How to value a hotel in Scotland

Why hotels are different

A hotel is valued on what it can earn, not on what it would cost to build. It is a trade related property: the building is designed for one use, and its value is bound up with the business trading from it. A 20-bedroom inn on Mull and a 20-bedroom townhouse in Edinburgh may look similar on plan, yet be worth very different sums because their trading potential, and therefore demand, differs. If you had a hotel business making £12,000 profit per year and another of a similar size making £200,000 profit a year which is worth more, and by how much?

That is why the main tool is the profits method, cross-checked against sales evidence. The rest of this guide walks through how that works in practice, then covers the Scottish factors that move the number.

The profits method in one line

Value equals a sustainable profit multiplied by a multiple that reflects risk, demand, location and comparable sales. Everything else is about getting those two numbers right.

Market Value = FMOP (or adjusted EBITDA) × multiple

The profit used is the fair maintainable operating profit (FMOP). This is the profit a reasonably efficient operator would expect to make, year after year, from the hotel as it stands. It is not last year's figure, the owner's figure or a buyer's dream figure. Valuers usually ask for at least the last 3 years' accounts to analyse average turnover, expenditure (business costs) and profit margins. You may have had a bumper year last year or a shocker of a year due to unforeseen circumstances. The valuer (and buyer) will have to be comfortable at what the yearly average sustainable turnover and profit margin will be going forward, assuming normal market conditions.

• FMOP: Fair Maintainable Operating Profit. Not just one year or the best year in isolation
• REO: Reasonably Efficient Operator, this assumes the person running the hotel knows what they are doing!
• EBITDA: Earnings Before Interest Taxation Depreciation and Amortisation

Different owners and different properties will have varying loan interest rates, corporation tax, depreciation levels (a hypothetical number provided by accountants on tangible assets - property, vehicles or equipment depreciation in value over time). Amortisation is less common to see in a standard profit and loss statement but it applies to non-physical assets. Examples include software, patents, copyrights, trademarks, goodwill, and customer lists.

The multiple is the inverse of a capitalisation rate. A multiple of 8 equals a yield of 12.5%; a multiple of 10 equals 10%. Lower risk and stronger demand mean a higher multiple. The valuation normally assumes a sale of the property as an operational entity. That bundles the land and buildings, trade fixtures, fittings, furniture and equipment, and the trading potential that goes with the property. Personal goodwill tied to the current owner, and consumable stock, are usually excluded or treated separately.

A multiplier could be as low as 4 in a property in a very poor trading location and 20 or more for a prime hotel asset in Edinburgh city centre for example. Independently owned hotels across Scotland would generally sit in the 6–10 range, but there are many factors which affect that number. Your agent should be able to explain these factors and if they can't, you may need to consider your choice of agent…….

Understanding what a qualified Valuer will be looking at when they value your hotel for a potential buyer puts you in a far more prepared and knowledgeable position.

When you choose Drysdale & Co to handle your hotel or hospitality business sale you get an experienced agent and a RICS qualified Valuer in one.

Building the FMOP from the accounts

The FMOP is built by taking (at least) three years of trading accounts and adjusting them to what a typical operator (REO) would achieve. Your agent will (or should!) ask for profit and loss accounts, management accounts for the current year, VAT returns, occupancy and average room rate data, and a breakdown of income by department.

Start with turnover, split into rooms, food, beverage and other income. Test each line against occupancy, average daily rate (ADR) and covers. Then rebuild the costs.

• Strip out owner's items. Remove directors' drawings, personal car and phone costs, private use of accommodation, interest, depreciation and one-off legal fees.
• Charge a market wage for management. Many family-run Scottish hotels show inflated profit because the owners work 70 hours a week unpaid. A buyer will need to pay for that labour, or a manager, so put it back in.
• Normalise payroll. Check staffing against the standard of service. Too lean is unsustainable; too heavy may be inefficiency a new operator would fix.
• Allow for repairs and renewals. Deduct a reserve for replacing furniture, fixtures and equipment (FF&E). Industry practice is commonly around 3–4% of turnover, but you should verify this against current guidance and the age of the fit-out.
• Adjust property costs. Use the current rates bill after revaluation and any relief the hotel actually qualifies for (see the Scottish section). Treat insurance, utilities and licence costs at realistic levels.
• Remove abnormal years. A closure for refurbishment, a one-off wedding season or a ferry disruption year should not drive the number.

The result is an adjusted EBITDA that represents the FMOP. If the accounts are thin, unaudited or obviously incomplete, the valuer's judgement carries more weight and the multiple should reflect that risk.

Choosing the multiple

The multiple comes from analysing what comparable hotels have actually sold for, divided by their FMOP. It is the hardest number to defend, because sales evidence is thin and buyers rarely share accounts.

The main factors that push a multiple up or down:

• Location. Supports a higher multiple: City centre, Edinburgh, Glasgow, St Andrews, strong touring routes. Supports a lower multiple: Remote rural, single-season, ferry-dependent.
• Trading season. Supports a higher multiple: Year-round demand, corporate and events trade. Supports a lower multiple: Six-month season, closed in winter.
• Scale. Supports a higher multiple: Larger hotels attracting institutional and group buyers. Supports a lower multiple: Small owner-operated inns with a narrow buyer pool.
• Condition. Supports a higher multiple: Recently refurbished, compliant, good energy rating. Supports a lower multiple: Capex backlog, dated rooms, roof or drainage issues.
• Tenure. Supports a higher multiple: Heritable (freehold). Supports a lower multiple: Leasehold with short unexpired term or onerous rent.
• Accommodation. Supports a higher multiple: Staff housing and owner's flat included. Supports a lower multiple: No staff accommodation in an area where housing is scarce.
• Trading record. Supports a higher multiple: Clean, consistent, verifiable accounts. Supports a lower multiple: Erratic trading or cash-heavy, poorly documented income.

