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Valuation Techniques

for Buyers and Sellers
Price Per Guest Room


Calculation:

Sales Price ÷ # of Guest Rooms
  

Example:

$1,200,000 (sales price) / 10 Guest Rooms = $120,000 Price Per Room
 

Most often quoted statistic related to an inn's value and when used alone, the least reliable indication of price.
   
Gross Revenue Multiplier


Calculation:

Sales Price ÷ Inn's Revenue - GRM (Gross Revenue Multiplier)
 

Example:

$1,200,000 (sales price) / $240,000 (revenue) - 5 Gross Revenue Multiplier
 

A more reliable indication of an inn's worth, this calculation looks at the inn's ability to create a revenue stream as an indication of its value.
   
Income Capitalization


Calculation:

Net before debt ÷ income capitalization rate = Cap Rate
  

Example:

$89,000 (net before debt, depreciation) / .08 (income cap. rate) - $1,112,500 Cap Rate
 

Income Capitalization indicates the fire-power of the inn. In essence, it answers the question "Will the inn pay for itself and generate the desired profit for the new owner(s)?"
   
Valuation Summary
 
  • Price per Guest Room
  • Gross Revenue Multiplier
  • Income Capitalization

   
     What Is Your Inn Worth?

It has been five years since you opened your seven-room bed and breakfast and its finally beginning to produce the way you anticipated it would. In fact, recently, you've been musing about "moving up" to a larger property. There is a twelve-room inn located in a strong southern market that would benefit from your experience and you would benefit from a warmer climate. Hmmmm...... the questions begin:

  • I wonder what my inn is worth?
  • Is the accumulated equity enough to make a new deal work?
  • Will anyone be interested in purchasing my inn?
  • Will a buyer think it is worth the asking price?
You may have asked some of the same questions when you originally bought the inn. Today's buyers will wonder about the asking price vs. value too. The difference may be that they are better educated. It is likely that they come fresh from attending an aspiring innkeeper workshop or valuation seminar conducted at a regional or national innkeepers meeting. They often have researched the industry, invested in lodging industry and bed and breakfast studies, read articles and may utilize a consultant or buyer's advocate to assist them in reviewing the numbers and evaluating the business.

In today's world, the transfer of an inn is best accomplished when both the seller and the buyer are informed and well prepared. For both parties, this will require some pre-planning and an investment of time and money to insure a successful sale.

So what do you need to do to get your inn ready for sale?

Document Your Operating Statistics. It is our opinion that you must be ready to sell your inn the day after you buy it. Whether the original purchase was a lifestyle decision, an investment decision or a combination of the two, it represents an investment when it's time to sell. And, you can't always predict when you may have to sell due to factors outside of your control.

Just as with your personal money market account balance, stock portfolio or monthly income statement from that apartment investment, your daily, weekly and monthly operating statistics should be current and available at a moment's notice. These numbers should be treated with as much or more care as any other investment.
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