What Buyers Look For When You Sell a Hotel

The numbers a buyer reads first

Three measures sit at the top of every hotel review. Occupancy is the share of rooms sold. Average daily rate is what each sold room brought in. Revenue per available room multiplies the two, and it gives a buyer one figure to compare against other hotels in your market. A buyer will want these by month for several years, so they can see the seasons and tell a hotel that is growing from one that is coasting on a good summer.

They will also ask how your property did against the other hotels around it. Most owners subscribe to a benchmark report that shows this, and a hotel that holds or gains share against its neighbors gets a different reception than one that slips every year. If you do not already receive that report, start now, because a buyer will ask for the history.

After that comes profit. Rooms are usually the largest line, and a buyer will look at what comes in from food and beverage, meeting space, parking, resort fees and anything else sold on the property. They will then subtract payroll, housekeeping supplies, utilities, franchise fees, online booking commissions and a yearly set-aside for replacing furniture and equipment. That last item surprises owners. Many hotels have not been setting money aside, and a buyer will subtract it anyway when calculating what the property earns.

Flag, independent and the franchise agreement

If the hotel carries a national brand, the franchise agreement is one of the most important documents in the sale. A buyer wants to know how many years remain, what the franchisor charges, whether the franchisor must approve a new owner, and what it will require of that owner. Many franchisors ask a new owner to complete a property improvement plan, which is a list of upgrades to rooms, lobby and common areas due within a set period. Buyers price that list as a cost, and it can be large. Ask the franchisor what it expects before you go to market and you will not be surprised in the middle of a negotiation.

An independent hotel has no one to approve the sale, which makes the closing simpler. Buyers then look harder at where the guests come from. A hotel that fills mostly through online travel agencies pays a commission on every booking, and a buyer will compare that to the share of guests who book direct, return on their own, or come through corporate accounts and group contracts. Direct and repeat business tends to be valued more.

Some properties are run by a management company on behalf of the owner. The management agreement has its own term, fees and termination terms, and a buyer may want to keep that company or replace it. Read yours before a buyer does.

The building and what it needs

Hotels age in predictable places. Roofs, boilers, air conditioning units in each room, elevators, parking surfaces, pools, fire systems, mattresses, carpet and bathroom finishes all wear out on a schedule a buyer's lender knows well. Lenders usually order a property condition report from an outside engineer, and whatever it finds becomes a negotiating point. Deferred maintenance gets turned into a price reduction or a holdback at closing.

You can improve your position by doing your own walk of the property before the buyer does. Make a list of what has been replaced and when, keep the invoices, and fix the small things that make a room feel neglected. A guest room with a stained ceiling tile tells a buyer more about the rest of the building than any report will.

Many hotel owners also own the land and building, either personally or in a separate company. That affects how the deal is structured, how it is taxed and what the lender will finance. Our post on selling a business with real estate attached goes through those choices, and so does the one on asset sales and stock sales. Talk to your accountant early, because the structure can change what you keep.

Records a buyer and lender will ask for

Expect requests for business tax returns, monthly profit and loss statements and a balance sheet. Beyond that, a hotel buyer wants the nightly audit reports from your property management system, the benchmark reports mentioned above, lodging tax filings, and a breakdown of revenue by room type and by booking source. They will ask for the franchise agreement or management agreement, the equipment list with ages, all service contracts, insurance history with any claims, and a list of employees with their roles, pay and tenure.

They will also want to see licenses and inspections. That usually includes the food service permit if you serve meals, the liquor license if you have a bar, elevator and fire system certificates, and health department records for the pool. Keep them current, because a lapsed certificate found during review slows everything.

The books need to match the property management system. If the nightly reports show one level of revenue and the tax returns show another, a buyer stops trusting either. Our post on getting your financials ready covers what clean books look like.

What has to transfer

Liquor licenses are often the slowest item. Whether one can move to a new owner, how long approval takes and what the buyer has to file all depend on the state, and your attorney confirms what applies to you. Start that conversation early, since the license can set the closing date.

Franchise approval is the other long item. Beyond that, a hotel has booking channel accounts, a website and domain, a reservation phone line, loyalty program memberships, group contracts, corporate rate agreements and a calendar of future reservations. Guests have often paid deposits or paid in full for stays that come after the closing, and the buyer and seller settle those amounts when the deal closes. Employees matter as well. A general manager, a head of housekeeping and a maintenance lead who know the property are worth more to a buyer than any report, and the buyer will want to know whether they stay.

If the property sits on leased land, or shares parking or utilities with a neighbor, the buyer will ask for those agreements. See our post on the lease as part of the deal for how consent usually gets handled.

What tends to sink a hotel sale

In most of the deals we see, the problem is visible months before the closing. The franchisor asks for a larger improvement plan than the buyer budgeted. The condition report finds a roof or boiler that nobody had priced. The books do not tie to the nightly reports. Cash receipts at the front desk or bar never made it onto the returns. The appraisal comes back below the price, and the lender will not cover the gap. The liquor license takes longer than the buyer's rate lock. Or the owner is also the general manager, and the buyer sees no one else who can run the place.

Getting ready

If you have a year, use it. Gather the benchmark reports and the franchise or management documents. Get a clear picture of the capital the building needs and decide what you will fix and what you will let the buyer price. Tie the revenue in your system to the returns. Train a general manager who can answer a buyer's questions without you in the room.

When you are ready, we build a valuation from the property's own numbers, prepare the materials a lender will expect and screen buyers before they see the hotel. If you want a sense of how the market views selling a hotel, start with that page, and then call us.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.