How To Sell Your Business - Questions & Answers

I've started a new section on my site that allows business sellers to submit a question specifically about their situation. Then we answer it online. The Q&A format is a great way to learn from other's experience. Here is a recent question one business owner sent in.

What Multiple Do I Use For A Hotel/Resort w/ Conference Center, Golf Course & Restaurant

Our business is a golf and beach resort with about $72 M in gross rev. includes condo resort rental pool, restaurants, golf courses, conference center, tennis and other amenities. EBIT is about $4.7M. What multiple of EBIT are typically used for a business like ours?

The Answer

I don't think multiplying EBIT times a multiple is the best thing to do in your case. There are two reasons for this.

1.) With a resort/hotel, the real estate accounts for a seizable share of the business' value and a multiplier would not be helpful for determining it's value.

2.) Your business is made up of several different operations - hotel, conference center, golf course, restaurant etc. A single multiplier will not apply equally to all of them.

Placing a value on this type of multifaceted operation is more complicated than most other businesses, but I will give you some guidelines to help you get started.

In other industries, you may be able to value a business with multiple revenue generating units by valuing each unit separately and then added them together, But with your business, all the secondary revenue generators probably feed off the resort/ hotel, so it is with the hotel that any valuation must begin.

Fortunately, hotel industry groups constantly compile and update detailed statistics on a host of operational metrics. Therefore, comparative analysis is a good method to start with when valuing a hotel or resort. Using comparative analysis at the start will give you a much more accurate price range to begin your valuation with than the "EBIT X Multiplier" method.

I say "at the start" because the industry standard for valuations of this type of business is to use the discounted earnings method. But to get a general idea of the price range for this business the comparative analysis approach is quicker, easier and cheaper.

A few examples of the the type of data that is collected by the industry are:

*occupancy rates *room expense ratios *restaurant and banquet revenue-to-expense ratios *average room rate

"Average Room Rate" is a key calculation that goes into valuing a hotel. The formula for calculating it is standard in the industry and recommended by the "Uniform System Of Accounting For The Lodging Industry", published by the American Hotel and Motel Association: www.AHLA.com

The formula for average room rate is:

Net Room Revenue/Number Of paid Rooms Occupied = Average Room Rate

Also important is the "Room Expense Ratio" which is total room expense/total room revenue. In most cases you want to see room expenses equal to no more than 25% of room revenue.

These ratios will give you a good idea of how profitable the hotel can be and are an easy way to make comparisons to other similar hotels that have been sold in your region.

The "Uniform System Of Accounting For The Lodging Industry" provides additional revenue information on hotels like yours that include food and banquet facilities.

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