TVG always enjoys a challenge and valuations in the hospitality industry can be challenging. Here are some articles regarding the variables that affect valuations in this industry. Enjoy the read!
For the complete article or to read the originals, please follow the links.
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Uncontrollable Variables That Affect the Hospitality Industry
by Jared Lewis – Small Business Chron
“As within any industry, the hospitality industry has a number of uncontrollable variables that affect those involved in management or ownership of hotels, restaurants and other hospitality establishments. Knowing what these factors are is important for those working in this capacity because it provides them with an opportunity for contingency planning. Even though the variables cannot be controlled, their effects can be mitigated somewhat with careful planning and anticipation.
Economics
When someone speaks of the uncontrollable factors in the hospitality industry, they are referring to the macro environment. External factors such as the economic situation facing the nation or the world are among the factors that those working within the industry can have no control over. When economies go sour, the hospitality industry may suffer because of a drop in discretionary spending. Tourism may go by the wayside during times of extreme economic difficulty, leaving industries within the hospitality industry, such as the hotel business, dependent upon the continued patronage of the business community.
Legal Changes
Changes in the law can also affect companies within the hospitality industry and cannot be controlled. The regulatory environment in the hospitality industry can change from time to time and this can have an effect on the way that hotels, airlines and restaurants all go about conducting business. For instance, a change in the tax laws that raise the price of gas will affect tourism and costs for the hospitality industry as well.
Technology
Technology continues to develop unimpeded. The hospitality industry, like many others, is affected by technological changes. As new technologies are made available, companies within the industry are forced to adapt to the changes or get left by the wayside. For example, changes in computer hardware and software options may make it necessary for a large national hotel chain to replace its entire computer infrastructure on a periodic basis.
Competition
Competition is another factor that those managing or owning businesses in the hospitality field have little to no control over. Many times, competition is heavily affected by economic and other regulatory factors. For instance, changes in the airline industry since 9-11 have been due, in part, to changes in the regulatory environment such as greater restrictions on airline travel and airport check-ins that have discouraged flying. Airlines have no control over these changes and many have suffered economically. They can only adapt to the changes as necessary and fight the other airlines for the customers that continue to travel by plane.”
Valuing a business in the hospitality industry – ValuAdder
“Hospitality industry continues to grow at a rapid pace. In addition to the major markets including business and luxury hotels, motels and country inns, recent growth has been fueled by the addition of privately owned establishments that tend to focus on lucrative niche markets. These include specialty bed and breakfasts, destination location inns, fitness oriented resorts, golf course and vacation properties.
Similar to other real estate based operations, hospitality businesses are cyclical in nature. Since much of their income is generated by renting the property, size truly matters.
An industry rule of thumb is that a property needs to have at least 10 rentable units to provide adequate returns for its ownership. Most small privately owned hospitality businesses fall into the 10 – 200 unit range.
Unique factors that drive hospitality business value
These businesses have a number of characteristics that have a major impact on their value:
They share the features of both business and real estate investment.
The business tends to be quite labor intensive.
Multiple profit centers are very common. In addition to property rental, restaurants, gift shops, fitness facilities and lounge are common.
Repeat and referral business is critical to revenue generation.
Rental rates are flexible and can be adjusted seasonally and even daily. Successful hospitality operators are quite skillfull in packaging their product to reduce vacancy rates.
Aggressive and continuous advertisement is essential.
Effective online presence is increasingly vital, including participation in reservation systems and membership in destination marketing organizations.
Capital requirements are quite high.
Businesses demand competent, hands-on management.
Determining the business value
When valuing a business in this industry, you should consider these essential elements:
Property expansion potential. In hospitality industry, business revenues are derived from rent, which is driven by property size.
Equipment condition and maintenance status. Watch our for deferred maintenance expenses.
Location. Needless to say, this has direct impact on the business earning potential – both in terms of room rent and vacancy rates.
Access to acquisition or expansion capital.
That said, you have 3 ways to value a business in this industry:
Cost (Asset) approach.
Market approach.
Income approach.
Cost approach to business valuation
The basic idea behind the asset based business valuation is this: business value equals the current property replacement cost less an allowance for physical, functional and economic obsolescence.
Note that cost based business valuation does not account for the business earning capacity or risk.
Market approach to valuing a business
Under the market approach to valuation, you determine the business value in comparison to actual selling prices of similar properties. Since many private hospitality businesses are quite unique, meaningful comparison may be a challenge.
Business valuation based on income
Under the income valuation approach, you have a number of capitalization and discounting methods to valuing a business. Typical ways to estimate business value are multiples of gross rental income and net operating income. You need to factor in both the property rental income as well as earnings from the other profit centers, such as the restaurant or on-the-premises gift shop.
Multi-year financial analysis is the choice of savvy business investors. A key factor which determines business value is the internal rate of return.
Capitalization rates vary across the business types in the hospitality industry. Typical values are in the 11% – 14% range.
If you need a reliable business value estimate, it is a very good idea to combine the results from several business valuation methods.”