another area where running a B & B is a complication to the usual property sale process.
It seems obvious, but a business( like anything else) is only worth what you can get a buyer to pay for it.
So you will never actually know the true value of your business until you start getting firm bids, and ultimately until you sell it. However, different types of business have their own widely recognized yardsticks for valuation and, whilst by no means foolproof, these are useful. When you start to think ahead towards selling your B & B, you should certainly look at these yardsticks, as they are the best means you have of gauging the likely value of your B & B.
The best financial valuation of any business is in relation to its sustainable profitability and return on investment.“ Sustainable” means the ongoing level of profitability which a new owner could rely upon given a realistic trading forecast based on established patterns, and having allowed for any anomalies the current owner( ie, you) may have injected in the“ profit and loss” figures. For example, if you have always done all the cleaning and laundry yourself, this will have kept your costs down and flattered your profit figures, but a prospective owner may feel this is unsustainable, and allow for higher future costs in cleaners and laundry bills, and therefore lower“ sustainable” profits.
Conversely( and this would help your sales pitch), if you have always farmed out the laundry and cleaning at great expense, you could point out how much a new owner with more time could add to the sustainable profits by doing these things in-house.
A widely used method of valuing businesses uses a“ price to earnings ratio”( p / e ratio). Different business sectors have different p / e ratios, which in the case of sectors featured on the stock exchange are easy to find. If shares in a particular sector tend to be valued at say six times earnings, then roughly speaking a business in that sector is worth six times its earnings( ie its sustainable profits), all else being equal.
It would be nice to be able to quote a“ p / e ratio” for B & Bs but unfortunately, for very small property-based businesses, the other variables( location, condition, property valuation, the state of the property market, interest rates etc.) are so important that any such figure would be meaningless.
This“ sustainability” concept also shows how important a well-documented record of trading figures is. Where a business has just started, and valuation will be based on hope or wishful thinking, but where there is a solid record of sales, the valuation can be solid, too. And because businesses are valued on future expectations of sustainable profits, a record of steadily growing sales and profits will greatly improve the valuation of that business( just as a record of decline will greatly reduce it).
A hospitality business like a B & B, though, has an added complication, which is that it is not just a business but also a property. Whereas its value as a business is limited to an accepted multiple of its sustainable( or possible future) earnings in revenue from its
How to Start & Run a B & B www. howtorunabandb. com