering. I know that revenues are hidden to keep below the threshold, but lenders aren't allowed to take this into account. It is, of course a serious criminal offence to do so.

I'm confused by your figures - it seems that you have £200k and the bank will offer £500k, which more than covers the purchase. Have you just spoken to your bank or have you approached a sector- experienced broker?

Finally, as suggested above, have you looked into the operation of the business as a whole, rather than just thecosmetic aspects?

 

[Mr D]

You can be more efficient with the business and increase its turnover. And profitability.
HMRC may take a dim view of what they would see as a way to get round VAT collection. Could probably be done but if they decide you should have collected the VAT then that's a big bill to pay. Payable by the business rather than the buyers of the services.

 

[billmccallum1957]

Just my 2p worth, with a turnover of just £110K, sounds like profit would be quite low, £625K asking price sounds quite high to me.

 

[Clinton]

Having never purchased a business before I have little knowledge of available option....

If you've never bought a business before, and don't know the first thing about negotiating seller financing deals, not to mention valuing businesses, do you really think it's smart to spend in excess of half a million pounds based on comments in a forum?!

Go get professional advice*!

*I, unfortunately, am fully booked up and not currently available to advise

 

[The Byre]

I must second what @Clinton says - get some advice from someone who knows what they are doing!

There are two types of B&B that work - (1) some rooms that you let out in your home and you keep TO below £80k and are VAT free and the whole thing is a bit of money on the side - and (2) a pukka eight-bedroom hotel with bar and lounge, with full kitchen and restaurant run by professionals and TO at least £500k.

Tip - there are loads of ailing eight-bedroom hotels up for grabs in the UK. People who have never worked in the hotel trade get fed up with their 9-2-5s and buy them and they all fail, as they have no idea what they are doing. If you are an experienced innkeeper and know how to pick a winner, some of these can be ideal objects, as they go very cheaply.

 

[Pish_Pash]

My sister worked in B&B & pocketed some good money...but I can imagine just how 'old' getting up early & cooking breakfast must get after....hmm 3 days in the new job! - therefore far easier/more lucrative was a holiday cottage - no pesky breakfasts to cook or acting as a tourist information point for guests - just hand over the keys - a week later change the bed linen & clean the place job done.

 

[Deleted member 283937]

This B&B course may be useful to you. http://www.cleveracorn.com/how-to-open-a-successful-b-b

 

[StartupDreamer]

Thanks for your feedback everyone - to add some additional context;

The £600k is for the purchase of the business and the property, which also includes separate 2 bed owners accomadation and planning permission for an additional room.

From speaking to several banks and building societies, for commercial mortgages they generally lend on a 40:60 basis, I.e £200k down, means I could borrow £300k, giving a total of £500k to spend vs the £600k valuation.

In terms of value of the property vs the business, the house must be worth in-excess of £500k, with the business valued just over £100k.

My primary concern would of course be the businesses ability to service the debt (c. £30k per annum) based on the £100k turnover, but that is one of the current expenses.

The place has rental 6 bedrooms, so max 12 breakfasts per day. Laundry will be completed off-site by a 3rd party, which should considerably reduce the upkeep.

The 7 days a week, 365 a year aspect feels relatively daunting, however if I could get it off the ground, I'm hoping there would be scope to bring in additional part time support to cover breakfasts in the longer term.

 

[Mr D]

Laundry off site is an expense. Think of what happens when you rent out one room in a week. Think of weeks with no rooms used.
Look at the profits - now imagine if you get less than half that figure. Survivable?

 

[DontAsk]

My primary concern would of course be the businesses ability to service the debt (c. £30k per annum) based on the £100k turnover, but that is one of the current expenses.

Oh, I think it might be achievable, if your guests don't clear their plates and you are prepared to live on the uneaten food returned to the kitchen

 

[Pish_Pash]

Oh, I think it might be achievable, if your guests don't clear their plates and you are prepared to live on the uneaten food returned to the kitchen

Why stop there....you can transfer their used bed linen to your own bed

 

[StartupDreamer]

Oh, I think it might be achievable, if your guests don't clear their plates and you are prepared to live on the uneaten food returned to the kitchen

That's plan B.

It does currently produce a £45,000 net profit, with opportunities to reduce costs from what I have seen to date.

 

[Mr D]

£45K net profit on a gross turnover of £110k? That.... look odd to anyone else?

 

[StartupDreamer]

Laundry off site is an expense. Think of what happens when you rent out one room in a week. Think of weeks with no rooms used.
Look at the profits - now imagine if you get less than half that figure. Survivable?

The laundry is currently completed off-site, so I'd expect the expense to remain fairly static.

Re; renting one room, that's comparable to any business that sells a product i.e. A shop - if you don't sell any stock then of course you would have financial challenges, however based on previous trading history, that would be a significant change in trend. I couldn't even find accomadation to stay in when I tried to visit due to current demand being unusually high for this time of year.

 

[StartupDreamer]

£45K net profit on a gross turnover of £110k? That.... look odd to anyone else?

Outside of utilities, rent, food, and commissions, there aren't many other running costs involved. One of the key reasons I was attracted to the area.

 

[DontAsk]

Plan C: Ask guests to leave their bathwater for you

 

[CVRO]

A few more costs that come to mind: Taxes, insurance, web hosting, advertisement, maintenance, supplies (shampoo, soap, cleaning material, etc, etc)

 

[silentjay]

Sounds like a lot of work and a lot of debt for a £45k income. Are the current owners employing staff or doing it all themselves?

 

[Talay]

I own hotels and I own laundry and the key metric you need to understand, not just know the number of, is the cost to replenish a room.

Say you think the current operation is weak on in room facilities. Let's say you think adding £2 per room clean and replenish would add £10 to the room rate.

On 20 rooms with 75% occupancy that is over 5000 nights and suddenly, you have put £10,000 plus down the drain.

Have you any idea how hard it is to get staff who can actually clean properly ? Can you combine that with them doing it fast enough to keep the rate to clean the room competitive ?

If you offsite laundry you will have issues. You need to have enough stock to cover that. What multiple would you use ?

Seriously, spend a year learning and earning. If you are in finance in the City, surely that is north of £200k a year so use the time to educate yourself and get some cash to play with.

 

[RMByrne]

I purchased a property in Northern Ireland in 2014 with this very model in mind, a retirement plan for my mother.

The property was an old 3 story detached building once used by Nuns, over the last ten years it had been used as a commercial premise. I paid £80k for it and spent £40k renovating over 5 months, once ready I decided to have it valued, to my surprise it was valued at £180k. I listed it and the first viewer bought it.

The point of my story is after doing the sums I figured it made sense to get out with over £55k profit and purchase another property to renovate.

 

[Lesley Morrison]

Hi

Just wondering if you purchased your B&B and if so how are you finding it all?

Lesley

 

[Scalloway]

The OP hasn't been here for a year so either they gave up on the idea or are to busy to come back.

 

[Tracy Arkwright]

This is something I would fancy doing in the future, all the very best x