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How do you value a holiday let?
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bobby spray



Joined: 17 Jul 2012
Posts: 21
Location: Stirling scotland

PostPosted: Tue Nov 17, 2015 4:28 pm    Post subject: How do you value a holiday let? Reply with quote

I have been looking to expand into buying another holiday let. The problem is how to value the current business out there. As I see it there a few ways to do this, Asset based ie the cost of the building, fixtures and fittings + something for goodwill, or a discounted cash flow model. where you look at the projected earning for several years, and discount said earnings based on the interest rate. How do others approach this?

regards

BS
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Essar



Joined: 12 Jun 2011
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Location: Bournemouth

PostPosted: Tue Nov 17, 2015 5:02 pm    Post subject: Reply with quote

Hello and welcome to the forum.

Generally a Holiday Lets business is valued at the total assets true commercial value, plus once the average of the last 2-years turnover; sometimes it can be valued at 1.5 times on the basis of taking the 1.0 times true turnover without really discounting. If it's operated as a limited company and there are commercial mortgages involved they have to be paid off or if they are passed over to the buyer the asking price is reduced by the loan outstanding. Private mortgages have to be paid off from the proceeds of the sale.

So, if a holiday flat is worth £250k & the the average of the last 2-years turnover is £20k then the asking price is £270k.
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newtimber



Joined: 24 Nov 2012
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PostPosted: Tue Nov 17, 2015 5:34 pm    Post subject: Reply with quote

Essar wrote:


Generally a Holiday Lets business is valued at the total assets true commercial value.


What is total assets true commercial value is you are talking about a property? A property whose use is restricted by planning to holiday letting only (rather than residential) is clearly going to be worth less than one that isn't.
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Gordo



Joined: 07 Oct 2015
Posts: 190
Location: UK, Spain, Ireland

PostPosted: Tue Nov 17, 2015 8:34 pm    Post subject: Reply with quote

This is my first year doing a holiday let but I've been a private resi landlord (BTL) since 1996.

This wont go down very well but I can't for the life of me see how a "holiday let" is worth anything more than it's bricks and mortar value plus perhaps the goodwill if fixtures and fittings were included?

Yes if you've got repeat bookings year on year so it's effectively a passive income then there's something else to sell but aside from that I don't see anything other than a liability!

Am I missing something?

newtimber wrote:
A property whose use is restricted by planning to holiday letting only (rather than residential) is clearly going to be worth less than one that isn't.


I missed that post but yes that's along the same lines as I was thinking.

.
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Essar



Joined: 12 Jun 2011
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Location: Bournemouth

PostPosted: Wed Nov 18, 2015 1:02 am    Post subject: Reply with quote

newtimber wrote:
Essar wrote:


Generally a Holiday Lets business is valued at the total assets true commercial value.


What is total assets true commercial value is you are talking about a property? A property whose use is restricted by planning to holiday letting only (rather than residential) is clearly going to be worth less than one that isn't.


A properties value is determined by it's possible legal uses. If it can be both a domestic rental and a holiday rental then it's value is greater than one that is just restricted to a holiday rental.

The value of a business is a different matter entirely; the sort of business, it's location, it's local competition, etc., will have a bearing on it's likely sale price.

Also, value will also be determined on the basis of the sale - selling as just a property with a "potential" for holiday rental income is not the same as selling an existing trading holiday rental business, including one or more properties, as a going concern - This is no different to selling a child's nursery business with nursery properties.

Just because a property may have an alternative rental or residential usage than for holiday rentals makes it anyless a trading business.

It will also depend on the vendors attitude towards the way they operate as a holiday rental owner - a full time operator is more likely to view their trade as a full-time business, whereas a hobby owner will see it has a way of paying expenses for a short lucrative time whilst using the property as a holiday home for themselves. Some localities are not suited to all year-round holiday rentals and the subsequent businesses will not be so valuable.

For example; a childs nursery business will have a selling price based on the value of properties plus 3 times annual turnover. A shoe shop using rented commercial property may get up to 4 times turnover as the value of the business.

At the end of the day; the value of a business is only really worth what someone is willing to pay for it.
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casasantoestevo



Joined: 06 Nov 2006
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PostPosted: Wed Nov 18, 2015 8:22 am    Post subject: Reply with quote

Question: How can you value goodwill? Are you guaranteeing a certain level of trade? If not what?
If you do, how do you know the new owner will keep up with the same standards you have set?
One cannot buy goodwill is undefinable and therefore valueless.
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Nemo



Joined: 14 Aug 2008
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PostPosted: Wed Nov 18, 2015 9:20 am    Post subject: Reply with quote

Just because goodwill can't be easily defined, does not make it valueless. A business with many regular customers and email records gained correctly under the data protection laws of the country concerned has a valuable asset. In the case of a holiday let, run as a proper business, with a website, a management system and proof of income over several years, that is proof enough.

I've no idea how it's valued, but there's an existing holiday cottage business in our small village and I'm sure it's being marketed at a greater value than just the bricks and mortar. It's worth however, what someone is willing to pay, which may or may not match that valuation.
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Essar



Joined: 12 Jun 2011
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PostPosted: Wed Nov 18, 2015 10:56 am    Post subject: Reply with quote

Businesses are bought on a valuation based upon "goodwill" - this is a little bit more scientific as Nemo has described. The term "goodwill" is an English term for the value of the proven turnover over a specific period - the longer the better as a pattern can be derived.