Remember that smaller rural hotels often trade on a lifestyle basis. Buyers may pay above a strict profits-method figure because they want to live and work in a beautiful place. That is real market behaviour, but be careful not to bake it into a lending valuation.

Cross-checks

No profits-method figure should stand alone; test it at least two other ways.

• Comparable sales. Compare price per letting bedroom, and price as a multiple of turnover, against recent sales of similar hotels. Adjust for room size, quality and how much non-room income there is. A per-room figure is a sense-check, not a method.
• Discounted cash flow (DCF). For larger hotels, or where trade is changing (a refurbishment, a new extension, a ramp-up after reopening), a 10-year DCF shows how value builds as trade stabilises. Institutional buyers and lenders often expect one.
• Vacant possession and alternative use. Ask what the building is worth closed. Could it convert to residential, holiday lets or a care home? In weak trading cases, the bricks-and-mortar value can set a floor, or even exceed the trading value.
• Reinstatement and construction cost. Not a valuation method for hotels, but useful for insurance advice and for testing a new-build proposition.

Where the methods disagree sharply, the gap is information. Usually, it means the FMOP is wrong, or the comparables are not truly comparable.

What is different in Scotland

Scotland has its own property taxes, rates regime, licensing law and, now, visitor levies, and each one feeds straight into the FMOP or the price a buyer can pay. Check every item below at the date of valuation.

• Non-domestic rates after the 2026 revaluation. All Scottish non-domestic property was revalued from 1 April 2026. For 2026-27 the poundages are 48.1p basic, 53.5p intermediate and 54.8p higher. Some hotels saw steep rises: UKHospitality Scotland reported an average 86% increase for licensed premises, although transitional relief limits the bill increase. Always use the actual bill, not last year's.
• Hospitality reliefs. The 2026-27 Budget gives a 15% relief for three years to hospitality premises with a rateable value up to £100,000, capped at £110,000 per business per year. Hospitality premises on islands (as defined by the Islands (Scotland) Act 2018) get 100% relief for the same three years. That is material on Mull, Skye or Arran, but it runs out, so a buyer looking beyond March 2029 should not capitalise it forever.
• Visitor levy. Edinburgh charges 5% on overnight stays from 24 July 2026, capped at five consecutive nights. Stirling confirmed a 3% levy expected from 14 June 2027, and other councils, including Glasgow, have consulted. Amending legislation also lets councils set a fixed per-night charge. The levy is passed to guests, but it can squeeze room rates and adds admin, so consider it when testing ADR.
• LBTT. Hotel purchasers pay Land and Buildings Transaction Tax at non-residential rates: 0% to £150,000, 1% to £250,000 and 5% above. On a £1.5m hotel that is £63,500 by my arithmetic. Buyers price this in, and investment valuations often deduct purchaser's costs.
• Licensing. Under the Licensing (Scotland) Act 2005 the hotel needs a premises licence and a designated premises manager. Check the operating plan, permitted hours and any conditions; a licence that restricts trade affects the FMOP.
• Remoteness and staffing. Rural and island hotels often struggle to recruit. Staff accommodation can be worth a great deal in trading terms, and its absence can make an otherwise good business unworkable.
• Ancillary letting units. Self-catering cottages or lodges sold with a hotel may need their own short-term let licence. I am not certain how this applies in every case, so check with the local council.

An agent's marketing appraisal is not a Red Book valuation

That distinction matters when a seller's asking price later meets a lender's valuer. A negligent valuation can be scrutinised in court in extreme examples, a negligent agent asking price due to lack of experience or knowledge has no repercussions, it just leads to prolonged marketing periods and frustrated sellers. Don't fall into the trap of going with the agent who gives you the highest asking price number, it may just be fantasy, inflated to get your signature on a contract, charge you a very high upfront marketing fee and pass you on to a call centre to deal with enquiries.

A worked example

This hypothetical 18-bedroom Highland hotel comes out at about £1.575m. All figures are invented to show the mechanics, and the multiple is purely illustrative, not market evidence.

• Turnover (rooms, food, bar): £1,200,000
• Reported net profit: £260,000
• Add back depreciation, interest and owners' personal costs: +£85,000
• Deduct market cost of management the owners provide unpaid: −£60,000
• Deduct FF&E reserve at 4% of turnover: −£48,000
• Adjust rates to the post-revaluation bill: −£12,000
• FMOP: £225,000
• × illustrative multiple of 7 (yield about 14.3%): £1,575,000

The cross-checks: £87,500 per bedroom, and about 1.3 times turnover. If local sales evidence sits far from either, revisit the FMOP or the multiple.

Common mistakes

• Capitalising the seller's best year, or a year boosted by a temporary relief.
• Forgetting or ignoring that unpaid owner labour has a cost.
• Ignoring capital spending a buyer must make in year one, such as a new boiler, fire safety works or a roof. Deduct it from value.
• Treating a lifestyle premium as if it were trading value.
• Using pre-revaluation rates, or an islands relief that ends in 2029.
• Relying on per-room figures as the valuation rather than a check.

In short

Work out what a competent operator would sustainably earn, choose a multiple you can defend from evidence, and test the answer against sales, cash flow and vacant value. In Scotland, get the rates, reliefs, levy and LBTT right, because each one changes either the profit or what a buyer can pay.

Try not to focus on what other hotels are listed at, and don't treat it as a competition. Comparable evidence is only relevant in relation to hotels that have actually sold, not asking prices of hotels that haven't sold….

The market will ultimately decide what your hotel is worth, your agent needs to understand the market and truly understand all the questions a buyer will have when they are considering a purchase in this sector.