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Book Direct

Finding a “satisfactory” balance between OTA (Online Travel Agent) driven bookings and direct bookings is a dilemma.  With excessive commission rates, it can feel like a double edged sword to be listing units with an OTA, receiving the booking, but having to pay a high commission rate that would otherwise be avoided with by direct booking.

This has led to the ongoing argument about fairness in the market in relation to OTA’s and best practices.  Dick Smith recently brought the accommodation sector’s issues to the attention of many who were unaware of what the industry faces.  It had an immediate affect with many of those previously unaware booking directly.  What steps can moteliers take to be more proactive in driving direct bookings as well as getting more ‘bang for their buck’ with the use of OTA’s?

We live in the digital age, it’s where people research, socialise and commentate, book and rate.  The first step to driving direct bookings is to have a user-orientated built website.  Build it for the market.  It needs to be fresh with professional, good quality photo’s that sell the property.  It takes only a few seconds to form an opinion and these are most often based on the photos and presentation of a website.  Make it easy to navigate through the pages, easy to book and easy to enquire.  Generally we are told the longer someone spends on a website, the better, however if a prospective visitor can’t easily find what they want to know, they’ll quickly go somewhere else.  If they come to a page from elsewhere and they can’t quickly and easily book or enquire, then they’ll either go back to an OTA site and do it there, or to a different motel altogether.

Use a webpage to upsell and put a very clear call to action that makes it obvious to potential guests that if they make contact directly, they will receive the best possible rates. It’s still not common knowledge that consumers can get better rates directly through a property than if they book using an OTA, so the website has to compel them to make contact.

An excellent website is only the first step, people need to be able to find the motel.  Maximise spending with OTA’s by utilising listings on their sites to the most advantage.  Consistency of photo’s and details on any OTA or third party website should all be of a professional standard and should ideally all be identical.  This helps to cement a brand and image and makes the motel easily recognisable across all of the various platforms.

Best price offers.  Whether nonsense rate parity agreements prohibit motels from offering cheaper prices or not, either way, consumers need to be prompted to contact the motel directly for the best price.  Human nature means we are always out to get the best “deal” we can, and people will always be more inclined to contact directly for this.  Education on the web or at reception is the key.

The OTA’s giving the billboard effect, means that simply by offering availability through OTA’s it will ultimately drive traffic back through your own website.  The big OTA’s have mammoth marketing budgets and their sheer size and structure mean that they almost always rank at the top of internet searches.  Take advantage of their marketing budget and brand awareness by ensuring a professional looking listing that gives an excellent first impression of the property amongst their other search results.  Make sure content is fresh and up to date and consistent with everything else on the web.

Trends such as a meta search drive direct traffic and as technology moves with the desire for instant gratification, we have seen the rise of comparison sites.  Where a consumer will make a booking through an OTA, a comparison site crawls the web for all available information relating to a search and provides realtime information on rates and availability, so that consumers can easily see in one place everything they want to know.  They can then quickly rule out or act upon motels of interest, either going directly to their website or if they see a more appealing option on an OTA, then heading there.  Here is where their attention can be captured so that they head direct, rather than to an OTA.  The first step is to ensure that the site is enabled on the Google platform and that all details are up to date and correct.  This should not be a ‘set and forget’ exercise.  To regularly display in the results one needs to make sure the realtime data is correct and reflects what is out there and available on other sites.  Again, consistency is a key factor here.

Finally, use direct marketing to your advantage.  We are limited by what we can offer on a website and other third party sites when there are agreements with OTA’s, however the ability to market directly to social media followers, previous guests and a database is very relevant.  Take advantage of direct marketing with special offers that keep the motel in the front of mind, so that if they are looking to travel or have friends or family who are, the motel’s name is there, ready for them to enquire or recommend.  Building loyalty is a big one.  No matter how a guest came to the motel, treat them as a priority and take ownership of their booking – leave them with no doubt as to where they want to stay the next time they visit the area thereby driving them to book directly next time.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Room Rates - Supply and Demand

The economic forces of supply and demand determine the price levels of most products and services.  It forms the basis of the Laissez Faire economic system (free from government intervention) under which we live and operate… most of the time.  Supply and demand are an everchanging dynamic as each go up and down with human actions.

