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Selling: Timing is Everything

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

Often late in the year people say to themselves let’s have a think about selling in the new year.  The new year rolls around very quickly and suddenly, it’s time to make some decisions.  How does one know when is the best time to sell?  To answer one question, lets pose another, or another three, to get the best answer for each individual owner’s situation.

1. When am I ready to sell?
2. What is the market like for selling a motel?
3. What is the best time of year to sell?

When am I ready to Sell?
Probably the most important of the three questions posed.  Knowing when you yourself are ready to sell is a difficult question to answer.  I firmly believe that once you start asking yourself this question, then it is time to do something about it.  No different to an elite sportsperson wondering when it’s time to retire.  If asking the question, then it is time.  Too many moteliers procrastinate about this decision until they get past a point of no return.  Staying on too long can end up in a seller making rushed or bad decisions in order to get a quick sale. The position all sellers would love to be in is selling on their own terms after having made informed decisions instead of forced decisions due to tiredness, personal pressure, being burned out or financial pressure.  A good idea is to make a decision such as taking the business/property to the market in a certain period of time say 3, 6 or 12 months, etc.  This then gives the owner the opportunity to prepare the property and business for sale rather than making a snap decision to sell whilst unprepared.

What is the Market Like for Selling a Motel?
First things first, get some advice.  Speak to a specialist Motel Broker who has been in the industry for a long time with a proven history of successful motel sales.  As the name says, a Broker will broker a deal that is best for the seller.  This way you are more likely to get the right advice, rather than the wrong advice for a “Listing Agent” to get as many listings as possible and hope that one sells at any price level here or there
Recent historical sales provide the most up to date information on how the market is tracking.  What has sold and at what price.  Also, how many motels are on the market and what prices they are listed for, will provide information on the competition in the market for buyer attention.  This information will offer enough details on what is for sale, what has sold and the how active the current market is for motel businesses.

What is the Best Time of the Year to Sell?
Historically we would say that the second half of the calendar year (July – December) was the time when more motel sales were transacted than the first half of the year.  As time has gone on and things invariably change, this situation has also changed.  We tend to now look at things on a year to year basis due to the fact that the previous market pattern has changed and no one particular half or time of the year dominates as far as numbers of sales go.  Generally speaking, year in year out, December and January are the quietest months of the year for transactions occurring.  This can probably be explained by people active in the market turning their attentions more to family, travelling and the holiday/festive season.  The rest of the year is probably dictated more by the second question above.  There is always an increased buyer appetite come March onwards as occupancies and turnover’s start increasing after the quiet months, the increase in motel sales follows the pattern of the industry activity.

Tips for Buying Motels - How, What and Why?

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

How to get started looking for a new business such as a motel is not always easy.  In gathering information, the web is usually the first port of call for any initial enquiry, and the simplest of searches will get things started.  As with a search on any topic, sorting good information from bad requires further investigation.  The next step may be talking to friends or relatives who are or have been in the industry.  Speak also to experts, not those who “dabble a bit”.

Consider the preferred tenure of ownership that meets one’s needs.  The main two types of ownership tenures available for Motel acquisitions are Freehold and Leasehold.  Both offer different benefits and burdens to the owner and one must determine which suits.  Weighing up the facts and comparisons between the two will help determine what is suitable for each investor.  Another main decision that is required to be made early on, is whether one is going to operate the business themselves or not.  This may affect the type of tenure that should be considered.

If the new owner is not going to operate the business themselves then someone else will need to on their behalf.  The business can be operated by a manager or can be sold to an operator whilst the freehold property (land and buildings only) is retained.

Property Specific Motel Matters to Consider

1. Number of Units – There are very different schools of thought within the motel industry as to what the minimum number of units should be to make a motel successful.  Individual should determine how many units they wish to operate and then work towards that.  The budget that is available will also affect this decision.

2. Dining – Some motel operators love restaurants and others do not.  This is the more social side of the business where operators can get to know and build relationships with their customers thereby making the decision for the guest as to where they will stay next time they travel to the locality.  This side of the business can also be a problem area if not operated efficiently.

3. Standard/Presentation – The standard of the presentation of a motel will affect the return on investment expected by the market.  If hundreds of thousands of dollars are required to rectify poor standards or years of neglect, it will affect the price that is willing to be paid for the property in its current state.  Motels that are not presented in the best manner can offer excellent opportunities to add value to the business/property by rectifying areas in need of work.

4. Location – the main positions motels tend to be focused are major highways, main roads, beach fronts and city centres.  These areas tend to be places where demand for accommodation is at its highest, such as business centres, tourist attractions or industry hubs.  Location does play a role in determining the value of a motel as the demand for a coastal motel has historically been higher therefore pushing the value of the motel higher and the return on investment lower.

5. Onsite Residence – Motels usually offer an onsite residence.  One must be aware however that although they are comfortable and large enough, they are not the size of a stand-alone house in suburbia.  There are substantial benefits of living onsite that include the lifestyle of a family living and working together and the tax benefits that are available.  The costs of living in a home in the suburbs are largely absorbed by the business in the case of a motel, such as food, electricity, council rates, water, insurance, telephone, and much more.

Business and Related Motel Matters to Consider

1. Online Reviews – Read but be careful what one takes on board.  The main thing is to consider the tone of the reviews in the main, and how they read, rather than individual reviews.  If there are nine reviews on a motel that are positive and one that is not, then go with the nine, as that tenth review may not be legitimate.  If nine reviews mention a specific issue with a property/business then consider just how big of a problem it is, and how easily it can be rectified.  Sometimes issues can be easily fixed by a new operator, and therefore may be to the benefit of the buyer in the future.

