Here is a quick and simple hotel valuation technique advocated by Gordon Robinson (Property Finance Consultant with over 38 years in experience) of Mutual Finance, London.
This calculation although typically used for hotel valuation can also be used for valuing a guest house or B&B business.
But before we share the ‘rule of thumb’ method, let’s quickly discuss and understand the 3 favoured long-hand methods used by professional agents and investors in arriving at a robust figure:
- Income capitalization: estimating the present worth of future cashflows inc. probability and discounting the future cash for a comparable rate, usually interest rate. In essence, this method answers the question, “If I take into account all future cashflows this business is expected to bring in, how much would be a reasonable price to pay for it in today’s money?”
- Cost approach: this involves conducting an on-paper cost comparison between buying the prospective hotel business for sale ‘as-is’, or building it new. With this method, unlike method one, the income potential of the business is not taken into account. But it is used to academically solve the puzzle of: “Is it better for me to buy this hotel or to build a new one instead?”
- Sales comparison approach: this is the practice of using historial sales prices of comparable hotels near-by and using this as a general yardstick for gauging value of a prospective opportunity. This says, “If (X) hotel down the road, which is not too dissimilar to this one, sold for (Y) amount, then this hotel might sell for (Z) amount.”
Having wrapped up and understood the more in-depth valuation techniques - here’s Gordon’s take on a simple rule-of-thumb method that takes 60-seconds to complete:
- Take the ADR (Average Daily Room Rate), multiplied by the number of available rooms, multiplied by a thousand.
Valuation of business = ADR x # of available rooms x 1,000
And example could be:
A B&B with an average daily room rate of £90.00 has 7 available rooms to let, how much would it be worth?
Valuation = £90.00 x 7 x 1,000 = *£630,000
(*For valuing a B&B business that has a more comparable set of rooms and costs applied, this simpler method - although, broad-brushstroke, is far more reliable than for a large hotel with varying standard of rooms and costs associated.)
Have a go at valuing a B&B for sale yourself using this method…also download Gordon’s PDF article below and keep it for future reference: