Pacific Rim Business Brokers Pty Limited

4. Advantages and Disadvantages of Motel



Steady Industry

The consistent occupancy rates and tariffs in the motel market provide a steady platform for growth and improvement, and give the motelier confidence that the market is unlikely to reverse in the long term.

Opportunity to Improve Profits by Raising Standards

The relationship between star ratings, occupancy rates and tariffs indicates the importance of quality. The higher the standard of accommodation the higher the occupancy rate and the higher the tariff a motelier can charge. A potential purchaser should note that the motel industry rewards quality, and a buyer who strives to improve his property should see a strong improvement in revenue and profit.


Generally motels occupy prime commercial sites on major highways or in the commercial centre of towns. This means that if the motel proprietor wishes to convert his property to a different use, such as strata units, there is sufficient value in land and building to attract a commercial developer. Generally, the value of an asset is related to the stream of profits that asset produces. Motel owners have a second source of value that relates to the position of their asset and the value of other commercial properties in their immediate vicinity.

Relatively Easy Access to Finance

Bankers know that the motels are part of a safe, secure industry. That is why they will lend up to 65% against freehold motels and 50% against leasehold motels.

Live on the Premises

Living on the premise can be an advantage and a disadvantage. By being close to their businesses, motel operators do not waste any time commuting, and they can fix problems that arise after hours quite easily. The disadvantage is the feeling that some moteliers express of being tied to their business. Sydney commuters, who spend up to ten hours a week commuting, may not see this as a disadvantage.

Probability of Capital Gain

Motel owners who build up and improve their business can expect to reap substantial capital gains when they resell. A motel buyer, who purchases a property for $1 million with a 14% return on investment, builds that business by 10% per year and resells in three years with a 14% return on investment will reap a capital gain of $331,000. If the motelier borrowed 65% of the purchase price, then he would have made a capital gain of $681,000.

If the same motelier takes the property from a low start rating to a higher star rating, the capital gain would be substantially higher.

Similarly, the purchaser of a leasehold motel can also achieve substantial capital gains, providing he lease he sells has a substantial number of years left to run. If a motel buyer purchases a 25 year lease for $500,000 with a return on investment of 33%, builds the business by 10% a year, and resells that lease three years later with the same return, he should realise a capital gain of $165,500. If the same motelier borrowed 50% of the purchase price then he would have made a capital gain of $415,500.

Once again, if the motelier improves the star rating the capital gain should be substantially higher.

(Note that these simple examples do not take account of stamp duty and other associated costs)

Known Customer Base

Because guests register with the motel, moteliers know exactly who their customers are. In many other businesses, particularly retail businesses, the customers remain anonymous. Motel buyers begin with a base of loyal customers which they can build on and expand. Motel owners with a computerised booking system or with access to a simple data base program can monitor their best customers and direct their advertising accordingly.

Stock, Bad Debts and Staff

Stock, bad debts and staffing issues can cause problems in other industries. They seem to be absent in the motel industry.

Stock, with its storage, shrinkage and insurance problems, is a minor aspect of the motel operation. Similarly bad debts, which can bring many businesses to their knees, are almost unknown in the motel industry. While corporate clients may be offered credit facilities, the majority pay by company credit card.

In many businesses, a specialised labour force is absolutely vital. In the motel industry, it is not hard to find part-time workers for cleaning and housekeeping duties. Even temperamental chefs tend to be less of a problem in country motels, where alternate employment opportunities are limited.


The disadvantages of owning a motel are

Live on the Premises

The advantages of living on the premises have been discussed above.

Long Hours

Long hours may be a problem, but there are few small business owners who enjoy a 35 hour week. In general, the motel owner must be available for most of the day, but his duties are not necessarily arduous, and it is relatively easy to find relief managers to enable the proprietor to enjoy a holiday.

Time Required for Sale

The time taken to resell a motel depends upon prevailing economic conditions, the condition of the property, the state of the trading figures and whether or not the price is realistic. In general, a well presented property with well maintained trading figures, a realistic price and a knowledgeable and experienced business broker handling the transaction will sell within six months.

As a potential motel purchaser you will come across many properties with poorly presented figures, no statistics and an owner who seems reluctant to impart any information. Do not be surprised if properties such as these have been on the market for a long time.