Due Diligence and Closing When You Sell an Inn
Seller’s Guide, Step 6 of 7: Completing Due Diligence and Closing
An accepted offer starts the most detailed part of the sale. This guide expands on Step 6 of our seven-step overview of selling an inn or B&B, explaining what buyers and lenders verify during due diligence and how to prepare for a smooth closing.
In brief: Due diligence is where the buyer and lender verify the business, property, financial performance, and operating assumptions behind the purchase. Be prepared for detailed financial review, inspections, appraisal and financing requirements, licensing and contract review, and reconciliation of future reservations and deposits. Keep information organized, maintain confidentiality, continue operating the inn, and address problems as they arise. Closing is not simply a transfer of real estate—it is the transfer of an operating lodging business.
Understand What Due Diligence Is Designed to Accomplish
By the time an offer is accepted, the buyer should already understand the basic business opportunity. Due diligence goes deeper.
The scope varies with the property and transaction, but the purchase of an inn, B&B or boutique hotel often combines elements of commercial real estate due diligence and business acquisition due diligence.
That distinction matters. Inspecting the roof and HVAC systems isn’t enough. Neither is reviewing a profit and loss statement. The buyer is acquiring an operating enterprise supported by a physical property, and both need to withstand scrutiny.
Expect Detailed Financial Review
Financial due diligence usually builds on the information provided during marketing and negotiation.
A buyer and lender may compare filed tax returns, profit and loss statements, reservation-system reports, occupancy-tax filings, bank records, payroll information, and other supporting documents. They may also examine revenue sources, operating expenses, owner adjustments, unusual or nonrecurring items, seasonality, and recent performance.
If legitimate owner add-backs or discretionary expenses were used to explain financial performance, expect them to receive additional scrutiny. As discussed earlier, an adjustment a buyer considers reasonable may not necessarily be recognized the same way by a lender.
This is why financial preparation should begin long before due diligence. The time to understand discrepancies in your records is before someone else finds them.
Physical Due Diligence Can Affect More Than the Property
A buyer will generally want to evaluate the physical condition of the real estate and major systems.
The results can affect more than the buyer’s willingness to proceed. Significant issues may also concern the lender, appraiser, or insurer.
An inspection finding does not automatically mean the seller must correct everything identified. Depending on the purchase agreement and circumstances, the parties may agree to repairs, credits, price adjustments, another solution, or no change at all.
The important point is that previously unidentified physical problems can become transaction problems when they are discovered late in the process.
Appraisal and Financing Remain Critical Until Closing
A buyer’s financing isn’t complete simply because a lender has issued an initial approval or prequalification.
If the lender’s analysis or appraisal doesn’t support the proposed financing, the parties may need to reconsider the capital structure. The buyer might contribute additional equity, the seller might consider financing part of the transaction, the parties might renegotiate terms, or the transaction may not proceed.
This reinforces a principle that runs throughout the selling process:
A negotiated purchase price and a financeable transaction are not necessarily the same thing.
Verify Zoning, Licenses and the Right to Operate
A buyer needs reasonable confidence that the property can continue operating as intended after ownership changes.
Do not assume that every license or approval automatically transfers to the buyer. Some may require a new application, inspection, approval, or other action.
Existing operations and future opportunities should also remain clearly distinguished. A property may have physical space that appears suitable for weddings, additional lodging units, food service, or another use without necessarily having the zoning, permits, infrastructure, or approvals required for that activity.
Due diligence should confirm what the business is currently permitted to do—not merely what someone believes the property could accommodate.
Account for Reservations, Deposits and Guest Obligations
Future reservations are valuable because they provide the buyer with booked business. But they also create obligations.
If the seller collected a deposit for a stay that will occur after closing, the buyer may be expected to provide lodging even though some or all of the guest’s money was received by the seller. Similar issues can arise with event deposits, group bookings, packages, gift certificates, credits, and other prepaid obligations.
The purchase agreement and closing process should establish how these items will be treated.
Accurate reservation and deposit records are therefore essential. Both parties need to understand what future business is transferring and what financial obligations accompany it.
