There are two valuation methods commonly used for Going Concern Motels.
1. Capitalisation of Net Income
The Capitalisation of Net Income is the primary method of valuation and is performed by assessing a net achievable income (based on the motel’s performance) and capitalising that into perpetuity at an appropriate capitalisation rate (yield).The capitalisation rate is derived by analysing other motel sales that are considered comparable. For example, if the valuer adopts an achievable net income of $400,000 per annum and a capitalisation rate of 16%, the adopted value would be calculated by dividing the net income by the capitalisation rate.
The achievable net income is assessed by analysing the motel’s historic performance through the profit and loss statements and occupancy reports.
2. Direct Comparison (Rate per room basis)
The Direct Comparison valuation method on a Rate per Room basis is generally performed as a check method to ensure the value derived from the Capitalisation of Net Income approach reflects a rate per room that is within the range of the sales evidence.
If the number of rooms in this motel is 25, the above value of $2,500,000 would reflect a rate of $100,000 per room. The appropriate rate per room will vary depending on the motel’s performance, location, quality of the improvements, etc.