What to do before you buy a motel business
Buying a motel business (leasehold) can be a rewarding experience. In entering into the business you are joining New Zealand’s tourism and hospitality industry. By buying a motel business you are securing a home for you and your family, a way of life, an income, and a commitment.
Motels are a lifestyle business. The main reason we receive inquiries for motel businesses is that couples are looking to do something together. Motels lend themselves perfectly to shared duties in a pleasant working/living environment. A successful motelier is someone who is positive and cheerful – a people person.
When looking to buy a motel you must consider three things:
- the physical environment
- the financial environment
- the lease
Inspecting the physical environment
When you have settled on motel to view, start by looking over the property – the physical environment. Start with the street appeal. This creates the initial appeal to customers. Does it appeal to you? Would you stay there? If you are satisfied, move to the reception area.
The reception is important as this is where you greet your guests. A reception that has a good view of the complex makes it easier to point out the amenities to guests – and monitor goings on. The owner/manager’s accommodation is the next to investigate. This part of the inspection is much like buying a home, so you must be happy to live & work in what is offered.
From here you can step back outside and survey the grounds/layout/street access. Check out where you will park your vehicles – courtesy van, extra cars and the like. Ensure this space is large enough for your needs, but doesn’t impede on residents ability to come and go.
Lastly, to conclude the physical tour, look at the guest accommodation. Look at the quality age and condition of the chattels. A large part of the purchase price will be for chattels. Take on board that reinvestment in chattels is an ongoing process. Ask yourself whether there is any immediate additional investment to be made? Has upgrading and maintenance been kept on top of? Any major lapses in maintenance will almost certainly need to be factored into any offer to buy.
The financial environment is a critique of income, expenses, profit and value. To make a proper assessment of the financial position of the motel business you will need:
- at least 2-3 years of annual accounts as filed to the IRD
- GST returns for the last 12 months
- the lease document
- rent review dates/periods
- a valuation of the premises (at your own expense)
The accounts offer an insight into how the business is being operated. Some expenses are not necessarily strictly related to the business, but rather a personal benefit or discretionary. It pays to examine the following:
- Advertising – is there any sponsorship or private interests?
- Entertainment – is this a necessity or discretionary?
- Insurance – is this entirely business or does it include vehicle’s as well?
- Interest charges – these are a factor of funding not trading, so consider your own position when looking at interest charges.
- Legal costs – one off charges.
- Power/telephone/internet – almost invariably include personal use.
- Rent – amount and next review date, plus what is the rent ratio to revenue.
- Repairs & maintenance – one off or recurring?
- Subscriptions – business or personal;
- Vehicle – if more than minimal does it include running of personal vehicles?
- Wages – are they staffed positions or owners? Most motels will pay wages for relief managers for annual holidays and engage cleaners on a daily basis.
You will need to total the declared Profit and personal/discretionary expenses to ascertain the total personal financial benefit. In doing this you will have a good view on how the business runs, day to day, and be alerted to matters that need further investigation. Invariably a critique of the accounts and profitability leads to an assessment of value for money.
All this begs the question; how much should you as the buyer pay for what is being earned? There are some equations to be done to determine a fair range, though it is not the scope of this article to deal with appraising motels for value. However a buyer should seek advice from professionals who work in the motel industry and whose job it is to know motel business values. You should look at the wider market too when making deliberations on an offer working from an informed position.
Reviewing the lease
Lastly a key part of all motel businesses is the lease, the commercial relationship with your landlord. Ask for a copy of the lease early on if you are interested in the particular motel business. Read the lease and understand it. The principles of respective obligations under a motel lease are that the landlord looks after the exterior and the tenant looks after the interior of the premises.
Remember that your landlord will be familiar with every aspect of the lease, as this is the instrument that is used determine rent income and protect the investment in the property.
Potential issues to look out for:
- A lease should be registered against the property title so as to be able to be used as security for any finance requirements by the incoming motelier. The long term nature of motel leases makes them suitable for use as security for finance.
- Ascertain whether all maintenance on the property is up to date. Clear up in writing all liability for potential maintenance hot spots with the landlord and outgoing motelier before declaring your unconditional satisfaction on the purchase.
- Create a check list of potential areas involving maintenance or the need refurbishment. Include general exterior weather resistance (water tightness), painting – inside and out, cladding, fencing, driveways, plumbing & wiring, bathroom amenities, kitchens, hot water supply, telephone systems.
- Investigate the number of remaining lease years. Motel businesses are typically set up new with a lease term of 30 to 35 years. Occasionally the number of remaining years may have an impact on the sale-ability, and therefore value of the motel business as the right to trade is diminished. An experienced motel finance lender may readily advise you if the term is sufficient to cover their lending criteria. Extending the lease is quite common. The landlord may well be approachable to extending the lease years. There is no set price for acquiring extra years.
As a motel business buyer start out on the right foot. Do your homework on the key areas, investigate thoroughly, be informed, act prudently, and appreciate that compromise is part of the art of business. Careful attendance to matters at the beginning will surely bode well for a long, rewarding motel lifestyle for you and your family.
Interested in buying a motel?
If you are interested in buying a motel business, LINK has an expert team dedicated solely to the tourism industry. Contact us today to start your business journey.
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