How to Value a Hotel or Motel
Hotels and motels provide temporary lodging services for domestic, business, and international travelers. Despite adverse economic conditions and travel restrictions, the hotel and motel industry has performed well in recent years. Moving forward, IBIS World expects healthy profit and revenue growth due to increased travel and rising consumer spending. As such, it is a great time to buy, expand, or sell a hotel or motel. Keep in mind, that this industry is extremely fragmented and competitive. To succeed, it is beneficial for operators to understand how to value a hotel or motel.
The best way to learn about valuing a hotel or motel is to receive a business valuation. During a business valuation, a business appraiser may use various methods to calculate the value of a hotel or motel. In addition, they will highlight the risks and opportunities associated with the business. This information can help operators take the next steps in maximizing the value of a hotel or motel.
Peak Business Valuation, business appraiser, works with hotels and motels throughout the nation. We are happy to provide you with a business valuation for a hotel or motel. Peak can also answer any inquiries you may have on how to value a hotel or motel. Start today by scheduling a free consultation with Peak Business Valuation below!
How to Value a Hotel or Motel
There are several common business valuation methods to consider when valuing a hotel or motel. At Peak Business Valuation, our valuation experts often use the market approach and/or the income approach. Both methods are effective, however, each valuation method uses a different basis of valuation. The valuation analyst will determine the most suitable approach for a hotel or motel during the valuation process. This often involves using a combination of valuation approaches.
Valuing a Hotel or Motel Using the Market Approach
The market approach is one of the most common business valuation approaches. This method is similar to how a real estate appraiser values a house. During the real estate appraisal process, appraisers assess similar properties that recently sold in the area. This allows them to accurately determine the fair market value of a home. When valuing a hotel or motel with the market approach, business appraisers consider similar businesses that recently sold on the market. If the hotel or motel is a private company, the expert relies on private transaction databases to gather information.
Multiples for a Hotel or Motel
Valuation multiples are a defining feature of the market approach. Multiples are ratios that measure the value of a hotel or motel based on financial metrics. These metrics often include cash flow, revenue, and earnings. To determine the valuation multiples for a hotel or motel, business appraisers apply the appropriate NAICS or SIC code. We highlight SDE, EBITDA, and REV multiples for a hotel or motel below.
SDE (Seller’s Discretionary Earnings) Multiple for a Hotel or Motel
- The SDE multiple measures the value of a hotel or motel by assessing its seller’s discretionary earnings. This is a common valuation multiple in small business valuation.
EBITDA Multiples for a Hotel or Motel
- EBITDA multiples reflect a hotel or motel’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation analyst understand the return on investment (ROI) a hotel or motel can expect.
REVENUE or SALES Multiples for a Hotel or Motel
- The REVENUE or SALES multiple represents the total amount of revenue a hotel or motel generates. Valuation analysts apply this multiple to the business’s revenue or sales to calculate its fair market value.
Valuing a Hotel or Motel Using the Income Approach
The income approach assesses the value of a hotel or motel in relation to its future income potential. In addition, this valuation approach considers any risks associated with buying, expanding, or selling a hotel or motel. Below, we highlight a few common risks in the hotel and motel industry.
- Cleanliness: It is vital for hotels and motels to hold a high standard of cleanliness. Failure to do so can taint a hotel or motel’s reputation.
- Financial Performance: Operating a hotel or motel can come with high overhead expenses. As such, it is important for hotels and motels to have strong financial planning and budgeting skills.
- Reputation: The reputation of a hotel or motel plays a vital role in its success. Hotels and motels can build a strong reputation through excellent customer service and attention to detail.
- Competition: The hotel and motel industry is very competitive. To succeed, operators must differentiate their hotel or motel from competitors and create diverse revenue streams.
Methods to Value a Hotel or Motel Using the Income Approach
There are several variations of the income approach appraisers use when valuing a hotel or motel. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we highlight how to value a hotel or motel using these methods.
Capitalization of Cash Flow Method
The capitalization of cash flow method involves identifying a reasonable amount of income for one period. Business appraisers then apply a capitalization rate to the income to determine a reasonable rate of return investors can expect. This income approach is generally used for hotels and motels with long and stable histories.
Discounted Cash Flow Method
The discounted cash flow method is ideal for hotels and motels with strong financial histories and/or predictable forecasts. When using the discounted cash flow method, valuation experts project future earnings over a 3-5-year period. The future earnings are divided by a discount rate rather than a capitalization rate. This method values a hotel or motel by taking the time value of money into account. Keep in mind, this method is less common as it relies on future cash flow estimates which can be inaccurate.
If you are purchasing, expanding, or selling a hotel or motel, it is important to learn how to value a hotel or motel. Doing so can help you understand the strengths and weaknesses of your hotel or motel. In addition, you will learn the fair market value of a hotel or motel. With this information, you can take the next steps in increasing the value of a hotel or motel. To learn about valuing a hotel or motel, it is best to obtain a business valuation.
Peak Business Valuation is happy to help! As a professional business appraiser, Peak works with hotels and motels on a regular basis. We are happy to provide you with a business valuation for a hotel or motel. Additionally, we can discuss any questions you may have on how to value a hotel or motel. Start today by scheduling a free consultation with Peak Business Valuation!