Accommodation room rates go up and down as a result of all sorts of activities created by people and external factors.  A couple of simple demand examples include, a big event being held in a locality on any given day or a large industry increasing or decreasing their activities in a region, just to mention a couple.  A couple of simple supply examples include, new short-term accommodation units being built and coming online, or an accommodation site being redeveloped for its highest and best use purposes thereby taking units offline.  There are literally hundreds or more different actions that change supply and demand.  Supply is generally the slower mover however demand is more dynamic, changing from day to day.

There are differing opinions on this however in the main it seems to be that most believe short term accommodation room rates must go up and down with supply and demand changes.  As the old saying goes “make hay while the sun shines”.  You can consider scenarios in the short term such as a busy weekend or week and long term such as a booming industry over a ten-year period as examples.  If there is a busy weekend for an event or an annual event perhaps and the available units in an area can be sold 3 times over, will the room rates for that period be the same as when things are quiet?  When things are quiet do the room rates stay where they are, or do they drop in order to meet the lower demand?  Peak and off-peak seasons are another example.  Holiday complexes always advertise high season and low season room rates.  They are simply going up and down with the relevant supply and demand for that time of the year.

Having seen situations where it is believed that rates should stay the same no matter what the demand is, those situations did not end up working out well.  Loyalty to guests is something that gets mentioned in these discussions.  Of course, this is a good thing, however it can only be sustained up to a point though, especially considering long term scenarios.  If the room rates are not raised during the busy times, then unfortunately come the quiet times, they cannot remain where they are either.  Even though the guest may still wish to stay at that motel to repay the loyalty of the lower rates in busy times, their company may move them on to a cheaper property in the quieter time, as the company does not have the indebted responsibility of loyalty in return.  This is where not moving room rates up and down with supply and demand can end up being a very costly mistake.

Looking after return guests and loyalty is a fantastic thing.  It is what builds the strength of any accommodation business.  Finding the right balance here is the difficult part.  Being able to increase room rates with higher demand and keep loyal regular guests happy around this, is not an easy thing to do.  The juggling act of any business operator is not an easy one to get right, or even close to.  Using room rates as effectively as possible must be the goal though.

Low room rates and under cutting are a major burden on the accommodation industry.  The damage caused by this line of thinking is big.  The thought process that undercutting the value of one’s product is the best way to sell the product is a very flawed ideology.  Why not go the other way and add value to the product to make it more attractive to the market, instead of giving it away?  If there is a low demand for motel accommodation then there is less chance of being able to lift room rates, however there is little benefit in underselling the value of the product.  Again, the juggling act.  What is the market willing to pay for the product and service?  Finding the fine line in not over pricing the product and not under-pricing it within the confines of the demand available is the trick.  What is a guest willing to pay for a neatly presented and clean motel room that offers the expected services such as, a good bed, quiet room, air conditioning, high speed internet service, etc, etc?  Therefore, what does one believe is the value of the combination of the product and service they are offering that can be achieved at a particular point in time?

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

The Search has Evolved

Whether your looking to buy a small leasehold motel or a large freehold hotel, the search must start somewhere.  So where does it start?  How does one find what they are looking for

Way way back in the 1990’s, “the good ole days” those looking to buy a motel would check the newspaper on a Saturday morning and see columns of motels being advertised for sale under the heading “Hotels/Motels for Sale”.  Caravan Parks had their very own heading however there were generally only about three or four advertised compared to dozens in the Hotel/Motel section which was a combination of pubs, motels and resorts.

