Before Acquiring a Hotel, How Can You Assess Whether Reported Earnings Are Sustainable?

Before acquiring a hotel, verify reported earnings item by item, assess which elements can continue after the takeover, and use that assessment to establish the operating earnings starting point for valuation. An accurate set of accounts can show what happened in the past. On its own, it cannot prove that the same earnings will recur under a new owner.

When a seller presents a profitable year, a buyer may quickly ask what multiple the price represents and how many years it will take to recover the investment. But if that year includes income that will not recur, or benefits from a fee discount about to expire, even a precisely calculated multiple may rest on the wrong starting point.

First, define which earnings both sides are discussing

Before reviewing the figures, write down the scope and definition of earnings. Are they earnings from hotel operations, or the net profit of the company that owns the hotel? Which period do they cover? Have rent, brand fees and management fees already been deducted? Are company-level financing, taxes or other businesses included?

There is no single answer to these questions, but the answers must be verifiable by both sides. In particular, a figure before rent cannot be compared directly with another hotel's figure after rent. Nor does renaming a hotel operating metric turn it into cash available for distribution to the owner.

A public transaction illustrates the difference. In its full-year 2025 results released on 26 February 2026, DiamondRock disclosed that the sale price of The Westin Washington, D.C. City Center represented 11.2 times its 2024 Hotel EBITDA. Excluding a one-time property tax credit and a temporary franchise fee discount, the same price represented 11.9 times Hotel EBITDA. Hotel EBITDA here is the hotel operating metric disclosed by the company, rather than net profit.

The transaction price did not change; the earnings used to compare that price did. The example shows how temporary benefits can affect the earnings baseline used in valuation. It does not establish which multiple a hotel in China should use, or determine a reasonable offer for any particular property.

Adjustments can run in both directions; ask whether each item will continue

For non-recurring income, first confirm whether it is already included in the selected earnings starting point, then assess whether it will recur after the takeover. Compensation, a gain on an asset disposal or a temporary concession should not automatically enter every future year's operating forecast simply because the money has been received. Conversely, deducting an item that was never included in the selected earnings figure would also be wrong.

Apply the same scrutiny to expenses the seller proposes to add back. An expense may be considered for adjustment if evidence shows that it is unrelated to ongoing operations and will not recur after the takeover. A document labelling it “one-time” is not sufficient evidence that it will disappear.

For example, a hotel may repair different equipment each year. That does not make every year's repairs exceptional. If continued expenditure is necessary to maintain the existing service, the corresponding normal expense or capital investment must be verified rather than removed entirely from the forecast. The appropriate treatment requires financial and engineering evidence.

Temporary discounts should not automatically be removed either. If a valid contract confirms that the buyer can retain a discount throughout the forecast period, model it for its actual term and show the return to normal charges after expiry separately. If transferability remains unconfirmed, retain both a continued-discount scenario and a normal-charge scenario, without treating either as an established fact.

Related-party support needs particular attention to contracts. Whether office, human resources, procurement or property services supplied by the seller's group will continue, and how charges will change, should have a written basis. The IFRS Foundation's official explanation of IAS 24 notes that related-party relationships and transactions may affect profit or loss. This is a reason to investigate; it does not prove that a particular related-party transaction is unreasonable or establish an adjustment amount automatically.

A buyer's expectations of higher room rates, fewer staff or lower procurement costs should also be kept separate from adjustments to historical earnings. These are improvement plans yet to be realised. Their required investment, decision rights, validation timetable and failure scenarios should be set out separately. It should be possible to distinguish what the seller earned in the past from what the buyer hopes to earn additionally in the future.

Use a simple calculation to check the direction of adjustments

The following figures are hypothetical and illustrate the review method only. They do not represent an actual hotel or an industry standard. Assume both sides select annual operating earnings of RMB 5 million. This already includes RMB 400,000 of income that will not continue and RMB 300,000 of fee discounts that expire in the following year and will not be renewed. It also reflects the deduction of RMB 200,000 in expenses verified as non-recurring and requiring no replacement expenditure.

Assuming all other conditions remain unchanged, subtract RMB 400,000 and RMB 300,000 from RMB 5 million, then add back RMB 200,000, to reach RMB 4.5 million. This is adjusted operating earnings under the stated assumptions. It cannot be called distributable cash directly, and it excludes gains from the buyer's future operating improvements.

