How a hotel is valued: methods and key indicators

A hotel is valued first and foremost on its operation. The bricks and mortar matter, but a buyer is above all acquiring an ability to generate income: rooms sold, at a given price, with a given margin. Valuation methods translate that ability into value, each with its own assumptions and blind spots.

This guide covers the indicators buyers examine, the adjustments they recalculate, the methods they apply and the factors that make value differ from one hotel to the next.

What is being valued

The first question is not “how much?” but “what?”. Depending on the structure, the valuation concerns:

• the property, or murs: the building, occupied by the operator or let to a third party
• the business, or fonds de commerce: the operation itself, including clientele, name, leasehold right, furniture and equipment
• the property and business together
• the shares of the company holding one or the other, which means moving from the value of the hotel to the value of the shares, after debt, working capital and latent tax

These values do not simply add up. A business that carries a high rent is worth less, and the property let at that rent is worth more: the total remains tied to what the operation can actually produce. The guide property, business or shares explains the structures.

Operating indicators

Occupancy, average daily rate, RevPAR

The occupancy rate compares rooms sold with rooms available over a period. The average daily rate (ADR) divides rooms revenue by rooms sold. RevPAR combines the two:

RevPAR = occupancy × ADR = rooms revenue / rooms available

A fictitious, rounded example: a 40-room hotel open all year has 14,600 rooms available over the financial year (40 × 365). It sells 10,220 of them, an occupancy rate of 70%, at an ADR of €150 excluding VAT. Its rooms revenue reaches €1,533,000 excluding VAT. Its RevPAR is €105 excluding VAT (70% × €150, or €1,533,000 / 14,600).

RevPAR makes it possible to compare hotels of different sizes and to track performance over time. It says nothing about food and beverage, meeting rooms or other revenue, nor about the costs incurred to achieve that revenue. A buyer always recalculates RevPAR from source data: any gap between the stated figure and occupancy × ADR is spotted immediately.

GOP and EBITDA

GOP (gross operating profit) is the operating result under the international hotel accounting format (USALI). It measures the margin after departmental costs and overheads, before management fees and ownership costs: rent, property taxes, building insurance. It is used to compare operations regardless of how the hotel is held.

EBE (excédent brut d’exploitation) is the French accounting aggregate, broadly comparable to EBITDA. It is calculated after rent and after taxes other than income tax. For a business run in leased premises, it is the starting point of the valuation. The two aggregates are not interchangeable: moving from one to the other means reclassifying costs line by line.

Rent-to-revenue ratio

For a hotel run under a lease, the ratio of rent to revenue measures whether the lease is sustainable. A high ratio reduces the margin left for the operator, and therefore the value of the business. For the property, it shows whether the rent received is durable or likely to be renegotiated. A buyer looks at it over several years, not just the best one.

Adjusting EBITDA

Reported EBITDA reflects the current owner’s management. The buyer wants the EBITDA the hotel will generate under its own management: adjusted, or normalised, EBITDA. Three adjustments come up in almost every file.

• The owner’s remuneration. An owner-operator may pay themselves little, a great deal, or through dividends. It is replaced by the cost of a salaried general manager at market level for a comparable hotel.
• The rent. Rent paid to a family property company or a group entity may be below or above market. It is brought back to market level. In a sale of property and business, the analysis is made before rent, since the buyer will own the building.
• Non-recurring items. An insured loss, a settled dispute, a one-off grant, a closure for works: anything that will not recur is neutralised. A cost that comes back every year is not exceptional.

Each adjustment must be supported by a document: contract, invoice, lease, court decision, certificate. An investment committee recalculates every adjustment, and one undocumented adjustment undermines the credibility of the whole file.

Key point: value is built on adjusted EBITDA, not reported EBITDA. Every adjustment must be verifiable in the data room, line by line.

Valuation methods

EBITDA multiple

Value = normalised adjusted EBITDA × multiple

This is the most widely used method for the business and for shares. The EBITDA multiple reflects perceived risk and potential: location, stability of the operation, condition of the building, lease term. For shares, it gives an enterprise value from which net debt is deducted and working capital adjusted.

Limitation: the multiple sums everything up in one figure. Applied to a single year, it amplifies an unusual year. It does not directly capture future works.

Discounted cash flow (DCF)

Value = sum of discounted future cash flows + discounted terminal value

Cash flows are projected EBITDA, less tax, capital expenditure and changes in working capital. The discount rate reflects the cost of capital and the risk of the asset. The method explicitly incorporates a works programme, a repositioning or a stabilisation period.

Limitation: it depends entirely on its assumptions. The terminal value often carries much of the result, and a small change in the rate significantly alters the value. A business plan should list and source its assumptions.

Rent capitalisation

Value of the property = annual net rent / capitalisation rate

This is the property investor’s method. The capitalisation rate depends on location, the fixed term of the lease, the allocation of charges and the strength of the tenant. Where the property is owner-occupied, a notional rent is used.

Limitation: a high rent only creates value if it is sustainable. The capitalised rent is therefore tested against the operation: a rent the hotel cannot pay over time overstates the value of the property.

Comparables

The hotel is compared with recent transactions involving similar assets. The method is intuitive, but data is scarce in the hotel sector: many transactions are confidential, scopes differ (property, business, shares), and two hotels in the same category have neither the same operation nor the same condition.

Value per key

Value per key = value / number of rooms

This is a cross-check, not a method in its own right. It ignores room sizes, ancillary revenue, the condition of the building and the lease. It is used to confirm that a result obtained by another method remains consistent.

Combining methods

A sound valuation combines at least two methods and explains the differences between them. For property and business together, the whole can be valued on EBITDA before rent, then checked against the sum of the property (capitalised notional rent) and the business (EBITDA after notional rent).

What makes value vary

With similar indicators, two hotels can be valued very differently. Buyers look in particular at:

• Location and demand drivers: business, leisure, conferences, seasonality, access.
• Technical condition and capex: works completed and planned, costed by quotes or a technical audit. A forthcoming works programme is deducted from value or reduces the multiple. See the guide capex, standards and classification.
• The lease: remaining term, rent relative to the market and the operation, indexation, allocation of works, risk on renewal.
• Hotel classification and compliance: star rating, fire safety committee opinion, accessibility.
• Dependence on the owner: an operation that relies on the owner’s presence carries more risk for a buyer than a structured team.
• Distribution: share of direct bookings, reliance on online travel agencies and the cost of their commissions, online reputation.
• Key contracts: franchise or management, term, fees, exit conditions.
• Potential: unused space, upgrading, rebranding, provided it is costed.

From value to price

Value is a reasoned estimate. Price is the outcome of a negotiation. Between the two sit the quality of the file, the number and profile of buyers approached, conditions precedent, the timetable and, for shares, the warranties given. A file whose figures check out without discrepancy narrows the buyer’s room to negotiate.

A valuation is all the more useful when it comes early: it brings out the points that will weigh on price and leaves time to address them. The guide preparing the sale of your hotel sets out the timetable.

RR Hôtels & Finance prepares a reasoned valuation of the property, the business or the shares, reading the operation before the bricks and mortar. To find out more: hotel valuation.