How to get the best valuation for your hotel

When it comes to getting the best valuation for your hotel there are some vital things to take into account. First and foremost we must remember the value of a red hotel is not equal to five green houses. There are a huge variety of reasons behind valuations, from bank purposes to balance sheets, from matrimonial and probate to the stock market – it can all play a major part. And when it comes to hotels they are very different from other forms of real estate in that they are income-generating. Cash flow can be generated from the four main income streams, accommodation, food and beverage, leisure and minor operating, including smaller income streams such as conferences, weddings, or events. There are a number of valuation techniques when it comes to calculating the market value, which according to the Royal Institute of Chartered Surveyors (RICS), is: “The estimated amount for which a property should exchange on the date of valuation between a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” These are the EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) Multiplier and Yield generator, the comparable method, value-per-room basis and net present value of future cash flows. But the foremost fact to remember is the value is going to be determined by the profit the hotel generates or will generate in the future. This is the EBITDA, which is essentially the net income with these added back to give a true picture of the hotel’s profitability. At this stage a valuer will select a multiplier that will give the correct yield taking into account the hotel factors, including location, style of hotel, condition, brand or no brand and business mix, amongst other factors. So how do we maximise all these areas to our own benefit? Maximise current EBITDA and implement strategy to increase future EBITDA Before you commission a valuation it is vital you look to make the most of your earnings before interest, tax, depreciation and amortisation. Your accounts must be in order and the business must be able to show it is in the best position possible at that time financially and you are clear about your future potential earnings. It’s important to be transparent and share your forward plans with a valuer. This will allow them to understand the potential of a business and how investment could work going forward. Control costs and look to grow turnover profitably In the run-up to the decision to value your property you should look to control outgoing costs. This allows buyers to understand what your outgoings are and should be while demonstrating a larger profit turnover. Aiming to grow turnover in the run up to the valuation is an ideal target and something that will inevitably allow you to demand more money for your business if you sell in the future. It is all part of the desire to consistently convert your revenue into a better bottom line and therefore a higher valuation. Is it better to be a good 3* or an average 4*? Before you begin the valuation process look to properly represent your hotel in terms of ratings. It’s vital when you secure a star rating that it truly represents your service level and offering as well as the message behind your venue. If you are a fantastic 3* property you may count yourself out of custom when it comes to searches on OTA sites, which will be detrimental to your online ratings and revenue. However customers will always receive the best of what they were led to expect, which will lead to repeat bookings and good reviews. With a 4* property you will be in the catchment for higher level searches and potentially be able to command a higher price. On the other side of this the reviews could potentially be lower and repeat business less, which could detrimentally impact on your turnover. However in terms of qualifying as a 4* this would mean the hotel has more assets and therefore this should ultimately lead to a higher valuation. Will a brand help the above if no brand is in place? A solid brand can definitely lead to a higher valuation as it denotes trust and sustainability of a business. This brand security and brand loyalty needs to be demonstrated in the turnover and repeat business figures leading to higher profitability. Look to maximise the property itself The valuation of a hotel will heavily weigh on what property assets are in place. Is there a pool? Do you have a spa? Are you a 10-suite property or a 50-bedroom hotel? These will all have a big part to play in your valuation so make the most of the building’s assets. Perhaps look to extend the property or add in more bedrooms or a further facility such as a spa or function room. You could also look to see if there is an alternative use that will generate a higher capital value from all or part of the property. Know your KPIs, and understand how to grow them It’s vital when you are looking to achieve the best valuation for your property to understand your key performance indicators (KPIs) and realise ways to grow them going forward. Demonstrating the ability to improve KPIs further is a positive when it comes to the valuation. Hand-in-hand with this is the ability to increase your Average Daily Rate (ADR), Occupancy (OCC), RevPar and Gross Profits (GPs). Of course if a business can show they have the ability to grow these going forward to increase the profitability and turnover and therefore result in a higher valuation. If there has been a decrease in trade or profitability this could devalue your hotel and so it’s vital at this stage to show an understanding of why this decrease occurred. Perhaps you were having a revamp or rehabilitation of some bedrooms leading ultimately to a higher value property and business but this led to a period of lower income. Highlighting the reasoning behind this loss, whether it be due to internal or external factors, such as the weather or a road closure, will lead to the correct amount of emphasis being placed on this factor. Have good knowledge of the hotel’s capital expenditure programme historically and future planned What are the future plans for your hotel and what impact will they have on the value of your business? When speaking with a valuer be clear about what your plans are as a business moving forward, whether this be expansion on site or off, and show projections going forward concerning turnover and profitability. Use this as an opportunity also to reflect on what capital expenditure your hotel has already invested and demonstrate the positive outcome this had on your business. Be prepared Most importantly be prepared when you meet the valuer and ensure your hotel is fully compliant and presented as well as possible. Be aware of future threats and competition as well as the positive path forward for your business. Property with trading potential, such as hotels, the market value of which may include assets other land and buildings alone, are commonly sold as operating assets – meaning the running of the business and its potential for growth is as vital as the condition of the buildings. So don’t undervalue your presentation of future growth figures and understanding of the market you operate in. This is a valuable asset also and one to be well marketed in terms of a valuation. It’s important to understand all these factors when heading into a valuation and ensure they are presented well and concisely for the valuer to make the right decision for you and the market. Basically be prepared and know your hotel and the business. Hospitality Experts’ Martin Rogers, MRICS MIH, is a director of property agents Savills. This feature first appeared in the November 2015 issue of Hotel Owner