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Hotel, guesthouse or B&B?: Understanding the name game

24 November 2009 by
Hotel, guesthouse or B&B?: Understanding the name game

For those looking to buy a hotel, guesthouse or B&B, the differences between the three may not be obvious. Ben Walker reports.

On the face of it, the distinction between a B&B, guesthouse and hotel may seem self-evident - it's easy for us to visualise a typical example of each. But for the independent investor, perhaps making their first foray into the serviced accommodation market, it is worth exploring the particular characteristics of each sub-sector.

A B&B is essentially a private house or farm with letting rooms and is commonly known as a "lifestyle" business suited to families, people who work from home, or the semi-retired.

B&Bs typically generate annual sales below the current £67,000 VAT threshold. One advantage of this type of lifestyle business is that owners can put many of their living expenses through the business accounts, which are then offset against earnings for tax purposes. These expenses include mortgage payments and a percentage of utility costs - eating out or staying at other B&Bs can also be classed as tax deductible since they constitute market research.

"If you are letting only two or three rooms you cannot always expect the business to support the whole family, but if one of you is working full-time, part-time, or you have another job you do from home, then it can work very well," says David Weston, chief executive of the UK Bed & Breakfast Association.

B&Bs do not tend to require a liquor licence since they do not serve evening meals or include a bar. The employment of extra staff by the owner/operators is rare.

New entrants to the serviced accommodation sector will have a series of regulatory issues to comply with, ranging from health and safety and business rates, to disabled access.

Many of these compliance issues are detailed on www.caterersearch.com by choosing from the "explore by topic" icon. VisitBritain's Accommodation Know-How website - www.accommodationknowhow.co.uk - is also worth a look. It includes a useful legislation check list, which enables new entrants to identify the legal areas that will be relevant to their specific business plan. Full access to the website is then available either via paid subscription or free once your business has opened and been quality assessed by VisitBritain.

From the agent and valuer's perspective, as a property gets smaller in terms of its number of letting rooms, it is likely to be worth more as a private house rather than a business. For valuation purposes, therefore, the accounts of a B&B are, in most cases, irrelevant, and the B&B is usually valued as a real estate asset, says Leigh Parsons, a partner at property agent Knight Frank based in Leeds.

The Georgian Guest House in Saxmundham, Suffolk, is a good example of the B&B model, despite its name. It has traded below the VAT threshold, making an estimated annual net profit of £35,000. As an impressive, detached, and fully refurbished period property, the freehold was recently marketed by licensed property agent Christie & Co for £695,000 (see below).

Equally, large family houses of five bedrooms or more typically make suitable B&B properties and prices will, therefore, vary according to location and condition.

The decision-making process for buying a B&B will be almost the same as for buying a private home and access to schools, shops, and hospitals are likely to be important considerations, as well as the location's ability to attract paying guests.

Compared with a B&B, a guesthouse tends to be a "proper" business that needs to justify its existence through income and profits - buyers will usually need to take out a commercial mortgage. Typically, a corporate hotelier or business person from another sector might trade down to running a guesthouse as something to do for a number of years before retirement, so in this sense a guesthouse can still be a lifestyle purchase.

Guesthouses are usually VAT registered and so, to be viable, should be capable of at least £90,000 annual sales net of VAT, Parsons says.

Some guesthouses serve dinner and have liquor licences; some don't. They are usually owner-operated, but occasionally will employ a general manager and a night porter, although this is rare. Typically, they have fewer than 15 letting bedrooms.

When it comes to valuing guesthouses, the skill is in assessing to what extent the guesthouse is a hobby or a business. How much of its value is in the real estate asset or in the cash-flow and profit?

If based on earnings alone, a guesthouse or small hotel is normally valued at between six and 12 times its annual post-tax profit. In some cases, the same property may be simultaneously marketed as a private house and a guesthouse.

"We are not residential agents but in some cases we will recommend that the seller gets a residential valuation as well if change of use is possible. There are some prime examples of seafront guesthouses being converted to private homes," comments Tim Gooding, a director at Christie & Co.

Again, in addition to its profitability, the value of a guesthouse may also depend upon a number of factors such as location and condition. For example, £700,000 will currently buy you a 10-bedroom guesthouse in Brighton or a 27-bedroom hotel in Eastbourne via licensed property agent Fleurets.

For its minimum one-star rating, the AA defines a hotel as including a designated eating area that serves breakfast daily and dinner most evenings, with most of its rooms being en suite. Unlike a B&B or guesthouse, a hotel normally provides access to guests 24 hours a day and this requires the employment of a receptionist around the clock. Typically, other uniformed staff include waiters and housekeepers and the business will require a liquor licence.

The value of a hotel is solely in its ability to generate profit and valuation will start and finish with the accounts. In the current economic environment, obtaining debt financing for a hotel which does not have a healthy trading record will be extremely difficult.

The hotel investor is usually solely motivated by his return on investment so will not necessarily have any knowledge or connection with the hotel's location. Owing to the current weakness of the pound against other major currencies, interest from overseas investors in UK independent hotels is strong, particularly for opportunities in London and affluent commuter towns near major airports, such as Haywards Heath in West Sussex and Bishops Stortford in Hertfordshire.

