The winter of the COVID-19 pandemic has started to transition to a spring season where people are more prevalent and hospitality industry entrepreneurial opportunities return. One type of business anticipated to have a strong balance of 2021 is accommodation providers as it is now proven science that the risk of contracting the COVID-19 virus from surface contact is low (https://www.cdc.gov/coronavirus/2019-ncov/more/science-and-research/surface-transmission.html). This knowledge combined with pent up demand for travel and disposable income created from cocooning with a reduced spend rate and government stimulus are anticipated to create a robust marketplace for the rental of rooms, cabins, and RV & camping spaces. As an avid traveler pre pandemic, I look forward to getting out and experiencing favorite and new vacation destinations with family and friends this summer. It is my hope to see the resurgent Pacific Northwest economy extend to hospitality industry entrepreneurs in the form of restaurants with long wait times and hotels with no vacancy signs as a reward for these business owners showing patience and following proper health protocols during the last year.
Entrepreneurs who elect to focus their energy in the hospitality industry traditionally do it for one of two reasons. First, service is something they enjoy whether it is creating a memorable stay, comfort away from home, or a strong desire to provide quality product with exceptional customer service. The song, “Be Our Guest” (https://www.youtube.com/watch?v=afzmwAKUppU) from the Disney classic, Beauty and the Beast, is not just a clever tune, but a soundtrack for their lives. Second, they wish to create a life of financial prosperity doing something they enjoy while executing on their own vision to their own cadence.
A special group within the hospitality industry are the innkeepers. Innkeepers have been a valued component of communities since people traveled by foot and horse. In the earliest days, these individuals were people who opened their homes to travelers. Today, accommodation providers create with a much more expansive palette of properties ranging from destination resort hotels to Bed & Breakfasts to small spaces where people can park an RV, boat, or pitch a tent.
IBA, as a business brokerage and commercial real estate firm, has been uniquely positioned to facilitate transactions involving accommodation providers for almost fifty years with our ability to comprehensively represent the owner of the establishment both in the sale of business and real estate with knowledge, experience, and a high professional skill set.
The sale of both the business and real estate of a hospitality business is a sophisticated, nuanced project. The process starts with establishing the value of both the business and real estate assets. During this value assessment it is critical that both assets are evaluated separately and as a package with revenue streams and expenses properly allocated to the appropriate entity. For example, a fair market rent rate for the entire property needs to be established to value the real estate, this income stream to the property owner will be multiplied by an appropriate capitalization rate for the location and real estate type (e.g., is the property single use or multiple use? A property with a hotel, cabins, store, and restaurant with a diversified revenue stream would have a different CAP rate than a property with yurts and camping spots) in establishing the real estate value. The premium revenue stream received above this fair market rent for the property is the revenue stream of the business. The business revenue stream minus operating expenses derives the profit from the entrepreneurial effort. This profit is a foundational element used to establish the value of the business. A capitalization rate will also be applied to this figure during the valuation process, but it will be a different rate than for the real estate. The selection of appropriate CAP rates for valuing businesses and real estate is subjective science requiring significant knowledge and experience.
The next step in valuing a business like a hotel is to separate tangible assets between the business and real estate. Consumables like the inventory of linens, towels, glassware, etc. need to be valued and incorporated into the business side analysis. Items that can be moved or sold independently including beds, dressers, televisions, etc. are also part of the business value. Attention to detail in assessing these assets can help lay the groundwork for justifying a premium value for a business to a buyer, their CPA, investors, or lending institutions. However, at some point furniture, equipment, and inventory cross over and become tenant improvements ranging from recently remodeled bathrooms to swimming pools and hot tubs to HVAC systems which are commonly part of the real estate valuation.
The next step in valuing an accommodation business and real estate is more art than science. Most hotels, motels, bed & breakfasts, cabin communities, campsites, and marinas are unique properties. Value is built on a foundation of financial and tangible asset facts, but ultimately will be greatly impacted by the intrinsic value placed on it by the buyer and the professional sales ability of the broker justifying the value in the marketplace. The distance from Arch Cape, Oregon to Cannon Beach is six miles. The distance from Port Townsend, Washington to Irondale is eight miles. All four towns are in similar settings with saltwater views and abundant nature. However, real estate values are significantly different between the four cities. Why? Value is in the eyes of the beholder. Perception is reality. This is true whether you are buying a business with real estate or selecting a place to stay the night. Ultimately, the value of both purchases will be determined by supply, demand, perception, and amenities offered.
A wonderful example of Pacific Northwest entrepreneurial success as an innkeeper is the story of Duane Hagadone. In 1986, Mr. Hagadone opened an eighteen story lakeside resort in a depressed logging and mining town with about 25,000 residents. His resort vision featured turrets and steeply sloped copper roofs. Forbes magazine called it a “study in excess erected in the middle of nowhere”. Today the resort is known as the Coeur ‘d Alene (https://www.cdaresort.com/), frequently appears high on lists as one of the premier golf resorts in the world, and features a floating golf green only accessible by boat that is a must play for golfers in a town that now is a destination vacation venue and features homes on the lake owned by the rich & famous from around the world. A radiant example of entrepreneurial and real estate vision and execution at a high level. Unfortunately, Duane Hagadone was lost to the world at the age of 88 on April 24. https://cdapress.com/news/2021/apr/26/duane-b-hagadone-visionary-developer-who-loved/ His persona will be missed in the hospitality industry, but his spirit is likely to live on at the gem on a lake in the woods he discovered and introduced to the world forever.
All entrepreneurs reach a time in their lives when they want to transition from active business owners to retirees enjoying the fruits of their success. If you are an innkeeper, accommodation business owner, or hospitality industry entrepreneur who would like to go from serving guests to being a guest, the members of IBA’s market leading hospitality industry transaction division would welcome the opportunity to learn about your business and provide an overview of our client services. IBA is unique in the mergers & acquisitions industry in that 100% of our fees are paid on performance upon completion of a sale. All information shared with IBA is held in strict confidence. We look forward to an opportunity to serve you with knowledge, experience, skill, and superior customer service.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.