If the reader liked something they saw in the three or four lines within one small newspaper column, they would pick up the landline in most cases (mobile phones were in their infancy) and call the office of the Broker who advertised the motel.  Information on that motel was then posted by the Broker via “snail mail”.

Fast forward 25 years to today and things have obviously changed significantly.  The ease of finding information is simply a couple of clicks away and people can access substantial amounts of information on scores of different businesses in very quick time.  No waiting for the postman to turn up with an A4 envelope three or four days after having made the request with the Broker.

The days of advertising for the industry in the Saturday newspaper are pretty well over.  You will still find the odd agent stepping out of their field of expertise and trying to sell a motel business in the newspaper, however it is just not cost effective anymore for this particular field.  Colour photos in newspaper print were not a common thing all those years ago, but again, things have changed and advertisements via any medium without colour photos just don’t cut it from the point of trying to attract buyer’s attention.  Not only this, but they need to be large, and that makes hard copy ads very expensive.

The web offers as many full colour photos as you like and the space to write as much dialogue as needed.  The costs can be high sometimes, however in most cases can be kept to a minimum if the motel is advertised with the right Specialist Motel Business Brokers.  These Brokers are focused on the sale of motels and therefore dedicate all their time to that sector.  Their marketing campaigns are largely centred around web-based marketing which reaches directly into the target market for such a business.  Nowadays many motels don’t even see a website and are sold before being put out to the view of anyone who has internet access.

Website advertisements of anything allow for photos to be “touched up” in order to make the product look better than it is.  Most Specialist Motel Brokers present photos they have taken themselves of the property.  These photos are expected by their clients to be untouched.  As much as they want to present a property as best as possible, professional Brokers know they will be attending the site with their clients and therefore want to show the property in its real state.  The line about “things looking good on paper but when you get there it is a different story”, is not what a professional Broker wants their client experiencing.

At the end of the day starting the search with the web is the obvious choice.  This will however only scratch the surface and extend the search only so far.  The way to progress from general research to real progressive action is to speak directly to a Specialist Motel Broker.  As mentioned, many very good motel businesses that are for sale may not actually be listed on any websites, often at the Vendor’s request for confidentiality reasons.  For those most serious buyers, this is the way to cut through all the out dated information and hyperbole that can be found on the web, and get to the most up to date and relevant information available.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker
Photo Credit Tourism & Events Queensland

Expected Selling Time

“Business valuers in Australia typically define market value as:
the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.”
(“Meaning of Market Value” n.d. https://www.ato.gov.au/general/capital-gains-tax/in-detail/market-valuations/market-valuation-for-tax-purposes)

What sort of timeframe is reasonable to expect the above to occur?  There is no definitive answer here or no one size fits all, especially where some properties or businesses are unique and don’t fit under the banner of others.

Looking at the motel industry, in general terms if a motel is priced correctly an acceptable selling timeframe will be around four months.  If the business or property is overpriced then it will most likely sit on the market for longer than this.  Again, in general terms, we believe a marketing commencement date to settlement of a Contract of Sale up to a six month period is acceptable when a motel is priced and marketed correctly.

The strength of the market will dictate market prices and marketing campaign timeframes, however the times mentioned are a good guide in most markets.  Even when markets are running hot the logistics of buying a business do take some time to formalise and complete.

External factors seem to be extending timeframes.  Delays in finance approvals lately seem to be a cause, particularly where clients are awaiting finance approvals for the Contract of Sale to progress forward.  Once finance is approved, timeframes to complete settlement have been relatively quick.

We find in the field of accommodation business and property sales often the Vendor does not wish the business to be displayed publicly for sale.  Hence an off market sale campaign is conducted.  This is becoming more common as Vendors do not wish certain individuals (who do not have a genuine interest in buying the business) to receive their business data.  This has become more relevant as accessing information online has become easier and easier as technology improves.  It allows those who either cannot finance the transaction, do not have a genuine buying interest in the business, or wish to find out information about the business or owner.  Enquirers often ask why we do not include the locations of the businesses on our website?  The answer is that quite often we do, however more and more of our clients have realised the value of confidentiality today and do not want their business compromised in any way by those who are not genuine potential buyers.

