Calculating an Asking Price for Hotels and Gastronomy Properties
“Working out a realistic asking price for your hotel or hospitality business can
be a difficult, emotional and often unpleasant and disappointing process!”
Working out the value of hotel and gastronomy properties or: What is my hotel/ gastronomy property actually worth ?
In this section we will present a few tips, practical examples and simple valuation methods so that you can calculate a very simplified valuation for your own hotel or hospitality property and gain an idea of what the process entails.
Valuating and appraising hotel properties can be a very delicate and difficult task particularly in the case of owner-operated hotels. Decades of hard work developing a business can result in strong emotions making it difficult for owners to view their property objectively. This is something that tourism expert Hubert Auer, founder and senior consultant at Auer, Springer & Partner, comes across on an almost daily basis.
The international tourism consultancy ASPI (Auer/Springer/Partner/International - www.aspi.ag) was founded in 1983 and has countless branches in various countries. Over the last 30 years we have compiled thousands of feasibility studies for hotel projects / expansions, valuations for hotels, site assessments, marketing studies, etc. for customers in over 50 countries and successfully supported many renowned regional, national and international hotels, hotel chains and hotel investors throughout a number of decades. In many cases we have successfully supported hotels and hospitality businesses through two or sometimes even three generations from their founding, as they develop and reach their peak, right through to the sale and handover to new owners.
Many hoteliers and businessmen considerably overvalue their own hotel because, of all the valuation methods available, (balance value, fire insurance value, estimated value, asset value method, new construction value, price per room, etc.) they always tend to choose the method that presents their assets in the best light. However, they are soon forced to face facts once they actually come to sell, or the property has to be offered to the bank as collateral.
With around 132,000 tourist companies in the hotel branch currently available in Germany, Austria, Switzerland and northern Italy alone, the property sales market for hotels, guesthouses apartment blocks and other hospitality properties is fast-paced. Determining the value of a company as a whole is one of the greatest challenges facing company managements.
In recent years the importance of business valuations in the gastronomy and hotel industry has increased. On the one hand due an increasing number of hotel owner families who have built up a business but no longer wish or are able to continue running it. In some cases the burden of borrowed capital forces such families to look for business partners or the bank may put pressure on them to seek new owners or joint owners. On the other hand there are a number of ambitious young businessmen, often new to the hotel industry, who are looking for an opportunity to run their own business. It is absolutely necessary to work out the value of a hotel of hospitality property when selling it, when partners leave or join the company, when companies merge or are taken over and when taking out substantial loans, as many loans which are granted are secured by a mortgage on the property at hand.
Unfortunately, many hotel and gastronomy property owners are far too optimistic when it comes to valuing their property and often approach it in the wrong way. Recently people have increasingly been using a method of re-valuing based on restructuring so as to capitalise on silent reserves and to counteract negative equity capital with new carrying values. It is vital that any approach be based on an objective valuation of your hotel or gastronomy property.
Important terms in hotel and gastronomy property valuation
When discussing property valuations it is important that you clearly understand all the relevant terms:
The market value of a hotel or hospitality property:
This is the amount for which a property, hotel, hospitality business, or company can actually be sold under normal market conditions – without taking any mitigating or personal factors into consideration. This hotel and gastronomy property valuation method should be used by buyers, sellers and banks as a basis for collateral.
Replacement value of a hotel or hospitality:
This is the amount it would cost to replace all fixed and current assets in a hotel or gastronomy property. This method is predominantly used to calculate cover for fire insurance and is of little use for determining the actual value of a company.
Asset value of a hotel or hospitality business:
The total assets encompasses a company‘s important production factors and determines the capacity with which goods and services can be produced. The value of a hotel is determined using the gross floor space or cubic content and the available floor space.
The asset value approach is only of limited use in the valuation of hotel properties. At best, it can be useful when considering liquidation as a plausible alternative. In this case the liquidation value of properties with low profitability serves as a minimum value in the valuation process.
Income value (future income value) of a hotel or hospitality business:
A company’s estimated future yearly profits determine the value of a hotel or gastronomy property. It is therefore essential that hotels possess resources with which they can create sustainable positive returns. In this approach the predicted business results of the next few years and the subsequent cash flow form the basis of any business valuation.
Hotel and hospitality business valuation methods
There are various different methods which can be used to value hotels, hotel properties and hospitality businesses, all of which should only serve as a starting point. A property will normally be valued as a whole, taking investment backlogs, elements of the company which are no longer of use, unused potential, possibilities to extend and expand, debts and pecuniary advantages or disadvantages stemming from various different contracts or through surcharges and discounts into consideration.
Practitioner valuations of hotels and hospitality properties using coefficients
Practitioners often use simple methods which use the attainable turnover (net VAT), or an adapted gross operating profit (operating surplus from ordinary operating earnings minus operative expenses) to give a rough valuation of the hotel or gastronomy business. This focus on earnings and cash flows bears clear resemblance to income value appraisal methods.
