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Tips For Purchasing Motels ( 17/05/2007 )
As Seen in Resort News Liftout Information Feature - Issue 129, May
2007 Written by Andrew Morgan, Partner, Queensland Tourism &
Hospitality Brokers.
There are many different motives for purchasing a motel, one may be
profits, another lifestyle, potential to improve, a change of
lifestyle, or a combination of all four. Ultimately everyone has their
own ideas as to what type of motel best suits their needs.
Some moteliers starting out in the industry will buy a motel, operate
it for a few years, then sell. The majority do this and then look for
another motel, perhaps a larger motel, or one with a restaurant, or
one with a higher turnover and profit. There are many people within
the motel industry who have owned and operated a number of different
motels over the years. These people have done very well in the motel
industry and have enjoyed a high return on their capital and a good
working lifestyle. Some of the benefits of owning and operating a
motel include:-
• Residence & Living – motels offer an onsite residence for the
owners which reduces living costs substantially, including food,
electricity, council rates, insurance, telephone, travel costs,
etc.
• High Returns on Investment – whether it be leasehold or
freehold, for the capital invested in a motel, a high return is
achievable.
• Lifestyle – motels offer a good working lifestyle for the
operators, with the whole family able to live on site, and the meeting
of new and interesting people each day.
• Stock – there is a small stock component within most motels,
whereas in other businesses a large amount of stock is required to be
carried at all times.
• Market – there is a ready market when you wish to sell as
there is always a strong market for people wishing to buy motels.
• Cash Flow – The first day of taking over a motel there is a
good cash flow. Most guests today pay by credit card or Eftpos, and
in most motels, accounts are limited to large companies only.
• Capital Gains – there is an opportunity to increase the value
of the motel and make a substantial capital gain upon sale. The trend
of motel values over the past 10 years has been a steady and
consistent rise in values that has resulted in good capital gains.
• Finance – Banks and Financial Institutions are eager to lend
money for the purchase of motels. Traditionally motels have been a
solid and secure investment, whether leasehold or freehold, and this
good history gives financiers confidence in lending on motels. Some
Banks are lending up to 75% on freehold motels and up to 60% on
leasehold motels.
Finding the most suitable motel for your needs involves considering
the above benefits and which ones dictate what you are looking for.
Ask yourself the following:-
1. What level of return are we looking for?
2. What locality do we want to own a motel in? Coastal or Inland
3. Does the locality have the necessary amenities we require, such as
schooling, etc?
4. Is a Leasehold Motel or Freehold Motel most suitable?
5. Do we require a restaurant in the motel?
6. Consider an exit strategy prior to purchasing?
7. What type of clientele do we want? Tourist or Corporate
8. How much finance will we require?
9. What size residence do we require?
10. Do we want potential that we can build upon?
11. How about a “renovators delight”?
Professional Advice
The use of suitably qualified and experienced professionals is a
decision that can make life either very easy or very difficult in the
motel purchase process. To have an Accountant, Motel Broker,
Solicitor and Financier who specialise in the motel industry is
extremely important in the transaction. Too many times I have seen
inexperienced or unqualified “professionals” handling motel
transactions for clients, and the process becoming more difficult and
frustrating for all parties than it needs to be. Most people are very
excited about moving into their new motel and too often the process
can be soured by not utilising the services of specialists in the
industry. It is highly recommended to consult with the parties you
are about to deal with and satisfy yourself of their expertise in
order to confirm their suitability for the job.
Return on Investment
Ultimately the market dictates the return on investment of a motel.
There are a large number of factors that affect the rate of return in
the market. Some of the main factors affecting Return on Investment
include:
• Condition or Standard – if a motel is in a poor condition,
requiring major repairs and maintenance or refurbishment, the market
will expect a higher return on investment than a motel that has been
refurbished, and presents very well.
• Age of Buildings – a newer more modern motel will be in
higher demand than an older dated motel and will therefore sell on a
lower return or investment.
• Location – Motels in desirable locations such as coastal
areas will show a lower return to that shown on an inland motel.
Inland locations may not seem as desirable from a lifestyle point of
view as coastal locations, however the compensating factor is that
substantially higher returns can be achieved.
• Size – a smaller motel tends to sell on a lower return on
investment, as there is more competition for these motels within the
traditional “Mum and Dad” style motel market.
• Restaurant – how much income is attributed to the restaurant
and bar. A motel purchaser will look at a slightly higher return,
where there is a large amount of food and beverage involved in the
motel business.
• Land – how large is the block of land and is there any spare
land for further expansion.
Leasehold Vs Freehold Vs Finance
The question of whether to buy Leasehold or Freehold is a common one.
There is no exact answer to this question as it depends on the
individual purchaser and what they are most suited to. Many years ago
buyers would say that Freehold was the only way to go, however today
the benefits of leasing are highly sought after by a large market.
How much cash or equity you have available will play a major role in
determining whether you buy Leasehold or Freehold. A cash or equity
component of $400,000 will allow you to finance a Leasehold Motel up
to approximately $900,000. This will generally be a 20+ unit motel of
good quality, with a Net Profit After Costs of up to $280,000. On the
other hand, the same cash component of $400,000 will allow you to
finance a Freehold Motel for up to approximately $1.4 Million. This
will generally be a less than 20 unit motel of good quality with a Net
Profit after Costs of up to $200,000. These details and numbers are
generalised as they are dependent to a large extent on the factors
above, location, condition or standard, age of buildings, size and
whether there is a restaurant and bar included.
Due Diligence
It is recommended no matter what type of business you are buying that
a due diligence is completed to the purchaser’s satisfaction. Some
purchasers do not require a due diligence. Most who do a due
diligence employ the services of an Accountant who is a specialist in
the motel field. A due diligence is mainly completed to confirm that
the business is performing as presented, and to give the Purchaser
some piece of mind. A specialist Motel Broker will insist upon a
Vendor providing detailed Accountant’s Profit and Loss figures on the
Motel and at the same time, clear with the Vendor that a prospective
Purchaser’s Accountant can if need be, communicate directly with the
Vendor’s Accountant to satisfy any financial queries.
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