While hotels are a business and as such may be appraised as any other business would be, there are some distinguishing factors that valuation experts need to consider. In a chapter from BVR’s special report, What It's Worth: Hotel Business Value, which we’ve excerpted here, Mark Dayman, founder and vice president of FranIntel, a franchise consulting company, outlines value drivers and considerations of hotel businesses that involve both tangible assets such as land and the building and intangible assets such as workforce, technology, and customer lists.
Common Intangibles Associated With a Hotel’s Value
- Flag Value
Many hotel properties have a “flag,” that is, they are franchised under a brand name hotel. The flag is intellectual property, and it has value, which could be viewed as the present value of all the royalty payments that will be paid. Some independent hotels and resorts may have a flag, so that is something to consider in a valuation.
- Reservation System
The reservation system can be a very important intangible for a hotel. It is often the reason a hotel owner signs on to a particular brand. The reservation system is part of what you are buying when you buy the flag. Along with the reservation system come standards, system support, and an entire group of assets that are provided to the buyer when the flag is purchased.
A hotel’s workforce and management are other key intangibles. In independent hotels, management is often more valuable because, in a flagged hotel, the owner relies on the capacity of the franchisor to help manage the property. When an owner operates as an independent hotel, the staff must have the skill to operate under all circumstances. The bottom line is that the questions stop at the hotel CEO’s desk.
Technology, such as telecommunications and internet access, is an important consideration to value. Any hotel can have unique technology, and, certainly, if it is an independent business, it will have a technology platform that needs to be valued.
- Noncompete Agreements
Noncompete agreements may be in place for the hotel, and they likely have a value, so they need to be examined.
- Customer Lists
Customer lists will exist for the independent hotel, but a flagged hotel may not have a separate customer list. It may be an integral part of the reservation system embodied with the flag.
Unique Aspects of Hotel Value
The basic underlying theory of value for a hotel is no different from that of any other business. The value is driven by the present value of future economic benefits using a reasonable cost of capital. How an appraiser determines the future economic benefits and the cost of capital requires some unusual considerations, but the basic concepts are no different and will include consideration of comparative sales.
In most business valuation work, appraisers consider a subject’s position in the market and the competitive advantages, which can be subjective. The distinctive feature for hotels and most hospitality businesses is that there is a pure supply and demand feature. An appraiser can actually study why a hotel is performing the way it is and how it is competing against the others in the competitive market where it stands.
Sources for Benchmarks
A good source not only for market data, but also for financial data on hotels and resorts is Smith Travel Research (STR). STR is probably the most widely relied-upon source of market and operating data for hotels. Most hotels receive monthly reports from STR that tell them exactly how they are performing within the marketplace. Other sources of benchmarking information include Econometrics, PKF Consulting, and the Highland Group, which specialize in limited service hotels. These data reveal the subject hotel’s direct competition and helps measure its strength and how well it is managed over the years and who’s actually doing better or worse than your subject.
Another good resource is your own network of colleagues. If you know individuals in other firms who have access to information that you don’t have, give them a call and get their insights. Real estate appraisers need to be part of that network as well. Using someone from your network helps you to better control the entire engagement.
Paying a visit to the business you are valuing is standard practice during a valuation engagement. But why not also visit competing firms? After all, you are assessing the performance of your subject hotel versus others in the market, so dropping in on rivals can yield some valuable information. Visiting competitors is a must when valuing a business in the hotel industry. You could learn what is missing in the market that may be an opportunity for your subject entity.
Analysis of Market Share
One of the major aspects of valuing a hotel is determining its market share. How well is a particular hotel doing compared to the others that are considered part of the market of that particular property? The hotel industry is highly segmented, and there may be a dozen different limited service properties out there, which is challenging because it is difficult to distinguish one from another.
Other Revenue and Costs
Don’t forget to consider other forms of revenue that may come along, such as from a food and beverage operation, stores, fitness centers, etc. If your subject company is a resort, a wide range of amenities could generate revenue.
At the end of the day, value comes down to EBITDA. That is, how much cash flow will this property generate for the owner of the property?
A final point to keep in mind is the replacement reserve that needs to be built into the cash flow. This is not a depreciation deduction but rather an amount of money that must be set aside for replacement for furniture, fixtures, repairs, and the like.
There are different approaches to valuing a hotel, motel, or resort, depending on the need. As with any business being valued, each case will be different, and there may be other tangible and intangible assets to consider for your subject hotel.To learn more about valuing hotel businesses, be sure to check out BVR’s special report, What It's Worth: Hotel Business Value. Download an excerpt to preview the table of contents and see highlights of the report.