Innkeeping 105 ~ How Much Should You Pay for Your Inn?

The Elements that Go into Determining How Much to Pay Are Many and Varied

You might think I skipped right over the session on selecting a location and the session on selecting the right inn.

Wrong! The elements that go into determining how much to pay are many and varied and your selection of a location or a specific inn will determine the relative importance of each of these elements. I believe you should be armed with a knowledge of these elements before venturing out to select a location or a specific property.

Some of these elements that factor into the right price include, but are not limited to the following:

• Revenue
• Expenses
• Cash Flow
• Condition of the Property
• Location
• Property value in an alternative use
• Interest Rates
• Supply vs. Demand

All of these elements can be summed up in one term, "Total Return."

Total return determines why a property in Bismarck, North Dakota may sell for 3 times annual revenue, while a very similar property on the coast of Southern California may sell for 10 times annual revenue.

Using this same example, with the cost of living lower in ND, that same property's total operating expenses may run 40-45% of revenue. This would leave cash flow at 55-60% of revenues. Doing the math, this property is selling at a multiple of approximately 5 times cash flow.

With a much higher cost of living in Southern California this property has a higher operating expense percentage at 60%. Again, I'll do the math...it turns out this property is selling at a multiple of 25 times cash flow.

It would appear that the Bismarck property is far more attractive. At 5 times cash flow the ND property will pay for itself in just 5 years, while the Southern California property would take a full 25 years to earn back the price of the property.

Simple, isn't it? I'm sorry to disappoint you but, it is nowhere near that simple.