How FDD adapts to hotels, restaurants and leisure: RevPAR and ADR, seasonality, FF&E maintenance capex, IFRS 16 leases, like-for-like growth and asset models.
A hotel that reports a record summer and a restaurant chain that grew revenue 20% can both be terrible acquisitions - and the reasons why are invisible unless you know where hospitality FDD differs from the standard playbook. This is a sector defined by physical assets that wear out, revenue that swings violently with the calendar, and growth numbers that can be manufactured simply by opening more sites. The operators live and breathe metrics that never appear in a generic diligence template - RevPAR, ADR, occupancy, like-for-like covers - and a buyer who can't read them will pay for seasonality peaks, ignore the capex the assets are quietly demanding, and mistake site-count growth for genuine performance. Getting this right is what separates a credible hospitality analyst from a spreadsheet operator.
Three structural features reshape the diligence:
Takeaway: In hospitality, EBITDA on its own means very little. You have to know what capacity produced it, what part of the year it fell in, and what capex the assets need to keep producing it.
The quality of earnings fundamentals still apply, but the adjustments and the operating metrics are sector-specific.
For hotels, three linked metrics carry the story. Occupancy is the percentage of available rooms sold. ADR (average daily rate) is the average price achieved per occupied room. RevPAR (revenue per available room) combines the two - it is ADR multiplied by occupancy, or equivalently total room revenue divided by available room-nights.
RevPAR matters because it captures both pricing and utilisation in a single figure. A hotel can lift revenue by discounting to fill rooms (occupancy up, ADR down) or by holding rate at the cost of empty rooms (ADR up, occupancy down). RevPAR tells you whether the net effect actually created value.
| Metric | Definition | What it reveals |
|---|---|---|
| Occupancy | Rooms sold ÷ rooms available | Demand and utilisation |
| ADR | Room revenue ÷ rooms sold | Pricing power |
| RevPAR | Room revenue ÷ rooms available (= ADR × occupancy) | Combined yield |
A worked mini-example makes the trap concrete. Two years, same hotel:
| Year 1 | Year 2 | |
|---|---|---|
| Available room-nights | 36,500 | 36,500 |
| Occupancy | 78% | 82% |
| ADR (€) | 140 | 128 |
| RevPAR (€) | 109.20 | 104.96 |
| Room revenue (€m) | 3.99 | 3.83 |
Year 2 looks busier - occupancy is up four points and the lobby feels full - but management chased occupancy by cutting rate, and RevPAR actually fell. Room revenue declined. A buyer told a "record occupancy" story needs to see RevPAR to know the yield went backwards. The restaurant equivalent is covers (customers served) and average spend per cover; the same discount-driven illusion applies.
Hospitality earnings are lumpy. A resort might make its entire annual profit in four months; a city hotel might depend on a handful of conference weeks. This has two diligence consequences.
First, never annualise a partial period naively. Taking a strong six months to a run-rate will massively overstate a seasonal business - and understate it if the strong months are still to come. Any run-rate EBITDA has to respect the seasonal shape.
Second, working capital swings with the season. Deposits taken for peak-season bookings, supplier payment cycles and staffing build-ups all distort the balance sheet at period-ends. A December year-end for a summer resort shows a very different working-capital position than a June one. This makes the net working capital analysis and the working-capital target genuinely hard - you must normalise across a full seasonal cycle, not pick a convenient snapshot, or the completion mechanism will hand value to one party by accident.
Red flag: A completion accounts date set at the seasonal peak - when the business is flush with advance deposits - can transfer several hundred thousand euros of value depending on how the working-capital target was set. Always ask when the reference date falls in the cycle.
This is where hospitality FDD earns its fee. Hotels and leisure venues require continuous reinvestment in FF&E (furniture, fixtures and equipment) - refurbishing rooms, replacing kitchens, updating the spa, repainting the ride. Skimp on it and the property still trades for a couple of years while EBITDA looks great; then occupancy and rate erode because the product has aged.
Because of this, the industry uses an FF&E reserve: a normalised annual allowance, typically expressed as a percentage of revenue, set aside to fund ongoing renewal. A buyer must judge whether reported maintenance capex reflects a sustainable reserve or whether the seller has been starving the assets to inflate the number being sold.
| Reported (seller) | Normalised (FDD view) | |
|---|---|---|
| Revenue (€m) | 20.0 | 20.0 |
| Maintenance capex (€m) | 0.4 | 0.8 |
| Capex as % of revenue | 2.0% | 4.0% |
| Implied deferred spend (€m) | - | 0.4 |
If a sustainable FF&E reserve is around 4% of revenue and the seller has been spending 2%, the business has a hidden liability: the deferred refurbishment that the buyer will have to fund to keep the asset competitive. That gap is both a cash-flow adjustment and, often, a price conversation. Distinguishing genuine maintenance capex from discretionary expansion capex is the core skill here - the same maintenance versus growth capex judgement, but with unusually high stakes because the assets deteriorate visibly.