Off market campaigns will often see a motel offered to genuine buyers that the Broker is aware of and are actively seeking such a business.  These campaigns will allow a sale to occur, generally in a reasonable marketing timeframe, and the first any non genuine buyers know about it is when it shows up as a completed sale.  The old line of “you can’t sell a secret” still has some merit, however those genuine buyers that maintain a relationship with their Broker will know about it, therefore there is no secret!  It is also relevant to add that off market campaigns suit certain property types and business types more than others.  Again, there is no one size fits all.

Achieving the highest price possible is any Vendor’s goal, however stepping over the line and pricing too high is an issue.  A Seller must do their research and come to their own conclusion of value based on all the collated information.  Some pitfalls may include sales evidence that was not an “arm’s length” transaction, or incorrect information (or lack of information) that may have been provided.  The way to protect one’s self from this is to arm yourself with information on genuine recent sales of a similar nature, what is currently available for sale, how does the particular motel compare and general market information on what may affect potential buyer’s assessments of value, such as interest rates rising or falling, access to finance, economic issues, etc.

A successful sale at the highest possible price will not be achieved by sitting on the market over time.  All that will happen is the price will come down and down over time until eventually it meets the market or sells below it.  Meeting the market within a reasonable time is the best way to avoid a protracted selling timeframe and underselling.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Bedding has a Limit

Everyone you speak to has a horror story at some time in their life about a motel bed they slept on that was the worst bed they ever had to endure.  They had no sleep that night and will never forget it… and, will continue to bring it up when any conversation allows them to introduce it.  Sound familiar?  Allow me to paint a picture for you of an all too common scenario.

A motel guest parks their car outside their unit, they chose this motel because it looked like a good quality motel from the street or online.  They open the door after a long day on the road, ready for a good night sleep.  They comment that they are so tired they could sleep on the floor if they had to.  They look around the unit and like what they see, the room is very nicely appointed.  They look past the bed, then stop, and look back as something catches their eye.  “Does the bed look saggy....  It does...  It is!”.  To their horror, the bed is sagging in the middle and looks as though it was new back in 1999.  Albeit very disappointed with the look of the bed after the long drive, they don’t say anything to management, and proceed to toss and turn all night, resulting in the worst night’s sleep they have ever had.  The next day they leave the motel vowing never to return because of the bedding and armed with a story for the ages

Over the last 23 years of motel brokerage and in excess of one thousand motel inspections, I still cringe when I walk into a motel unit to see a beautiful room spoilt by a bed that should have been upgraded five years ago.  One of the first things a potential buyer of a motel does when they enter a room is to lift the bedspread, sit on the bed and check the bedding quality.  If the bed is sagging and well past its use by date, immediately the potential buyer becomes concerned about what else in the property needs replacing.  One of the first things asked is, “when were the beds last replaced?”

As anyone in the motel industry knows one of the fundamental items of a motel unit is a good quality bed.   Without this, you may as well throw away the HD or 4K LCD television, quiet split system air conditioner, free WiFi and all the other goodies, because that bed has now done more damage than any of these items put together can make up for.  When that guest tells one of his friends not to stay at that motel because they will not get a good night sleep, the cost to replace that bed now seems like a drop in the ocean compared to the potential business lost by bad word of mouth.

In my opinion beds can be easily replaced at a minimal cost and can be done regularly, rather than when the sag in the centre appears.  To a guest a bed is the be all and end all.  It is the difference between a guest giving the best free advertising for a motel to everyone they speak to.  It can also be the worst adverting when they review the motel online or in person when the bed is not up to scratch.  To a potential buyer of a motel business it is also the be all and end all, even though they are easily replaced.  Human nature then makes a buyer wonder what else is not up to scratch if one of the most important items, such as the beds, are in poor condition.