Review Contracts, Vendors and Other Operating Relationships
An operating inn depends on systems, services and vendor relationships that don’t automatically follow the real estate. Some agreements can be assigned, some need approval and others must be replaced, so identify them early.
The objective is to determine what transfers, what needs to be replaced, and what must happen for operations to continue without unnecessary interruption.
Address Employees Carefully
Employees can be one of the most sensitive parts of an ownership transition.
A buyer may want to retain some or all existing staff because they provide operational continuity and institutional knowledge. But employment relationships don’t necessarily transfer automatically, and the buyer may have different staffing plans.
The seller also has legitimate concerns about when employees should be told about the transaction. Premature disclosure can create uncertainty or unwanted turnover; waiting too long can create its own operational and relationship problems.
There is no single communication timetable appropriate for every transaction. The employee transition should be planned deliberately, with appropriate legal and professional guidance where needed.
Continue Protecting Confidentiality
An accepted offer doesn’t make confidentiality irrelevant.
Until closing, the seller still owns and operates the business. Employees, guests, vendors, competitors, and the local community may not need to know that a sale is pending.
The appropriate approach is usually controlled disclosure based on legitimate need and transaction timing, rather than either complete secrecy or broad public announcement.
Respond to Problems Without Losing Perspective
Due diligence frequently identifies questions or issues. That doesn’t necessarily mean something has gone wrong.
A repair credit may resolve one issue. Additional documentation may resolve another. Some matters may require legal advice, a contract amendment, a change in financing, or additional time.
Preparation helps, but so does perspective. The purpose of due diligence is to identify issues while there is still time to understand and address them.
Prepare Carefully for Closing
As contingencies are satisfied, attention shifts to the transfer itself: documents, prorations, deposits, accounts and the many operating details that must move to the new owner.
Financial and tax considerations can be significant as well. The allocation of purchase price among real estate, FF&E, goodwill, and other assets may have different consequences for buyer and seller and should be addressed with appropriate tax and legal advisors.
Closing isn’t merely signing documents and exchanging funds. For an operating lodging business, it is also the point at which control of an active enterprise must move from one owner to another.
That makes advance coordination particularly important.
Know When Professional Advice Is Necessary
Due diligence and closing can raise questions involving contracts, taxes, financing, title, zoning, employment, licensing, insurance, environmental conditions, and other specialized matters.
Your attorney should advise you on legal documents and obligations. Your accountant or tax advisor should address tax treatment and financial consequences. Lenders, inspectors, title professionals, insurance advisors, and other specialists each have their own roles.
An experienced lodging-industry advisor can help keep the transaction organized and recognize issues that commonly arise in an inn or bed and breakfast sale, but that role does not replace specialized legal, tax, lending, or technical advice.
A successful closing depends not on one advisor knowing everything, but on the right professionals addressing the right issues at the right time.
Questions About Due Diligence and Closing
How long do due diligence and closing take?
The purchase agreement sets the deadlines. Due diligence usually takes at least 45 days and often runs to 60 while the buyer reviews records, inspects the property and lines up financing. Closing follows once financing, the appraisal, licenses and other conditions are complete, and SBA and other government-backed loans can add time. Plan for it, and keep the business running well until the day of closing.
What happens to guest reservations and deposits at closing?
Future reservations usually transfer with the business, and the buyer takes on the obligation to host those guests. Deposits already collected for stays after closing, along with unexpired gift certificates, are typically credited to the buyer, often as a separate transaction outside the closing itself. The specifics are governed by the purchase agreement, so make sure it spells out how reservations, deposits and gift certificates will be handled.
What if the inspection finds problems?
Most inspections turn something up. Depending on what is found, the parties may agree to a repair, a credit, a price adjustment or no change at all. Keep perspective: the question is whether the issue changes the value or the buyer’s ability to operate, not whether the inn is perfect.
Heading Toward Closing?
If you are under contract or expect to be soon, we can help you anticipate the questions due diligence is likely to raise and keep the transaction organized on the way to closing.
