Question:
What is the best way to determine the asking price of an independent motel business? The motel I am looking at has an asking price of $435,000 and annual revenue of $145,000. This motel is in a very small city with a population of only 12,000 people, but the location is right off the major highway exit.
Answer:
When it comes to valuing motels, there are a wide range of options available to you that are somewhat standard within the industry.
These include multiples of the annual revenues, per room valuations, net income “cap rates” and multiples of what may be referred to as “Owner’s Benefit” or “Sellers Discretionary Cash Flow” or “Adjusted Net”.
Personally, I prefer a multiple of the Owner’s Benefit figure because what you ultimately can put in your pocket, and have available to service debt and build the business is really what any business owner should be concerned with when valuing any business. After all, if the business is producing solid revenues but weak profits, who cares what the revenues are?
Having said this, the various barometers are:
- 2.5 – 3 times the annual revenues for motel/small hotels
- $18,000 – $22,000 per room
- 6 – 8 times Owner’s Benefit
The Owner Benefit Calculation is a combination of:
Pre tax Profit + Owner Salary + Owner perks + Interest + Depreciation.
Although I prefer to use this technique, be certain that you properly adjust the Owner’s Benefit Figure to allow for any anticipated capital expenditures that are required now, or within the next few years.
On a separate note, be certain that you visit with city hall to determine if there is any major roadwork planned for the highway or road which the motel borders.
Usually, you can expect to have construction at least every 10 years so you’ll want to check this out.