The difference between a good quality bed and one ready for the scrap heap cannot be overstated, and no one can be fooled by a poor bed dressed up to look five star.  Regular replacement of bedding can not only ensure happy guests, but come sale time can indirectly help to play a big role in achieving a successful sale.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Enjoy the View

Everyone would love to live by the mantra, “work smarter, not harder”, but this is extremely difficult to do.  Rolling the sleeves up and getting the job done is the Australian way.

It is just so easy to think “by the time I explain it to someone, I will have the job done myself”.  The trap here is that we end up working harder, and running ourselves into the ground.  This is very easy to do in any profession, especially in the motel industry.  When living on site at the business and trying to operate that business as efficiently as possible, the result can easily be running oneself into the ground.

The most important role in operating a motel is the role of the owner/manager.  It is therefore important to avoid falling into the old trap of only working in the business and not on the business.  Working in the business takes care of the day to day jobs, but it does not grow the business.  It is the owner/manager who will take the business to a higher level by attracting new customers and growing the client base, making the operation more efficient, improving the online presence, etc, etc.  If the owner/manager is not working on these things and just the day to day jobs then it is really a caretaker’s role as opposed to being a management position.  Working on the daily items will cut wage costs but this is a very short term view.

This is all very easy to say, however putting it into practice is another matter.  Delegating certain roles to free up time to either work on the business or take some time out is extremely important.  Burn out is a common reason for selling, before one has been able to achieve what they set out to with the business.  In many cases this ends up in the sale of a motel (or any business) at a lower value than could have been achieved had the owner not been tired and therefore more eager to sell than necessary.  A typical example is when a new owner takes over, spends a large sum on capital improvements or refurbishments and sells out short of their planned time frame prior to realising the full benefits of their investment.

Effectively managing the roles within a motel are important whether it be management, reception, accounts, cleaning, meal preparation, etc.  If one is attempting to fulfil all these roles to some extent, there is going to be a point where it cannot continue due to fatigue.  If an operator can free up some of their time by allowing staff to handle certain roles, this will assist in freeing up time for the operator to work on improving the business or alternatively taking time out to recharge the batteries.  This is another important area to consider.  Taking time out can often refresh the mind and assist in working on the business also.  New ideas and improvements that can be made to the operation will often come more easily when one is relaxed and has taken some time out from the pattern of the day to day jobs.

Enjoying operating the building the business will no doubt make for a more relaxed environment for all concerned including family and employees.  An excessive work week cannot be sustained for any length of time, and this is where working smarter rather than harder by delegating some of those jobs to staff, even just for a few hours a day, will make for a much more enjoyable motel operation.  It may cost a little more in staffing extra hours, but in the long term view it may be a cost that is recouped in many ways, tangible and non-tangible.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker
Photo Credit Tourism & Events Queensland

Annual Motel Market Wrap Up 2018

Written by Andrew Morgan, Specialist Resort & Motel Broker

What a difference a year can make. In the 2017 wrap up I commented that 2017 was similar in many aspects to 2016. This time I am happy to say that 2018 could not have been more different to its predecessor.

In summary, 2018 has shot the lights out compared to 2017. Sales volumes are up significantly and 2019 is looking strong going forward. Sale values are improving along with occupancy rates and slowly but surely, room rates throughout the state.

The first quarter started out strongly with activity that had been building late in 2017 and the rest of the year continued to follow. The second quarter showed a very strong period of sales and enquiry. The third quarter activity continued with impressive sales numbers that confirmed an appetite for good quality accommodation businesses. The final quarter of 2018 has seen enquiry levels drop slightly however genuine buyers are still active with many accommodation businesses across Queensland under contract. Again, as was the case last year, freehold sales have dominated the transactions settled.

