When buying a motel, it’s important to understand the business financials. Typically, these will be present in documents provided by the seller during the purchase process. The right documents let the buyer verify the financial health of the business and the various obligations that may come with it.
The Lease
Assuming that your business, like 70 percent of all motel businesses, is a leasehold agreement with the freehold being owned by another party, you need to see documents regarding the lease. Look for paperwork that covers at least these five main points:
- The length of the lease
- The rent review period and when it is due next
- Maintenance requirements and schedules
- The maintenance fund
- The right of refusal
Typically, the length of the lease is marketed upfront, although it’s good to see it in writing and enshrined in a document. This is because motel businesses cannot easily relocate to another premises, so the length of the lease affects how much the business is worth. The longer the lease, the more valuable the business is, and you might find motels for sell with up to 25 years left on the lease.
The rent review period lets you know when the leaseholder can increase the rent. In general, buyers are looking for the next rent review to be at least a couple of years in the future so they can keep rent costs consistent and in line with their business plan.
The maintenance schedule forms a binding agreement as to how often the building should be painted or other repairs made. From a seller’s perspective, it’s a good idea to get essential maintenance out of the way before marketing the property, as a fresh refurbishment and painting makes it more desirable to buyers.
The maintenance fund is typically around 5% of annual agreed rent, not profits. Look for information regarding how the maintenance fund is structured and funded, what can be withdrawn from it and what the current balance is. A healthy maintenance fund is a good selling point, particularly if the building is in good condition. Maintenance funds remain with the property, not the lessor or lessee and good lessees use maintenance funds wisely.
Often, the landlord has first right of refusal over the business when it is sold, and this clause can appear in one of several places in a lease. The seller should get an early waiver that the landlord is not interested in the business to make it easier to market it to other buyers.
Check to see if the lease is registered on title.
Financial Information
Documents relating to financial information should cover five key areas:
- Cash
- Operating costs
- Accounts
- Up-to-date GST returns
- Monthly occupancy rates, revenues and room yields
Business value is typically based on the bottom line, so for every dollar profit you make, you can expect a return of around $3.50 to $5 when selling the business. As a seller, you want to maximise your bottom line, so make sure that each dollar of profit is present and accounted for in documentation.
Operating costs are the day-to-day costs, not extraordinary items or non-recurring purchases. Documentation should represent the average running costs of the business over the course of the year, which can be used to calculate profit and loss.
Accounts should include a Statement of Financial Performance, which details how the business is performing officially. The report should be in date within a couple of months. In a pinch, a draft cash flow statement from your computer cashbook may be helpful, but buyers will want the full accounts quickly.
GST returns help indicate the overall turnover of the business, and they confirm that the accounts are broadly accurate. However, they don’t include wages, and they may include certain capital purchases that are not necessarily defined as operating costs.
Occupancy rates, revenues and room yields give buyers an indication regarding typical trends and how the business performs throughout the year. It also helps to identify areas of growth and indicates where savings may occur.
Overall, it’s important have the information readily available so that you can proceed as soon as a buyer shows suitable interest. Delaying the sale can mean losing the sale, so it’s critical to be prepared.
