Valuation Multiples for a Hotel or Motel
Hotels and motels provide temporary housing for domestic and international travelers. This often includes providing food, beverage, recreational, and other additional services. According to IBIS World, there are over 166,000 hotels and motels throughout the United States. Despite poor economic health, the hotel and motel industry has seen healthy growth. Over the past several years, the industry has generated over $239 billion dollars in sales revenue. Moving forward, the hotel and motel industry may benefit from increasing travel rates and improving economic conditions. This is ideal if you are looking to buy, expand, or sell a hotel or motel. Whether you are entering or exiting the hotel or motel industry, it is important to know the value of a hotel or motel. This may involve learning about valuation multiples for a hotel or motel.
Valuing a Hotel or Motel
Whether you are buying or selling, there are many benefits that come with learning the principles of valuing a hotel or motel. The best way to start is by receiving a business valuation for a hotel or motel. When buying a hotel, receiving a business valuation may allow you to learn about effective negotiation strategies. Business appraisers may also discuss a fair purchase price for a hotel or motel. When selling a motel, obtaining a business appraisal may help you understand a fair listing price. Overall, you can take the next steps to increase the value of a hotel or motel by receiving a business valuation.
There are various business valuation methods that experts may use when valuing a hotel or motel. The market approach is popular in business valuation. This method relies on valuation multiples for a hotel or motel. In this article, we discuss the basics of valuation multiples for a hotel or motel. Keep in mind, this article is only a guide. For more accurate information, receive a business valuation. Additionally, see our article on Valuing a Hotel or Motel.
Peak Business Valuation, business appraiser, works with hotels and motels on a regular basis. We are happy to provide you with a business valuation for a hotel or motel. We can also answer any questions on valuing a hotel or motel. Start now by scheduling a free consultation with Peak Business Valuation!
Valuation Multiples for a Hotel or Motel
The following image shows average valuation multiples for a hotel or motel. Keep in mind, this diagram is only a guide and may not apply to your hotel or motel. To understand what is best for your hotel or motel, receive a business valuation. Peak Business Valuation is happy to help. Schedule your free consultation with Peak Business Valuation today!
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
A valuation multiple is a value that compares a hotel or motel’s value to a financial metric like cash flow, earnings, or sales. For instance, the SDE multiple is common when determining the value of a hotel or motel. This valuation multiple compares the implied value of a hotel or motel to its seller’s discretionary earnings. Valuation analysts will consider the market multiples of similar hotels or motels that recently sold. Then, they will apply the multiple to your hotel or motel to get an accurate range of value.
For example, a hotel or motel has $390,000 in seller’s discretionary earnings and receives a 1.22x SDE multiple. In this case, the hotel or motel has a fair market value of $475,800 ($390,000 times 1.22x). Conversely, if it receives a 2.44x SDE multiple, the value of the hotel or motel would be approximately $951,600 ($390,000 times 2.44x).
Peak Business Valuation, business appraiser, frequently works with individuals who are buying or selling a hotel or motel. Below, we list a range of valuation multiples for hotels and motels that they typically transact at. The range of value may vary since each hotel or motel is different. The following sections discuss SDE, EBITDA, and REV multiples for a hotel or motel.
SDE Multiples for a Hotel or Motel
Average SDE Multiple range: 1.14x – 2.54x
According to Peak’s data, hotels and motels transact at an SDE multiple range of 1.14x – 2.54x. Business appraisers can determine an implied value of a hotel or motel by applying an SDE multiple to its seller’s discretionary earnings. Refer to the equation below for valuing a hotel or motel.
SDE X Multiple = Value of the Business
For example, a hotel or motel generates $172,000 in seller’s discretionary earnings. Suppose the hotel or motel transacts at a 2.00x multiple. Here, the value of the hotel or motel is about $344,000.
$172,000 X 2.00x = $344,000
Valuation experts often use SDE multiples to value a hotel or motel. They can calculate a hotel or motel’s SDE by adding back any expenses the new owner may not incur to the value of the hotel or motel. Common add-backs may include personal expenses, a fair owner’s compensation, and non-related or non-recurring business expenses. Doing this allows valuation experts to determine the cash flow potential of the hotel or motel. Knowing the cash flow potential is important when valuing a hotel or motel.
EBITDA Multiples for a Hotel or Motel
Average EBITDA Multiple range: 1.57x – 3.34x
Hotels and motels transact at an average EBITDA multiple range of 1.57x – 3.34x. Valuation analysts apply this multiple to a hotel or motel’s EBITDA to determine its fair market value. The equation is as follows.
EBITDA X Multiple = Value of the Business
For example, a hotel or motel has an EBITDA of $138,000. If it transacts at an EBITDA multiple of 2.78x, the hotel or motel is worth $383,640.
$138,000 X 2.78x = $383,640
EBITDA multiples measure a hotel or motel’s return on investment (ROI). When determining the value of a hotel or motel, valuation experts may rely on an EBITDA multiple since it helps normalize differences. This allows the expert to compare your hotel or motel to similar businesses. Normalized ratios also provide more accurate forecasts of the future earnings an investor can expect from a hotel or motel.
REV Multiples for a Hotel or Motel
Average REV Multiple range: 0.40x – 0.98x
The average hotel or motel transacts at a REV multiple range of 0.40x – 0.98x. Business appraisers at Peak Business Valuation can calculate the implied value of a hotel or motel by multiplying its total revenue by the multiple. See the following calculation.
Revenue X Multiple = Value of the Business
For instance, a hotel or motel generates $478,000 in revenue and transacts at a 0.88x multiple In this example, the hotel or motel is worth approximately $420,640.
$478,000 X 0.88x = $420,640
The REV multiple measures the total amount of revenue a hotel or motel generates. Keep in mind, REV multiples are less common when valuing a hotel or motel. Business appraisers at Peak Business Valuation often use cash flow multiples – SDE and EBITDA to value a hotel or motel. However, valuation experts will use their knowledge to determine which valuation multiples are best for your hotel or motel. In addition, the value of the real estate may play a large portion of the worth of a hotel. To learn the value of the real estate of a hotel or motel, seek a real estate appraisal.
Summary
There are various valuation approaches for determining the value of a hotel or motel. Often, business appraisers use the market approach which utilizes valuation multiples for a hotel or motel. Valuation multiples help experts understand the performance and health of a hotel or motel you are buying or selling. To learn what multiples are most suitable for your hotel or motel, receive a business valuation. Doing so can help you take the next steps in maximizing the value of a hotel or motel.
Peak Business Valuation, business appraiser, works with many hotels and motels across the nation. We are passionate about valuing a hotel and motel and finding success. Peak is happy to provide you with a business valuation and answer any questions you may have on valuation multiples for a hotel or motel. Start today by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Hotel or Motel, Value Drivers for a Hotel or Motel, and How to Value a Hotel or Motel.
