How to Value a Hotel

You’ve done the hard work of opening your hotel, guests are coming in droves, and your hotel is thriving.  But, how much is it worth?  In this article, we show you how to accurately value your hotel and why it matters.

Why Value Your Hotel?

Running a hotel is more than a full-time job, and it can be so easy to get caught up in the day-to-day operations that you neglect some of the big picture items, like having a valuation done for your hotel.  You may even be wondering why you’d ever need one.

There are several valid reasons [1] to get a valuation done, such as:

• Selling your hotel
• Seeking investors or additional financing for expansion/upgrades
• Fairly allocating partner ownership/shares

You may be able to think of several other scenarios in which a hotel valuation could come in handy, as well.

Understanding Value and Profit

For many hotel owners, the terms “value” and “profit” seem synonymous.  It makes sense on the surface:  If your hotel is earning large profits each year, it must be a valuable business, right? 

Unfortunately, there’s a lot more to a hotel’s value [2] than its annual revenue.  Value takes into account both the tangible and the intangible assets that make up your hotel, including:

• Your brand (independently or as part of a franchise)
• Any non-compete agreements that exist for your hotel
• Employees and staff
• The hotel’s reservation system
• How well your building has been maintained
• Your location

We take a look at a few of these factors in more detail below.

What’s in a Brand?

If you’re part of a well-known and well-respected franchise or own a beloved independent brand, you’ll receive a lot more interest when selling, and investors will be much more willing to provide you with financing.

If you’re associated with a brand that has a bad reputation overall, even if your particular hotel provides guests with an incredible experience, your valuation could be negatively affected just because of your hotel’s brand.

Employees

For hotels, more than nearly any other business model, your staff’s reliability, competence, friendliness, and attention to detail can make or break your hotel’s reputation; and potential buyers, investors, and partners know this, too.

Think about it—your staff determine your customers’ experience with your hotel.  Were the rooms neat and clean?  Thank your well-trained, hard-working cleaning staff.  Are meals cooked properly, served efficiently, and presented in an appetizing way?  Thank your kitchen, dining, and/or wait staff.

Do the heating/air conditioning units work properly in each room?  Do you have good water pressure in the bathrooms, and well-functioning, non-clogging toilets, sinks, and showers or tubs?  Thank your maintenance and cleaning personnel.

Again, because so much of your guests’ experience with your hotel rides on the professionalism of your staff, this becomes a crucial factor in your valuation. 

Reservation Systems

Not all reservation systems were created equally; some are up-to-date marvels of technological efficiency, and others crash so often or glitch so easily you may as well take all your reservations manually.

A good chunk of your hotel’s value will rest on the strength of your reservation system.  Do your potential guests often give up on your online reservation system before they can complete the reservation process and just call your hotel instead? 

How many customers are you losing to other hotels because of a poorly functioning reservation system?

Because the hotel market is so competitive, don’t be surprised if a poor system nets you a lower valuation than you were hoping for.

Non-Compete Agreements

Believe it or not, having a non-compete agreement [3] in place with employees can often be seen as a plus in the hotel valuation business.  If there’s less chance of competition from former employees and staffers, you’re more likely to gain a higher valuation than if no such agreement is in place.

Valuation Methods

There are many different hotel valuation methods [4], and the one(s) you choose may depend on the type of hotel you own.  We discuss a few of the most commonly used methods (in no particular order) below.

Comparison Approach

This valuation method directly compares your hotel [5] to similar hotels, taking special care to choose hotels that offer the same levels of service and the same types of amenities as your hotel in the nearby area (or comparable areas).

This is sometimes called the market approach method.  Often, this is done simply by taking daily reservation rates at your hotel and evaluating them against comparable hotels.  Others take a more detailed approach and use data analytics companies that focus on hotels, like STR [6], to conduct comparisons across multiple metrics.

Obviously, for a proper comparison valuation, a full-service hotel wouldn’t be compared to a budget or value hotel.  Instead, your full-service hotel would be compared to another full-service hotel in the area (or in a similar area) that offers the same amenities you do.

Income Approach 

There are several ways to do an income approach valuation.  Income capitalization and discounted cash flow (DCF) are two methods that can be used when choosing this type of valuation.

The income capitalization [7] approach compares your income to your capital value (also called the capitalization rate) and is reviewed for a wide range of comparable hotel types and geographic locations, making it one of the most reliable methods. 

DCF [8] estimates the current value of future cash flow and discounts against your current costs for equity and debt.  This method looks only at your own hotel and is not a comparison to others.

Cost Approach

As the name implies, the cost approach [9] method looks at the cost of building the same type of hotel as your existing property. 

This method adds the current value of the land to the cost it would take to rebuild the hotel, less depreciation, to arrive at a valuation.  For example, let’s say your land costs $150,000 and it would take $500,000 to rebuild your hotel from scratch, but the hotel has depreciated by $50,000 over time. 

Your total value would be $150,000 plus ($500,000 minus $50,000) for a valuation of $600,000.

However, it’s considered less reliable [10] than the other methods for the following reasons:

• It doesn’t take the hotel’s revenue or intangibles like branding and staffing into account
• Depreciation of real estate can be difficult to accurately assess
• Assumptions must be made at several steps in the process

This method isn’t recommended unless you have no other alternatives.

Many conscientious hotel owners make the mistake of overlooking another crucial aspect of hotel valuation:  their point of sale system.

Adding Value Through Your POS

When working to build a valuable hotel, you’ll want to choose a robust and secure point of sale system that offers your customers the flexibility of paying with their phones using Apple pay and Google pay.  And, you’ll need a system that allows you to be more nimble by providing options such as mobile point of sale.

Epos Now can handle all that and more!  Of course, Epos Now works with Visa, MasterCard, and American Express to name just a few, and has specially designed systems just for the hotel industry, giving you the ability to manage everything from room service orders to bookings all from one terminal.

Not only that, but you can rest assured knowing that Epos Now was recently ranked as one of the best POS providers in the country by US News and World Report [11].

Now that you’ve chosen a POS that can only help with your valuations, you’re ready to dive into how much your hotel is actually worth.