Depending upon the type business the goodwill value will a multiple of the turnover average for say the last three years of trading. These figures will have to be proven as true and accurate. Nurseries are 3x, shops 2x to 5x depending upon the size of premises, small auto repair 1.5x. An IT company may have a much higher valuation multiple of upto 10x - just look at AB valued at $25m and they lose money.

How a new owners operates their new company maybe be entirely different to the previously successful owner - if they mess it up and don't make as much that's their problem.

Earlier this year I sold one of our apartments and bought a bigger house to replace it as part of the business. As I didn't want to sell the apartment as a "going concern" holiday rental, I sold it as a residential property at the market value. All the bookings I had I transferred to the other apartment or the new house. The new owners knew it had been a holiday let and they have chosen to advertise it through an agency; their success has been considerably less than when I had it. They chose to let on a full week only basis without short breaks and their occupancy level halved.

As a proven business I can role over the capital gains made on the apartment sale into the new house. When I sell the holiday rental business the capital gains on the properties will be much lower than if selling residential properties only.
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casasantoestevo



Joined: 06 Nov 2006
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PostPosted: Wed Nov 18, 2015 5:49 pm    Post subject: Reply with quote

The term Goodwill from Wiki:
https://en.wikipedia.org/wiki/Goodwill_%28accounting%29#Modern_meaning
It is described in a very different way to the above explanations.
You can see that an intangible asset is something which lacks physical substance/intangible asset.

The next definition states that as a company there should be something written in the accounts and it should be regularly tested. http://www.accountingtools.com/dictionary-goodwill
http://www.accountingtools.com/dictionary-goodwill

Still is something you should not pay for when talking about a property sale. You are not purchasing a company. Plus it doubtful if anyone here adds goodwill tests to the company account books do they?
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visitslovenija



Joined: 01 Dec 2008
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PostPosted: Wed Mar 30, 2016 6:29 pm    Post subject: Reply with quote

Resurrecting an old thread here.....

With the potential sale of one of our rental properties looming, I am wondering how to deal with existing bookings, deposits, balances etc. We are, in this instance, selling a running business.

Revenue for bookings up to the date of transfer is ours of course, but what about the rest? We take 25% deposits, plus the balance 60 days before arrival, so there will be a collection of bookings that fall into the grey area of part payment - plus the buyer is getting a nicely filled booking calendar.

I note Essar's comment of a valuation being the building valuation plus 2 times average annual earnings. Sounds good, and if this is the agreed sale price, then presumably the buyer takes over all future earnings. But what if they sale price is just the building - my feeling is they are not then entitled to the revenue for bookings we worked hard to secure.

We could just cancel them of course, but that then leaves guests in an unpleasant situation - especially if we cancel the peak summer season.

Could we perhaps not cancel the bookings but expect to retain some of the future revenue?

And, yes, in a slow property market I guess our bargaining positions are limited..... But would be interested in your thinking on this.

Ralph


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Cassis



Joined: 20 Jan 2006
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Location: Normandy/Pays de Loire border

PostPosted: Thu Mar 31, 2016 10:06 am    Post subject: Reply with quote

Some people bought an existing B&B near us a couple of years ago and took on the existing bookings. A lot of these guests were a pain because the previous owner sold rooms on a stack 'em high and sell 'em cheap basis.

I don't think any seller should take any of the deposit or revenue for future bookings - I would regard them as part of the property and business value.

If someone expects the new owners to honour bookings that they have taken, under their old old terms and prices, then the new owner should get the full revenue from them. That's my view, anyway.
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Nemo



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PostPosted: Thu Mar 31, 2016 10:17 am    Post subject: Reply with quote

I think it would be fair, if agreed beforehand, to keep a small percentage of the booking money, or perhaps the deposits, to cover the admin and marketing you have put in to achieve those bookings. They didn't materialise from nowhere after all with no effort. It's definitely something to discuss early on in any negotiations.
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Cassis



Joined: 20 Jan 2006
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PostPosted: Thu Mar 31, 2016 11:00 am    Post subject: Reply with quote

I would agree to them paying for the appropriate proportion of any direct advertising costs from the date they take over the business, but costs up to that point, your own admin and time to date are part of the business itself. You cannot in all fairness keep the deposits or future revenues if they're also buying the business, not just a property. If someone told me they were keeping the deposits - part of the future revenue - then I would want them to knock it off the value of the business.

I would negotiate a price for my website if they wanted to buy that, possibly based on the value of direct bookings from that source. That's a separate issue, albeit related.
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casasantoestevo



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PostPosted: Thu Mar 31, 2016 11:35 am    Post subject: Reply with quote

Be aware of "penny pinching", it could be a deal breaker for the purchaser.
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Essar



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PostPosted: Thu Mar 31, 2016 10:26 pm    Post subject: Reply with quote

The main reason for not including the future bookings in my apartment sale was to retain the customers myself - the new owners would be new competitors and I certainly didn't want to help them with existing business.

However, if you are selling the property just as a property but with existing bookings - I would want to keep the deposits paid on future bookings as a "commission". Any balances already received would be the new owners and offset against the deposits retained. The new owners would then have to collect the balances on all other bookings as part of their ongoing business. Alternatively, if the property and business were being sold as a whole including all the future bookings; this would be reflected in a higher price for the business. All monies taken on future bookings would belong to the new owners and dedeucted from the overall price on completion.
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