Hospitality is lease-heavy. Restaurant groups and many hotel operators rent their premises, so IFRS 16 brings large right-of-use assets and lease liabilities onto the balance sheet, and rent that used to sit in EBITDA reappears as depreciation and interest.
Two things matter for diligence. First, IFRS 16 mechanically inflates EBITDA relative to the old operating-lease treatment, because rent is stripped out above the line - so any multiple or comparison must be consistent about whether it is pre- or post-IFRS 16. Second, the lease liability is a genuine claim on the business and usually belongs in, or alongside, the net debt analysis. Whether lease liabilities are treated as debt-like in the equity bridge is one of the most negotiated points in a leasehold hospitality deal, and getting it wrong swings the equity value materially.
A chain can grow reported revenue and EBITDA in two very different ways: by making its existing sites perform better (like-for-like, or same-store growth) or simply by opening new sites. These are not equally valuable. Like-for-like growth demonstrates a healthy, replicable model. Growth that comes only from adding units can mask an underlying estate that is flat or declining - and it consumes capital every time.
FDD should decompose growth into:
Red flag: Strong headline growth with negative like-for-like is a business papering over a deteriorating core estate by opening new sites faster than the old ones fade. It is also unsustainable - the new-site pipeline eventually runs out.
A related subtlety is the maturity curve: new sites take time to reach steady-state trading, so a business with many young sites has embedded upside - but also embedded risk if those sites never mature. This is close cousin to the revenue quality question in any multi-unit rollout.
Two hotels with identical guests can have utterly different economics depending on the operating model. The main structures:
Fee-based (managed and franchised) income is more stable and less capital-hungry than owned-asset income, and the market values the two differently. A key diligence task is to split earnings by model and understand the mix, because a shift from owned to managed changes the risk profile, the capex requirement and the multiple the business deserves. This mirrors the analytical care a carve-out demands when a single reported number hides very different underlying economics.
Within a single hotel, rooms and food-and-beverage (F&B) behave differently. Rooms are high-margin and yield-managed; F&B (restaurants, bars, banqueting, events) is lower-margin, labour-intensive and operationally demanding. A hotel leaning heavily on banqueting and events carries more revenue volatility and cost complexity than one that is essentially a rooms business.
FDD should analyse the departmental split, the margin of each stream, and how the mix is trending. A business growing revenue through low-margin F&B while rooms stagnate is not the same quality as one growing high-margin room revenue - and the EBITDA margin analysis should make that visible rather than hiding it in a blended number.
There is a labour dimension here too. F&B, banqueting and events are staff-heavy and expose the business to wage inflation, seasonal recruitment and, in many markets, a structural shortage of skilled hospitality workers. A hotel that has grown its events revenue may be carrying a cost base that is far more fragile than its room revenue, and recent margins may reflect suppressed wages that the next pay round will erode. The same discipline you would apply to any EBITDA adjustment - separating a structural margin from a temporary one - belongs here: ask whether the departmental profit is repeatable at a normalised staffing cost, not just whether it was achieved once.
A common hospitality prompt: "A hotel group tells you EBITDA is up 15% and last summer was its best ever. What are you worried about?"
A strong answer:
"My first worry is that a record summer tells me about seasonality, not about the business - so I'd want to see the full-year picture and normalise across a whole seasonal cycle rather than annualise a peak. Then I'd go straight to RevPAR by property, because 15% EBITDA growth could be a genuine yield improvement or it could be occupancy bought with discounting; I'd split RevPAR into ADR and occupancy to see which. The big one for me is maintenance capex: hotels can flatter EBITDA for a year or two by underspending on FF&E, so I'd benchmark their maintenance spend against a sustainable reserve as a percentage of revenue and quantify any deferred refurbishment as a hidden liability the buyer has to fund. I'd also check whether the growth is like-for-like or just new openings, look at the owned-versus-managed mix because that changes the multiple and the capex, and confirm how IFRS 16 lease liabilities are being treated in the bridge. So: normalise the season, read RevPAR properly, stress the capex, and understand where the growth and the risk actually sit."
That answer signals that you understand hospitality as an operating business, not just a set of accounts.
Hospitality rewards the analyst who can walk the property in their head. The record summer, the packed dining room and the rising occupancy are exactly the surfaces a seller wants you to admire - and each one can hide a business that is under-investing in its assets, discounting to fill space, or growing only by opening doors faster than the old ones close. Learn to read RevPAR against ADR, to size the FF&E the buildings are silently demanding, and to normalise a lumpy year into a real one, and you will value a hotel or a restaurant chain for what it will actually earn, not for the story it tells on a sunny afternoon.
The Transaction Services Interview Programme (€119.99, one-time) includes a hospitality and leisure module on RevPAR and ADR, seasonality normalisation, FF&E maintenance capex and IFRS 16 lease treatment in the equity bridge. Enrol today.
Hundreds of candidates prepared their interviews with this programme. Those who landed the role have one thing in common: they worked the cases before walking into the room.
