The quality of the profit and loss statements, and quality of the record keeping in general are an asset whenever you decide to exit a hotel investment. First of all, it should go without saying that only the revenue that is shown on the statements is used in any valuation of the hotel.
The old adage, “garbage in, garbage out” applies to a P&L statement. As a broker, to help you get the most return on investment, we want the opposite. Put in quality data, to get quality intelligence out.
The level of detail in the P&L helps to identify any add backs to the net operating income. Keep records of all capital items purchased and note whether the capital expenditure item was expensed, i.e. written off 100% in one year. These expenses are added back to the net income, as well as any other one time unusual expenses. Other items that are added back are owner compensation, and of course depreciation, amortization, and interest on all debt that the hotel is paying. Any expense that is added back can be used to increase the value of the hotel in a capitalization rate valuation, and bring a higher price at the sale.
Having expense line items, such as utilities, broken down into specific line items, like gas, electric, auto fuel, phone, cable, internet, etc. are important in identifying any expenses that may be able to be reduced in the future. For example, the electricity expense, could possibly be reduced by replacing old inefficient equipment, like guest PTAC units, with new, more energy efficient equipment that will save energy and might even generate energy tax credits.
Breaking down labor is also important to help a buyer and/or lender understand the hotel operations and possibly identify opportunities for the buyer to reduces expenses in different departments, i.e. maintenance, sales, or administration.
As a hotel owner, more detail in your profit and loss statements provides the basis for well-informed decisions in operating your hotel efficiently. The bonus is that when you go to sell, the buyer and buyer’s lender can make confident conjectures for future performance and net operating income, getting you the most for your asset.
If you are interested in a hotel valuation, request one from our website here.
‘Till Next Time,
– Charlie Fritsch