Solid gains in economic prosperity for areas of the state that had been down have been welcomed. Increasing occupancy rates have resulted and room rates are now under pressure to increase. The redevelopment of sites (and pending future redevelopment) predominantly improved with older neglected properties where the highest and best use of the site was no longer the existing motel property has been occurring. There are no doubt more to follow where the lack of capital injection for maintenance on some of these properties will result in redevelopment of the sites.

The tourism sector has again continued to grow with Far North Queensland showing good signs of improvement. Last month’s issue of Resort News spotlighted the North Queensland region which showcased some very positive commentary on how the region’s accommodation sector has been faring. The Australian Dollar has been holding around the 70 – 72 cent mark which at the same time last year it was noted that it was “maintaining that mid 70’s percentage mark”.

The contraction of the resources sector seems to be largely behind the state. Companies have been reporting strong growth and demand for labour has seen regional towns that were struggling now having a spring in their step. A clear example of this is Mackay, where the residential rental vacancy rate reached 10.5% in 2015/16. It is now down to 1.7% which is as low as it has been for the last 10 years. Again it confirms that everything is cyclical. What goes down will go up!

Leasehold motel transactions have been subdued witnessing the lowest amount of sales activity. There is however always a market for a well presented motel business that has good fundamentals, a good client base and is priced correctly. We have noted some improvement in the level of demand for motel leases in the last couple of months.

Investors have continued to seek the comfort that freehold motels offer with freehold sales being recorded at all stages throughout the year. Any good quality freehold properties with up to date trading data, priced correctly, and presenting well are selling.

An interesting point to note is that often in times of fluctuating markets buyer demand and confidence can be hit and miss. In contrast to 2016 and to a lesser extent 2017, this year has seen most properties that have gone to Contract have reached settlement. Pressure on those buyers from under bidders has ensured that special conditions were met on time, or that Contracts were entered into on an “unconditional” basis. Cold feet has not been an option. Again, this has been another very positive sign of the market continuing to strengthen.

2019 looks to be very positive moving forward for the Queensland accommodation sector.

Location Location Location

Written by Andrew Morgan, Specialist Resort & Motel Broker

Question: What is the best location for a motel?  Inland, coastal, north, south?
Answer: All of the above.

Question: What is the best position for a motel?  Highway, CBD, Suburbs, Beachfront, Riverfront?
Answer: All of the above.

It depends on numerous variables and on each individual property and business.  Of course there is no “best” location for a motel.  All the things that go into making that business or property what it is, such as location, presentation, the operator, the standard of beds, the local economy, the services provided, marketing, etc, etc, all play a role.  

There may be locations where the economy is performing stronger than others at one time or another.  Certain positions within a locality may also be performing better for specific reasons.  I have been asked the question many times in the past, as to where the best place is to buy a motel.  There is no one answer to this question.  I guess timing plays a part here also as mentioned with fluctuating local economies and how they are performing.  An excellent example of this is Mackay.  It performs extremely well until the resources sector had a downturn.  Now the local economy there is improving very well.  Hence why many experienced motel investors are now taking their opportunity to buy back into Mackay.

I often have enquiries from people wanting to buy their first motel and invariably they want to limit their search to one town or location.  This is fine when buying a house as the decision is largely based on where they need to live for employment, family or retirement purposes.  When buying a business, limiting one’s search to where they want to live disadvantages them considerably.  It is the best way to buy an unsuitable business, as it is based on the wrong reasons.

One should always be looking for the best business that suits their requirements.  Therefore, if return is the driving force so be it.  If the type of business is, great.  But limiting a search for a motel for example to one area, means the best business opportunity for them may end up being written off as an opportunity lost.

This does not mean going and buying a business that is, location wise, completely unsuitable for family reasons or another.  It simply means don’t limit one’s self.  Keep the options and possibilities open.  Explore different areas of the state that may not have been considered suitable.  A lot of the time people end up finding the perfect motel for them was not what or where they had considered going at all when they first started out looking.