In an actual project, the most valuable checks often concern the assumptions rather than the arithmetic. Was the RMB 400,000 actually included in the starting figure? Is it certain that the RMB 300,000 discount cannot transfer? When the RMB 200,000 expense disappears, will similar spending need to replace it? Any changed answer should be reflected in the worksheet, rather than explained only verbally in a meeting.

After reviewing earnings, work through to cash

Earnings may be adjusted on the correct basis while cash remains affected by receivables, payment timing and subsequent investment. The IFRS Foundation's official explanation of IAS 7 distinguishes operating, investing and financing cash flows, and explains that reconciling profit to operating cash flow requires adjustments for non-cash items and differences in receipt and payment timing. This provides a methodological basis for distinguishing earnings from cash; it is not an accounting conclusion for a particular project in China.

For an acquisition decision, then identify the capital expenditure needed to maintain operations, changes in working capital and financing arrangements. Outstanding receivables, for example, affect funding needs, while overdue equipment replacement may require subsequent spending. Whether these belong in completion adjustments, future operating cash changes or acquisition price terms depends on the transaction structure and underlying records.

An expense must not be deducted in earnings and then deducted again in the cash calculation without explanation. An unpaid amount already recognised as a historical expense must not be treated as a new operating expense merely because the cash has not yet left the business. The relationship between the schedules should be clear.

Put disputed items into a traceable review worksheet

The accompanying Hotel Acquisition Earnings Review and Adjustment Worksheet can serve as a working record. Start with the hotel and operating entity, period, original financial statement name and earnings definition, then review each item in a separate row. Each row should record at least the original statement item and amount, whether it is included in the starting figure, the proposed adjustment direction and amount, the reason, the location of original evidence, whether it continues after the takeover, outstanding questions and the person responsible for confirmation.

Record the subsequent cash effects of capital expenditure and working capital separately at the end, identifying which calculation schedule includes them to prevent double counting. Where figures use different currencies, tax bases or periods, first put them on a comparable basis.

Give each row a clear status. Items supported by vouchers, contracts and matching periods are “verified”; those awaiting transfer confirmation, contracts or originals are “pending verification”; requests with insufficient support or double counting are “adjustment not accepted in this review”. Rejecting an adjustment request does not mean the original accounts are false. It means the valuation starting point cannot currently be changed on that basis.

The finance lead should reconcile adjustments to the original accounts. The operating team explains the purpose of expenses and the service consequences, while the contract lead verifies whether rights and obligations will continue. Suitably qualified personnel should provide additional checks for equipment and repairs. The buyer's investment lead decides which unresolved items affect further negotiations, evidence requests or offer conditions. That responsibility cannot be delegated to the seller's adjustment schedule.

Before the first discussion of an offer based on earnings, conduct a limited review: select material items, unusual fluctuations and requested add-backs from the latest complete operating year, and trace each to vouchers, contracts and receipt and payment records. Set the scope according to the project's scale and potential effect on the offer, rather than applying a universal amount or percentage to every hotel.

Judge the review by whether every difference between reported and adjusted earnings can be explained, material items have supporting evidence, expenses have been counted twice, and changes in unresolved items could materially affect the offer assessment. A completed spreadsheet and a finished meeting do not establish that earnings are reliable.

When evidence is limited, retaining conditions is more useful than manufacturing certainty

This method mainly suits operating hotels with reasonably complete operating records. A newly opened hotel, a property still ramping up or one that has just completed major renovation may lack a stable historical baseline. Such projects need phased forecasts; a few additions and deductions cannot manufacture a “normal year”.

If key balances cannot be reconciled, the terms for continuing related-party support are unclear, or the seller refuses to provide sufficient evidence for material adjustments, stop treating the item as certain earnings in the basis for an offer. Retain supported scenarios or evidence conditions where appropriate. If the gap could affect the investment decision, suspend the modelling conclusion rather than using a higher discount rate to conceal missing underlying information.

Once the earnings baseline is established, connect it to the investment return model. Projects requiring renovation also need further assessment of asset cash flows and investment arrangements. The first step in an acquisition discussion is to put an evidence-backed earnings review and adjustment worksheet on the table, with unresolved items and named responsibilities, so both sides can establish what will allow the earnings being valued to continue.