In conclusion, with respect to valuation, the distinction between a B&B and a hotel is clear - the former is primarily valued as a real estate asset and the latter as a business. The guesthouse category is where the grey area occurs and where the skill of the valuer is exercised.

What an accommodation provider chooses to call his property can also be a marketing issue. Common accommodation standards agreed by the national tourist boards of England, Scotland, and Wales, the AA and the RAC have been in place since 2005 and those registered within the scheme may have a choice, as Will Thomas, a hotels negotiator at Fleurets points out. "Whether you are a hotel or guesthouse can be decided by how you want to be defined in the guidebooks. Would you prefer to be a guesthouse with four stars or a hotel with two?"

Those not registered in the scheme can, of course, do what they like, hence the continued prevalence of "hotels" which are essentially boarding houses for benefit recipients in seedy parts of cities and towns.

Some properties will have the potential to gravitate between the categories. The Old Mill, in Mold, North Wales, for example, comprises a five-bedroom family home and six en-suite letting bedrooms in a separate building. It is classified by the AA as four-star guest accommodation and described as a B&B on its own www.old-mill.co.uk website. Income has been maintained below the VAT threshold and the property is currently on the market through Knight Frank for an asking price of £779,500.

"The current owners, Mr and Mrs Evans, have owned the property for 20 years and are selling as they wish to retire. The property was a craft centre when purchased. Mr and Mrs Evans then converted it into a full-service private hotel but scaled back the operation in recent years and finally dropped the evening meals in October 2007. There is scope to re-establish this side of the business if new owners desired to do so," Parsons says.

If the new owners also chose to convert the family home into five more letting bedrooms, then it could easily call itself a guesthouse or hotel once again.

A hotel will generally be a "proper" business, and its valuation will depend only on the state of the accounts. A bed and breakfast, on the other hand, will often be run chiefly as a lifestyle choice, and the operators may well have other jobs

CASE STUDY

Christie & Co acted for the sellers of the Georgian Guest House in Saxmundham, Suffolk. The freehold was sold last month (October) to a cash buyer off an asking price of £695,000.

The Grade II-listed former private school has been operated as a guesthouse with seven en-suite letting bedrooms since 1999. The detached property also comprises four-bedroom living accommodation. The business was sold as a going concern and is classified by EnjoyEngland.com as a five-star guesthouse.

The guesthouse business was run below the VAT threshold - for the year to 30 September turnover was estimated at £64,500 and reconstituted net profit at £35,000.

The purchaser, Sarah-Jane Cashman, is personally new to the hospitality trade, although her family have 30 years of experience working in the pub and hotel sectors.

CHECKLIST FOR STARTING A B&B

Starting a B&B typically involves no staff but making use of your own home.

  • Prepare a budget. Consider if it can provide you sufficient income.
  • There are no mandatory licences to pay to start a B&B, though the physical investment - en suite bathrooms, fire precautions, etc - can be expensive.
  • Do not forget that you will need to invest in marketing, too.
  • Going through the inspection process to become star-rated by VisitBritain can cost £200 plus, and an alcohol licence - if you want one - can cost £350 or so in year one and £70 per annum thereafter.
  • Are you the right sort of person? You'll need to be a people person, houseproud, with a focus on detail, and well organised.

Source: www.bandbassociation.org

PROPERTIES OF THE MONTH

Doxford Hall Hotel & Spa, Chathill, Alnwick, Northumberland

Price Offers Invited

The Grade II-listed property, built in 1818, opened for business in January 2009 following its extensive renovation. It consists of 25 individually-styled bedrooms, a 60-cover restaurant, spa, pool and function room. The grounds include formal gardens, a yew maze, a number of outbuildings and car parking. EnjoyEngland, previously known as the English Tourist Board, has given it a four-star rating and a Silver Award.

Agent Knight Frank (Leeds office)

Tel 0113 297 2430

The Beacon Inn, Haresfield, GloucestershirePrice £35,000 leasehold

This village leasehold Inn, close to the M5 motorway and the bustling city of Gloucester, includes a spacious lounge bar (seating about 40), restaurant (about 50), function room/skittle alley (about 60), patio gardens, large car park, five en suite letting bedrooms and four- bed owners' accommodation.

Takings for the year ending October 2009 were in the region of £240,000, split 30% wet, 45% food and 25% accommodation. The landlord is Enterprise Inns and there are nine years remaining on the lease.

Agent Guy Simmonds

Tel 01332 865112

Cygnet Hotel, Sandown, Isle of WightPrice £850,000 freehold

Located close to beach, town centre and tourist attractions, this is an easily run 44-bedroom resort hotel with two-bedroom flat for resident owners or managers. The property has spacious public areas with large function room and a leisure suite complete with indoor swimming pool. This established business is consistently profitable with a growing turnover.

Agent Colliers Robert Barry

Tel 01285 852852

Chambers House, DerbyPrice OIEO £750,000 freehold

Occupying an elevated plot close to the main shopping area, Chambers House was originally two separate townhouses which have been skilfully merged and converted into an excellent bed and breakfast business. The Grade-II listed Victoria property is well presented throughout and comprises reception hall, residents' lounge with feature fireplace, breakfast room (seating 18), 18 letting bedrooms, self-contained flat, two separate staff rooms, front garden area and enclosed rear car park.

Agent Christie & Co (Nottingham office)

Tel 0115 948 3100

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