A common objection we hear a lot is that someone years ago in their infinite wisdom told them that “any town” was not a good motel town or that they should steer clear of a particular town for some “wonderfully incorrect” reason.  I say have a look at all the details and facts about the locality and the business, then make your own mind up.

As a young man in a hurry 20 years ago, I was told by a very experienced and successful man I worked for and respected greatly, that when making decisions in business and life I should “listen to the advice given to you by your trusted people (Accountant, Solicitor, Financier, Parents, etc).  Take that advice on board, go with it, go against it, but be your own man and make your own decisions”.  That advice has stayed me, and I have continued to use that advice, and I suspect even used it subconsciously each day since.  This is relevant in that only the person making the decision to buy the business is the one who can truly make the right decision for their own reasons and in their best interests.

Leasing over the Long Term

Written by Andrew Morgan, Specialist Resort & Motel Broker

All markets fluctuate.  None stay at the top forever and none at the bottom.  Motel leases are no different.  Having been very popular for such a long time it was inevitable that they would not stay that way forever.  With freehold tenure seeing most of the interest in the market in more recent times for various reasons, leases took a back seat for a while.  Again though, all markets fluctuate and interest in leases is starting to come back around.

Leasehold motel ownership has been a success story across four decades now.  It grew very quickly throughout the early to mid-nineties and has remained an attractive option for motel ownership for very good reasons.  The many benefits of owning a motel lease are why many moteliers continue to expand their motel investment portfolios.

Changes within the motel leasing industry in recent years has had some positive influences as a result.  This has largely been on the back of changing market perceptions and the industry adapting to “accommodate” these changes.

Over an extended period, the benefits of owning a leasehold motel business have held up.  Leasehold motel businesses satisfy the main buying motives of any business investor - financial, lifestyle and security.

Financial Benefits
High ROI – The return on investment (ROI) for motel leases is strong and in the main range upwards from 28% (most are within 30% - 35%) depending on certain factors such as location, length of the lease, level of rent, economic strength of the region, property presentation, strength of business, etc.
Low Capital Outlay – A motel lease does not require one to buy the land and buildings of the motel.  This is the larger value component of a motel and buying the property therefore increases the capital outlay considerably and reduces risk, and therefore return.
Financing – The lower capital outlay means the loan required will be substantially lower.  Lower loan repayments and fewer sleepless nights for those not wanting to borrow to buy freehold.  Banks are historically very comfortable lending for motel acquisitions as they are solid and secure businesses.
Taxation Benefits – This is dependent on numerous factors such as how the ownership structure is setup.  The benefits of living out of the business include but are not limited to, whatever costs one incurs living in their stand-alone home such as insurance, electricity, rates, food, beverages, telephone/internet, rent/loan repayments, motor vehicle costs, etc.
Quality Presentation – If a budget to buy a motel is one million dollars, the opportunity exists to buy a much larger and higher quality motel property under lease, than a freehold motel at the same budget.
Long Lease Tenures – On most occasions’ leases commence as a 30-year term inclusive of option periods.  This is a very long lease tenure offering the lessee long term security to operate the business.
Strong Cash Flow – Upon commencing operating a motel there is an income from day one depending on the level of occupancy.  An operator will achieve a certain level of cash flow immediately as most guests pay by credit card.
Limited Stock on Hand – Motels carry very low amounts of stock.  Motels with restaurants will carry more stock than those without depending on the size of the food and beverage operation.
Ready Market – When the time comes to sell there is a competitive market to acquire motel leases.

Lifestyle/Personal Benefits
Easily Operated Under Management – Motels are comfortably managed by a couple, so if an owner decides they would like to step back from the business for a while, there are many good management couples available who can manage a motel.
Onsite Residence – Offers a home to live on site for the family allowing more family time together whilst operating a business.  Children can also get involved and start experiencing the industry at a young age.
Downtime During the Day – Motels are generally busy until late morning and again from late afternoon.  The time during the middle of the day offers some downtime for the operator.
Building Customer Relationships – For those who enjoy building customer relationships, motels can offer a lot of repeat clientele if the guest is looked after.  There is a lot of personal satisfaction gained when a customer keeps coming back regularly because they are happy with the service being provided.

