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How Should I Value My Business?

I'm a business owner of a small hotel. After eight years of running it successfully, I want to sell 40 percent shares. How do I value the shares to determine a price that must be paid? Or, is there another avenue you'd suggest?
Tim Berry answered June 23, 2011
URL: http://www.entrepreneur.com/answer/222328
Usually industries have generally accepted formulas as a starting point, and then you adjust for extra factors. In hotels, I went online a searched for "valuation multiples for hotels" and found that industry average for the larger, publicly-traded hotel chains are somewhere around 10 times EBITDA (earnings before interest, taxes, depreciation, and amortization). So go back to your accounting reports and figure out what that's been for the last three years or so, and that will give you a starting point.

Unfortunately, that's only a starting point. You have to discount heavily since yours is a small privately-owned hotel, which is generally considered more risky as an investment than buying shares of stock in large hotels and chains whose stock is publicly traded.

And you have to discount for the fact that your 40 percent partner is buying a partnership with you (no offense) instead of an arms-length share in a major company. And it's worse as a 40 percent share, because that means your investor will have to spend a chunk of money worth 40 percent of the value of your hotel, but he or she still has no real control. There are several other ways to establish a value.

You also have to add in some amount for the value of the building and the real estate value of the land.

That's not the only way, however. Some analysts would build a detailed forecast of cash flow for as much as 10 years, and then discount that at a discount rate established to compensate for the present value of future cash flows, and the risk. Others use a technical hotel formula based on capitalization.

And for newer hotels, some will use a formula based on cost to buy and build. Professionals will also look for information they can find on recent private deals with hotels, so they have a basis for comparison. It's not like looking up the value per square foot and doing the math.

My underlying point is that you want to link yourself to some real expertise, as in an attorney, business broker and consultant with experience in selling hotels.

Ultimately, what you'll get is what you can negotiate. After all the formulas and reasoning you can muster, in the end, the price is the price that a buyer will agree to pay you.

Related: Tips to Consider When You're Ready to Sell
Related: Your Startup May Be Worth Less Than You Think
Tim Berry is the chairman of Eugene, Ore.-Palo Alto Software, which produces business-planning software. He founded Bplans.com and wrote The Plan-As-You-Go Business Plan, published by Entrepreneur Press. Berry is also a co-founder of HavePresence.com, a leader in a local angel-investment group and a judge of international business-plan competitions.