INFO REQUEST - VALUATION ANALYSIS OF HOSTEL

I have done both. Unfortunately there is no clear cut way to do it. You have mentioned a couple valuation methods that can be of help. One that you left out is the use of a multiplier. In some instances, you will see certain industries (insurance brokers,retailers,restaurants) implement a multiplier. Essentially, you are taking the multiplier times the target business (the one for sale) annual sales. For example, lets assume that the industry multiplier for a small restaurant is 3 and the sales for the year are $100,000. your sale price is $300,000. Now, that multiplier could be increased if there is evidence that the historic sales have increased each year. On the other hand, what if you are looking at a retailer selling a product in its decline or the market is saturated with similar products or substitutes? Well, the multiplier would decrease.

All this said, you see how subjective part of this equation is. There has to be agreement on what the multiplier is to begin with. If you are not dealing with people who have been party to commercial real estate transactions before you are probably in for a long day. So, where does that leave you?

You are going to need a number of things in mind.

(1) Lots of hostels deal in cash, so the record keeping may be suspect to say the least.
(2) Some owners, without a nondisclosure agreement are not going to want to share their internal records.
(3) Are all the licenses and permits in place? And, is there any reason to suspect they will not be renewed.
(4) Are you buying the building or leasing it? Or, is it a lease-option purchase? AS to the lease, are you going to have to renegotiate with the landlord?
(5) Is the building in good condition and can you count on the landlord to make quick repairs? If the water heater breaks down on you on a Friday night, you might have to deal with it. Leaks in the roof? Or worse, a possible hidden termite issue.
(6) What the reviews like? Are they good and/or trending up?
(7) Is your website driving business to you? Or, is it dated?
(8) What are the labor conditions in your market? Are there barriers to using volunteers?
(9) Do you no all your fixed and variable costs?
(10) What does the current and future competition look like?
(11) Can you expand? If you are in a UNESCO area you are not going to be able to change the physical structure of the building in most case. Rest assured, there are wasys around it. But, that turns on your location.

The above list is by no means exhaustive. You have to keep in mind that there is little to no value in used linens, basic furnishings, flatware and the like. A lot of the value is built into "goodwill" and that is subjective to be sure. I have evaluated countless hostels all the way from Portland, Maine in the U.S. to Cusco, Peru in South America. Each presents its own challenges and risk. I am in the market again. Sometime soon I am going to write a detailed handbook that is going to explore this in more detail.

Until then, good luck and happy hunting!

Steven

This question came up again outside the Forum recently, and I wanted to summarize the suggestions from that conversation.

Lyuba Sorokina: "in Russia that would typically based on Return of Investment time. Here, for example typical time is 3 years, and the price is based on this. In Europe - 5-7 years".

Nuno Constantino: "I would say (50% to 60%) X number of years of lease until the end of contract X net operating profit. In an owned property I would say 14-18 times net operating profit."

Inbal Tubi: "As someone who bought and sold hostel i would say it much simpler. The buying price is what you are willing to pay and the sell price is what you feel you need to get. Simple. I sold a hostel for $80,000 when hostel around me where selling for half. It took me longer but i wasn’t in a hurry. There are so many factors which have nothing to do with you and are very hard to calculate all into 1 price. How many other hostels in your area, what did previous hostels sell for, your hostel rating, location, economy of your country etc."

Anden Annunaki: "So many variables to consider:
Location, owned or leased property, age/state of building, age/state building infrastructure(electricity, plumbing et al), previous 5 years income and expenses, 5 year projected income and expenses, 10 year projected income and expenses, current tourism trends for city/country/region, taxes, beauracracy, geopolitical environment, projected tourism trends for region, proximity of competition, quality of competition, proximity of property to transportation hubs and attractions, recent history of hostels bought or sold in area. All factors i think are important to answer before either purchasing a business or presenting to potential investors. Consider the same factors when estimating a sell price as well and keep in mind that blood, sweat and tears do not show up on a balance sheet so you can't up the price for sentimental value(despite the fact someone may have put their entire life into the business it doesn't make the value increase)"

Jon Thorne: "3.5 times your years gross plus the original investment. It's how I valued my place when I sold 50%"