A Georgian seafront hotel, twenty-two bedrooms, on the market at £990,000. The particulars say £45,000 a bedroom and describe the trade as "well established with considerable scope". The accounts show a turnover of £610,000 and a net profit of £48,000 before the owners' drawings.
The bedrooms are irrelevant to the price. What is for sale is a stream of profit and a building that will demand money back from you on a schedule you do not control.
A hotel is a trade-related property and is valued as one
Hotels, pubs, care homes and petrol stations are valued in a specific way, set out in RICS valuation standards, because the property and the business cannot be separated. Nobody buys a twenty-two bedroom building on the seafront to live in.
The method is to establish fair maintainable trade, meaning the level of turnover a reasonably efficient operator would expect to achieve, then derive fair maintainable operating profit from it after realistic costs including a market rate for management, then capitalise that profit at a multiple appropriate to the type, location and condition of the property.
Two words in that carry all the weight. "Maintainable" excludes the good year and the wedding that will not recur. "Reasonably efficient operator" means the trade a competent person would achieve, not the trade this particular vendor achieved, which cuts both ways: a badly run hotel may be worth more than its accounts show, and a hotel carried by a charismatic owner who is leaving may be worth considerably less.
The same logic applies to your business rates. The Valuation Office Agency assesses most hotels by reference to trading receipts rather than floor area, so a rateable value is a comment on trade. If you grow turnover substantially, expect the assessment to follow at the next revaluation.
The accounts a seller shows you are not the accounts you need
You will be given a profit and loss account, probably three years of them, probably prepared for tax purposes. Treat them as the beginning.
What to ask for, and what to do when it does not arrive:
- Departmental trading: rooms, food and beverage, bar, functions, separately. A hotel making money on rooms and losing it on a restaurant is a different purchase from one making money on both.
- Occupancy and achieved room rate by month for three years, so you can see the season rather than the average. A coastal hotel with 82% occupancy in August and 23% in February is normal and has to be financed.
- The booking channel split, with commission costs. Turnover that arrives through online travel agents is worth less per pound than direct business, and a hotel with almost no direct bookings has no list and no brand, only a listing.
- Payroll in full, including the owners. Owner-operated hotels routinely show a profit that is really two unpaid full-time jobs. Add a realistic salary for whoever will do that work and look at the number again.
- The repairs and maintenance line for five years, not three. A suspiciously low figure is deferred capital expenditure, and it is now yours.
- Utility contracts, their expiry dates and their rates.
If the seller will not provide monthly data, that is itself information. A hotel operating without monthly management figures is being run on the bank balance.
Freehold and leasehold are different businesses, not different prices
Freehold means you own the building and the trade, you carry the maintenance, and you have an asset that can be refinanced. Bank lending against a freehold hotel is available, though loan to value ratios for trading property are conservative and lenders will want to see the trading record and your experience.
Leasehold means you have bought the trade and a right to occupy. The rent is a fixed cost that does not care about occupancy, the lease will almost certainly be full repairing and insuring, and the rent review clause is the most important document in the transaction. An upward-only review linked to an index, in a lease with fifteen years left, is a liability you should price precisely rather than note in passing.
Check whether the lease is protected under the Landlord and Tenant Act 1954, or whether security of tenure has been excluded. A leasehold hotel business with eight years left and no right to renew is a depreciating asset, and your exit is somebody else buying a shorter one.
Transaction tax applies either way. In England and Northern Ireland, stamp duty land tax on non-residential property is charged in bands, with nothing on the first £150,000, 2% to £250,000 and 5% above that, and it applies to the lease premium as well as to a freehold price, with a separate calculation on the net present value of the rent. Scotland has land and buildings transaction tax and Wales has land transaction tax, with their own bands.
The compliance that comes with sleeping accommodation is the expensive kind
A building where people sleep is regulated more heavily than one where they do not, and the costs are not optional.
Fire safety sits under the Regulatory Reform (Fire Safety) Order 2005, amended by the Fire Safety Act 2021 and supplemented by the Fire Safety (England) Regulations 2022. You need a suitable and sufficient fire risk assessment, recorded, and premises with sleeping accommodation are treated as high priority by fire and rescue authorities. An enforcement notice on a hotel can close floors.
Water systems fall under the duty to assess and control the risk of legionella, with the Health and Safety Executive's approved code of practice as the reference. Hotels are exactly the risk case the guidance is written for: large systems, variable occupancy, rooms that stand empty and then get used.
Asbestos: if any part of the building predates 2000, the Control of Asbestos Regulations 2012 impose a duty to manage, which means a survey, a register and a plan. This is the item most often discovered during refurbishment, at the worst possible moment.
Licensing: the premises licence under the Licensing Act 2003 does not transfer automatically. An application to transfer must be made to the licensing authority, and a designated premises supervisor holding a personal licence must be in place. Get this wrong on completion day and you cannot sell a drink.
And then employment. If you are buying the business as a going concern, TUPE applies and the existing staff transfer to you on their existing terms, with their continuity of employment intact. You cannot simply start fresh.
The tidy reception is hiding a capital expenditure schedule
Hotels consume capital continuously. Bedrooms need refurbishing on a cycle, and guests notice long before the fabric fails. Boilers, lifts, roofs, windows, commercial kitchen equipment and bathrooms all have finite lives, and in a building that has been sold because the owners are tired, several of them are usually at the end of those lives at once.
Before you agree a price, get a building survey from someone who understands commercial property, and ask specifically for a schedule of anticipated expenditure over ten years. Then treat that schedule as part of the purchase price, because it is.
There is a tax consolation. Capital allowances are available on plant and machinery and on integral features within the building, and on a purchase you and the seller can make an election under section 198 of the Capital Allowances Act 2001 to fix the value attributed to fixtures. Agreeing that election is worth doing properly at the point of sale, because it is difficult to fix afterwards.
Where this shows up in the game
Hotels arrive in Business Baron with the Hotels & Leisure Track, an add-on to the full game. You can buy a trading business rather than start one, and the asking price is built from adjusted profit and a multiple rather than from a price per room. Every listing has a hidden reserve and a reason for selling, and the reason deserves more of your attention than the brochure.