What do I need to know when buying a Guesthouse or Bed and Breakfast?

What are the secrets to buying a guesthouse or Bed and Breakfast? Are there hidden perils or warning signs we need to be aware of? In an earlier post we advised that the buyer consult with an expert before signing the purchase agreement. But why? In this post we would like to continue our discussion with Colleen Seabell, an expert in the buying and selling of guesthouses and other hospitality establishments

What are the most important questions for the potential purchaser to ask?

1. What is the profit after all the costs? – and then work out what money you need to get by and how much will you have for a bond. You will then be able to work out how much you need as a down payment.
2. What is the zoning on the property? Can you run the business from it?
3. How much marketing is done on the guesthouse and where do the clients come from – website, booking systems, etc. This is important because once you take over the guesthouse you have to keep up with this marketing and you have to make sure that you know how to do this marketing. If it is the website, make sure that you know about websites and how to keep on marketing on the website and if not then make sure that you learn. Business does not come from sitting around and hoping that someone finds you.
4. What is included in the sale and make sure that you have a writing inventory that is accepted by both parties.
5. How am I going to buy the property and the business? Do I buy it in a company, privately, etc. Consult with a tax consultant on the best way of proceeding. Every circumstance is different so there is not rule of how it should be done.
6. Which are the busy months so that you know which months you need to provide extra money for?
7. Which of the staff members stay? Have they been paid all the benefits that are due to them before the buyer takes over? You do not want to be landed with any unpaid leave pay, leave time, pensions or retrenchment packages.
8. Are you buying through agent’s that know the correct documentation to use and that will look after everyone’s interests and not only 1 party.

Room with a view in Knysna

Are there specific legislation or industry bodies that the purchaser needs to be aware of?

Not really. They should make sure that the property they are buying has the rights to be run as a guesthouse. I think that because of the talk of hospitality properties being taxed more than regular properties, the rules might become a little stricter than they are at the moment. Hospitality properties will probably be more scrutinised because of the possible additional income that the local municipalities could claim.

Which documentation would you request to be disclosed?

Financials, zoning on property or the guesthouse departures on the property, the title deeds on the property to make sure that there are no restrictions that could affect your business.

Would you require financial statements and data – and over which time frame?

Yes, but give the seller enough time to get these drawn up because I have found that mostly the sellers are not up to date with the financials. This is not the rule because some sellers are very much up to date with their figures. You should put a due diligence into your offer to purchase so that you can get all the documentation you need to make sure that the business and property is what you expected. The normally for a due diligence is between 10 to 14 days. [Ask for statements over 3 years if possible.]

Should the purchaser rely only on the documentation alone or should he do some other homework?

If he deals with a reputable agent that knows what they are doing, they should have the required information in the offer to purchase agreement but the seller should ask for what ever they feel they need to make an informed decision. If the purchaser is bothered by anything, do what you have to, to find the correct information.

How important is “grading” by tourism authorities in the process of selling or buying a guesthouse?

Buyers often think that this is important but it is not unless you want a 5 star establishment. What you do to the guesthouse is what is going to get you the grading. Often all it takes to turn a 3 star into a 4 star is adding some appliances into the room or putting a fridge behind a cupboard or just cleaning up a little better than the original owner. This of course makes a difference if you want a 5 star establishment because the size of the room counts and the bathrooms count. If you do not have this in the rooms to start with, the costs could be exorbitant.

Which aspects should the buyer investigate for himself with reference to the reputation of the business?

If the establishment has a bad reputation but you are able to buy at a good price and know how to market, buy the guesthouse but change the name unless it is very well established and has a strong website. Then just change the marketing and let the previous clients know that it is under new management and the attitude of the new owners has changed. On the other side, if the guesthouse has a good reputation, try to move into the position of the seller and be a little less aggressive with letting people know that there are new owners. Clients come back to where they have had a good experience and this is sometimes because of the owner’s attitude toward their guests.

What are the major pitfalls you have found in your experience for potential purchasers?

Over-extending themselves. Don’t get yourself into financial difficulty by buying beyond what you can afford. Rather buy where you can afford and work on the marketing to make the guesthouse better so that you can reap the profits of your hard work. Don’t work hard just to pay off a large bond. You will get into financial trouble.

How important are existing employment contracts and service provider agreements in the buying of a Guesthouse or B&B?

Enjoying South African Hospitality

Very important especially if you need the staff to carry on working for you. I always suggest that when new owners take over the guesthouse, they re-negotiate the employment contracts so that there is clear understanding from all parties. With regard to service provider agreements, these all have to be renewed when there is a new owner because the account details change but the buyer has to remember that telephone numbers have to be transferred, DSTV and MNet machines have to be signed over to the new owners otherwise they can not change the accounts, codes for different websites have to be handed over, etc.

Would you advise the purchaser to request the claims history on the guesthouse insurance policy?

This would be a good idea to see what has been claimed for in the past and what problems there have been.

Any additional aspects you would like to alert the potential buyer to?

Make sure that you are buying in an area that you want to be in. If you are expecting 4 star clients make sure that the area is right for a 4 star guesthouse. If you want corporate clients, make sure that the area will attract corporate clients. If you want to specialise in golf tours, make sure that you are buying close enough to golf courses and that the travelling times put the traveller off.

If anyone has any other questions or needs some advise, please feel free to contact me.

Colleen Seabell

To contact Colleen Seabell visit www.guesthousesale.com

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