Pricing Method: Real Estate value PLUS Cash Flow

From “Ask Kit!”:

Q: If I can figure the real estate value of the building and I know the cash flow of the business ..How do I add the value of the Established, successful B&B that I would like to purchase?

A: There are several ways of valuing a B&B and you are on the right track for one of the approaches, though it’s the least common approach and the most involved and detailed approach. There are industry standards to help you calculate from the income and/or cash flow what a reasonable purchase price is; Gross Room-Income Multiplier (GRM) and Net Operating Income (NOI) — or Cap Rate — are the two most common methods. I suggest you use either of the cash flow methods rather than the method you wrote asking about, because they are more straight forward. To give you a ball-park price, use 4.5 (2004 value) multiplied by the gross room income or divide the net operating income by 11% (2004 value). NOTE: These formulas give you only an approximation of pricing, enough to help you evaluate whether that property is worth your consideration, not enough to “take you to the bank”.

There are two other methods used by some consultants that I personally don’t like because they don’t reflect the condition of the business or building; price per furnished questroom and price per square foot. You will hear some consultants and real estate agents talk about them, but I don’t find any value in even discussing them more than I have here.

Regardless of the approach you use, I strongly urge you to have a B&B professional (B&B Broker, consultant, or appraiser) assist you in pricing an inn because they are up-to-date on the values used in the formulas and the other non-formula issues that go into pricing a B&B.