Security Benefits
Long Term Leases – Often leases commence at 30 years in total split up with option periods.  The ability to extend leases as the term of the leases diminishes is often available.
Lease Terms – Leases are predominantly set up on mutually beneficial commercial terms to the Lessee and Lessor and therefore work very well.  The clearer these terms are, the better for both parties.
Asset Ownership – Includes the title to all the plant and equipment in the motel and the remaining tangible and intangible assets such as business names, contacts and goodwill.

The End Result

Written by Andrew Morgan, Specialist Resort & Motel Broker

Every now and again I hear the comment that “the Income is not high enough” when a prospective investor is looking at a business.  When I say Income, some call it Turnover, some call it Sales Revenue, and the list goes on.  The only reason I can conclude in regard to the objection, is that the potential buyer looking to buy the business is planning on operating it at a lower profit margin or higher cost base.  Usually new operators look to reduce overheads and improve profit margins to increase the Net Profit and therefore the value of the business.  The value of any business is largely determined by two factors, the return on investment, capitalisation rate, or yield and the Net Profit of the business, against this yield.
Depending on the structure of the business, how it produces its income, how it operates and the resultant profit margin it achieves, will determine what income the business makes and what profit it can achieve.  A business producing a high profit margin will have low overheads and therefore a high profit in relation to sales income.  Vice versa for a low profit margin with high operating costs to produce its income.  Every business will produce a different profit margin.

The Net Operating Profit of any type of business is the determining factor for assessing the business’ value.  No valuer determines a business valuation on the basis of what Sales Income is produced.  Yes, it plays its role in the process, however capitalising an income figure as opposed to a Net Profit is not done.

The value of cashflow to a business, relates directly to the day to day operation of the business, not the on-going Net Operating Profit over the period of say a year.  It stands to reason though that a motel with a higher Sales Revenue that also has higher Operating Expenses, may therefore have the same cashflow problems that a motel with lower sales and lower expenses has.

A simple comparison to consider.
 
Motel A 
  25 units & Restaurant  
Motel B
  25 units & Restaurant  
Annual Sales Revenue   $1,000,000  $750,000
 Annual Net Operating Profit  $400,000  $400,000
 Net Profit Margin  40%  53%
 Return on Investment  14%  14%
 Freehold Value in the Market  $2,850,000  $2,850,000

Now with both these motels being valued at the same price in the market due to their returns on investment being the same, why would a lower Sales Revenue make Motel B worth less than Motel A?  These motels have very different Sales Revenues, however their Net Operating Profit is the same.  The reasons for this are numerous, however a few explanations may be that one is operated more efficiently than the other, or because one has a source of revenue that is not as profitable as others, or because the particular location attracts higher operating costs, etc.  A big one is often the underselling of a unit.  A 90% occupancy rate on a tariff 20% less than what is achievable will do it!  In other words, discounting!  The easiest way to create a higher cost base and operate less efficiently.


Either way, the business with the lower Sales Revenue is not worth less than the one with the higher Sales Revenue? I would assume that the business with the lower Sales Revenue and Higher Profitability could end up being more attractive to the market than the Motel with the higher Sales Revenue.  This would be due to it being potentially less labour intensive or having a lower level of risk than the other, by being able to operate at a lower cost base.

As mentioned, a Registered Valuer who is doing a Valuation on a Motel Property or Business will base their valuation on a Capitalisation Rate of the Net Operating Profit of the business, not the Sales Revenue.  Therefore in the above example, with all else being equal, Motel A and Motel B will be valued at approximately the same level, even though they have substantially different Sales Revenues.