2. Lifestyle – Again the benefits of a family working together and the opportunities to grow with the business can be very rewarding.  Delegating certain areas of the business to key staff members where one is comfortable to, allows more time to get out of the property and take time out for family, schooling or other social activities.

3. Potential – The old saying is “no one buys any business unless they see potential”.  There is generally potential in every motel business of some kind.  A new broom always sweeps clean and a new perspective, vision and enthusiasm offers the opportunity to take a motel business to the next level.  See what areas of the motel are underperforming? What new initiatives can be implemented to gain more market share?  What areas of expenditure are too high and can be brought under control?  An injection of funds to do a refurbishment that the previous operator did not want to do is a proven method of adding value to a motel.  This is an area where one can take a position of advantage over competitors who do not reinvest back into their motel.

4. Finance – Historically motels are known as solid and secure investments and therefore financial institutions (in the main) are eager to lend against them.  They will generally lend 50% against the value of a leasehold motel and 65% against the value of a freehold motel.  In general terms these percentages offer a good base to start searching.  The balance percentage plus purchasing costs will need to be made up of preferably cash, or part cash and part equity against another property depending on the financial institution’s requirements.

5. Purchasing Costs – These costs can be substantial, however are a fact of life.  Government stamp duty accounts for the largest portion of purchasing costs.  Other costs then include legal fees for advice throughout the purchase process, search fees for the property and business such as council searches, liquor licence, vendor entity, etc.  Further costs can then include settlement adjustments for prepaid advertising, council rates and also the purchase of Stock at Value in order to continue to operate the business.

6. Return on Investment – This depends on many of the items included within such as location, standard of presentation, number of units, lease document, land area, etc.  Outside the business/property itself, the strength of the market and demand at that time plays a major role.  Motels do offer very strong returns when compared to many other business opportunities.

7. Cashflow – In most cases and depending on the time of year the first day of taking over a motel generally results in a good cash flow.  Most guests today pay by credit card or Eftpos.  Guests on accounts are more limited to large companies only (of whom many are tending towards credit cards now).

8. Future Resale – When it is time to sell there is generally a ready market for both leasehold and freehold motels.  If priced accurately most motels will sell within a reasonable time frame in normal market conditions when marketed correctly.

Leasehold Specific Matters to Consider

1. Who is in Charge – Many Lessee’s are unsure about their rights and the rights of the Lessor in a motel lease.  The lessee is entitled to “quiet enjoyment” of the property.  In other words they are entitled to operate their own business from the premises without any disruption from the Lessor, as long as they are not in breach of the lease.

2. Rent – The annual rental of a motel should never be more than the Net Operating Profit After Rent.  A new lease should have a commencing rental of approximately 40% - 45% of the entire Net Profit for the complex.  There are other methods for determining motel rentals such as a percentage of Turnover.  A dollar figure per unit site is often utilised as a check method.

3. Lease Period – Motel leases mainly commence as a 25 or 30 year lease (inclusive of option periods).  These are very long leases especially when compared to retail and commercial tenancies which are often 3 year + 3 year leases.  Even a lease that has been in place for 10 years that has 15 years remaining is a long term lease.  It is rare that motel leases ever run down too low as it is in both Lessee and Lessor’s best interests to have a long term lease in place for the security of each party’s investment.  The opposite may occur if the site is ripe for redevelopment, however there are many if’s and but’s in this situation.

4. Lease Terms – Who is responsible for what?  The terms of the lease and responsibilities of both Lessee and Lessor should be considered and advice sought from an experienced motel Solicitor in regards to whether the lease is reasonable or too onerous on either party.  Most motel leases are drafted with standard terms however may not necessarily end up that way in a final copy.  Therefore it pays to make sure one is happy with the Lease Document prior to entering the agreement.  As long as both parties act reasonably regarding extending leases then both benefit in the long run.

5. What am I Buying – The right to lease the land and buildings for a certain period of time on specific terms and the tangible and intangible assets of the business.  This can include goodwill such as the reputation the business has built up, the telephone numbers, email addresses, websites, social media profiles, the business name, the Plant and Equipment, the right to the liquor licence being transferred, etc. 

Freehold Specific Matters to Consider

1. Finance – The cost to purchase a Freehold motel is substantially higher than a lease simply because the land and buildings are also being acquired.  The interest repayments will be much higher so one must ensure that the business’ cashflow can cover the required loan repayments.  There are many benefits to owning and operating a freehold motel and many people purchase a lease motel in the first instant to build up funds and experience with the ultimate goal of acquiring a freehold motel.

2. Land Area and Spare Land for Expansion – Generally motels on a large parcel of land are sought after by the market and any with spare land offer the opportunity to expand and increase the number of units, income and profits and value of the business and property.  Being able to add value to a motel is a big incentive for those who wish to build up the value of their investment.

3. Passive Investments – The ownership of the freehold and business of a motel often leads to the owner selling the business to another operator and retaining the freehold property as a passive investment.  The comfort and confidence in the strength of the motel industry often results in motel owners wanting to keep an investment in the industry whilst moving on to operate another motel acquired or taking life a bit more easily whilst receiving a high return on their investment.

When considering a motel as an investment or lifestyle opportunity speak with experienced industry specialist professionals with a long association in the motel industry such as Accountants, Solicitors, Specialist Motel Brokers and Financiers.  Once a suitable motel has been found always complete a financial and legal due diligence of the business and property to make sure what you think you are buying is the in fact the case.