What determines the value of an enterprise / hotel / hotel real estate / gastronomy property is the ability to make money (revenue and cash flow) with it in the future
It is not the extent of existing assets (capital) and their replacement values which are relevant but solely the ability to make money with them in the future!!!
Leisure hotel industry –hotel / gastronomy property valuation using coefficients
|Ratio to Turnover
|Ratio to OR II*
|Turnover x coefficient 1,8 - 2,0
|OR II x coefficient 8-10
|Turnover x coefficient 1,9 - 2,3
|OR II x coefficient 8-10
|Turnover x coefficient 2,0 - 2,5
|OR II x coefficient 8-10
|Turnover x coefficient 2,3 - 2,8
|OR II x coefficient 10-13
|Turnover x coefficient 2,8 - 4,0
|OR II x coefficient 12-16
*Operating result before tax, including allowance for depreciation
Comparative valuation methods for hotels and gastronomy establishments
Using data from previous sales of similar hotels in similar locations and the establishment’s capacity it is possible to provide a rough property valuation. Differences in location, condition, the standard of facilities, different functions and states of preservation mean that these are of course only very rough figures. It does not take other factors into consideration (seasonal hotels, city hotels, occupancy rates, prices) which will also affect the value of a property.
Hotel/gastronomy properties are nearly always sold for considerably less than the new construction price because they are nearly always a personalised, specialised entity and are often visibly in need of repair and investments. Issues surrounding planning permission and other legal restrictions may also make it difficult or impossible to make changes to the purpose for which the property is used.
Comparative valuation approaches - buying price per room to ascertain the value of a hotel property
|Buying price per room dependent on condition *
|New construction value *
|€ 30.000 to 60.000
|€ 65.000 to 90.000
|€ 40.000 to 70.000
|€ 75.000 to 120.000
|€ 60.000 to 80.000
|€ 110.000 to 175.000
|€ 70.000 to 100.000
|€ 125.000 to 180.000
|€ 150.000 to 250.000 or more
|€ 200.000 to 300.000 or more
* Applicable in Austria, Germany, Switzerland, northern Italy (South Tyrol). Differing criteria and land and building prices mean that other countries and regions use different valuation approaches which the tourism experts at ASPI AG or the hotel brokers at ASP Global Hotel Brokers will be happy to explain to you in detail. ASP has this information readily available for over 150 European regions.
Average value method using the first two valuation methods
Income approach coefficients and comparative valuation method –asset value
1 x asset value + 2 x net value ( Turnover and OR II)
Divided by 3
The discounted cash flow approach to business valuation
According to Hubert Auer, experienced tourism expert at ASPI AG, approaches to business valuation (particularly in the hotel branch) have witnessed a drastic shift in recent years away from asset value approaches towards approaches focusing on company success levels. This is nowhere more evident than in the internationally widespread DCF method, which derives the value of a company/hotel/hospitality business, etc. from the cash flow surpluses which it is expected to generate in the future.
If we work on the assumption that businessmen pursue solely financial aims, then it is the sustainable future cash flows which determine the value of a business. These cash flow values are discounted to create present values. The sum of these discounted present values represents the company value. This may seem somewhat theoretical so please see the attached PDF for a more easily understandable practical example
Summary of hotel and hospitality property valuations
According to Dr. Bodo Count of Hardenberg, one of the leading hotel brokers at ASP Global Hotel Brokers, there have never been as many hotels and hotel properties changing hands as in the last few years. In 2014 sales across Europe amounted to an astounding 36 billion euros. Although city and chain hotels account for a large percentage of these figures, it is only a matter of time before real estate investment trusts increasingly turn to medium-sized hotels with a manageable company size. This development along with many other transactions in which business valuation is a key issue, mean that it is extremely useful to possess at least general knowledge of common valuation methods.
Business valuation is a complex business problem which must should also take tax implications, financial aspects and many other elements into consideration. The valuation methods described here have presented business valuation calculations in general terms without taking debts or other financial burdens into consideration. Hotel and gastronomy property owners are strongly advised to seek the impartial advice of a professional tourism consultant or hotel broker at ASP Global Hotel Brokers.
Any figures quoted are based on a property in an average state of repair and assume the business would continue in its current capacity. The fact that valuations are now largely based on income and revenue figures clearly illustrates that what makes a company valuable is not its material assets, but the revenue that can be created with these assets. It is not an accumulation of hotel facilities or size but rather economic success which will guarantee a successful, satisfactory sale. This means that large investments in frequently overpriced wellness facilities or excessively expensive high quality furnishing and fittings are often merely stranded investments - an extremely unpopular term in the market valuation of hotel and gastronomy properties.
The complete article together with practical examples can be found here: http://www.aspimmo.com/deu_dyn_24.html
We highly recommend that hotel or gastronomy business owners or prospective buyer seek the professional advice of one of the tourism experts or tourism consultants at Auer, Springer & Partner, a hotel property surveyor, or experienced expert ASP Global Hotel Broker right from the very start of the buying or selling process.