a. Area
Limit your search for a
motel to your preferred area.
Most motel buyers have a good idea of the area to which
they wish to move – eg
b. Type of Motel
Motels come in all shapes
and sizes. You
probably have a preference for room numbers, star rating,
restaurant etc. Once
again, we have all this information on our database.
If you purchase a motel
with 15 rooms or less then you and your partner will probably
run the operation yourselves with very little external help.
Motels with 15 to 30 rooms are usually run by the
proprietors with permanent or casual housekeeping assistance.
Proprietors who own motels with 30 or more rooms are
seldom involved in the day-to-day housekeeping while proprietors
of motels with 50 rooms plus tend to run a corporate style
operation, often with assistant managers, catering managers etc.
Whether your motel is big
or small the chances are you will be working fairly long hours.
If you enjoy the industry, as many moteliers do, this
will not be a problem.
If you find you do not enjoy the industry then call us
again and we will sell your motel, hopefully for a better price
than you originally paid.
c. Price
The price you can afford is
dictated by lending conditions.
In general, banks will lend up to 65% of a freehold
motel’s value as assessed by a professional valuer.
Therefore you need at least 35% in cash or 35% in a
combination of cash and other real estate assets.
For a leasehold motel the
maximum loan is currently 50%.
Lending also depends upon
serviceability, so if you are unable to repay the loan from the
motel’s cash flow, the loan will not be forthcoming.
In addition to the price
you will have to pay stamp duty, legal fees and a valuation fee.
You will also have to cover the costs of relocating, and
you need a small float for the day to day running of the motel.
Stamp duty on both
leasehold and freehold motels is set out below:
| Price | Stamp Duty |
| $0-$14,000 | 1.25% |
| $14,000-$30,000 | $175 plus 1.5% of (price minus $14,000) |
| $30,001-$80,000 | $415 plus 1.75% of (price minus $30,000) |
| $80,001-$300,000 | $1,290 plus 3.5% of (price minus $80,000) |
| $300,001-$1,00,000 | $8,990 plus 4.5% of (price minus $300,000) |
| Over $1,00,000 | $40,490 plus 5.5% of (price minus $1,000,000) |
As discussed, the return on investment for
a standard NSW country freehold motel is around 14%.
This is just the net profit divided by the price.
Your return on equity can be substantially
more. Take a motel
costing $2,000,000 with a 14% return ($280,000 net profit).
Stamp duty will be $95,490.
If legal costs, valuation etc comes to $12,000 then the
total investment is $2,107,490.
If the bank lends 65% of $2,000,000
($1,300,000) then the purchaser must have equity of $807,490.
If interest is 6.5%, then $84,500 must be
paid from the net profit of $280,000, leaving $195,500.
$195,500 on $807,490 represents a return on
equity of 24.2%.
The return on equity will depend upon the
return on investment, the amount borrowed and the interest rate,
but it will always be substantially higher than the return on
investment.
d.
Freehold or Leasehold?
Most motel purchasers prefer the security
of a freehold purchase, but many lessees make profits and
capital gains that are as strong as, or stronger than those of
freehold moteliers.
A leasehold purchase allows you to operate a larger property for
a smaller price, but does not allow you to operate that property
forever. When your
lease expires, so do your rights to the property, and you must
renegotiate with your landlord or move out.
Most lessees sell their leases before they
expire, often making substantial capital gains.
Therefore the longer the lease, the better the deal.
It is unwise to pay a substantial premium for a lease
that has less than ten years to run.
Leasehold motels often have problems
regarding repairs and maintenance.
The landlord is reluctant to cut into his rental return
by outlaying vast sums on his property, and the lessee is
unwilling to invest in what he sees as a benefit for the
landlord. It is
therefore important to examine the repairs and maintenance
provisions of a motel lease, so you can see exactly who is
responsible for the various aspects of a motel’s upkeep.
A small, run down freehold motel is often a
worse proposition than a larger leasehold property, and if your
budget is less than $500,000 you should closely examine
leasehold properties and not confine your search to freehold
motels.
e.
The Great Restaurant Debate
Many potential purchasers prefer motels
without restaurants.
Others see the restaurant as a source of additional profits and
a vital ingredient of the motel business.
The majority of small motels run their
restaurants at a loss.
A 30 room motel with a 50% occupancy rate can draw
restaurant guests from 15 rooms.
If there are 1.5 guests in each room, and only one third
of them decide to eat in the motel restaurant, then the
restaurant will cater for only 7.5 guests.
7.5 guests cannot profitably support a chef, waitress,
cooking materials, power etc, so unless the restaurant can
attract diners from outside the motel, it will run at a loss.
However, this does not mean that a new
owner of a small motel should close down his restaurant.
There are many other possibilities, eg
·
Lease the restaurant.
·
Promote weddings and conferences.
With set menus and prepayment there is very little waste,
while larger numbers produce economies of scale.
·
Make the restaurant the best in
town. NSW country
towns mostly rely on clubs and hotels for restaurant service and
many are desperate for alternate venues.
Motels without restaurants are generally
easier to run, but fail to attract bus groups and business
representatives.
Motels with restaurants that are well managed have the
potential to generate a second stream of profits.
f.
Contact Agents
Agents are happy to provide prospective
purchasers with details of motels on the market providing the
purchasers can demonstrate that they are serious buyers.
Potential purchasers who have owned a motel previously,
have inspected a number a motels with a view to purchasing or
have discussed finance with a bank are generally regarded as
likely prospects.
Purchasers who indicate that the idea of buying a motel
has only just crossed their minds might find difficulty
obtaining listing details from agents.
Purchasers are often asked to sign a
confidentiality agreement.
If they refuse they are generally regarded as unlikely
candidates for a motel purchase.
g. Inspections
It is important to physically inspect as
many motels as possible that are in the area that interests you
and within your price range.
While agents’ reports can be very comprehensive, buyers
will discover much more about the motel by inspecting the
property and talking to the owner.
Owners often tell buyers small details that are not
included in sales reports, thereby influencing the buyer’s
decision to purchase or not to purchase.
Many buyers treat vendors with a great deal
of suspicion. This
is not a good idea.
The majority of moteliers are honest, hard working business
people who are prepared to provide buyers with all the
information they require.
However, they are often concerned about their staff
discovering that the motel is on the market, and it is up to the
buyer conduct inspections with discretion.
When you inspect a motel always think of
things you can do to improve it.
The property may need repainting, landscaping, minor or
major renovations.
Remember that the figures the motel produces are the results of
an array of circumstances, many of which are under the control
of the motelier. If
you can improve the circumstances of the property, you can
improve the profitability.
Make a note of your first impressions when
you inspect a motel.
Your opinion of the property is probably similar to that of a
potential guest, and you can use these first impressions to
improve the property.
It is advisable to prepare a list of questions for the
vendor. Ask him
about the type of guests he accommodates – holiday makers,
business representative, retirees, etc.
Discuss annual repairs and maintenance and ask whether
there are any major repair projects on the horizon.
Ask about the motel staff – how long have they been
employed; are they reliable?
Discuss the daily routine of the vendor.
You will be replacing him, so his daily tasks will become
your daily tasks.
Some vendors will provide you with a great
deal of information about their property, while others can be
very secretive. You
must ask yourself “what information do I need to make a decision
about this property?”
If the information is not forthcoming the broker will
strongly advise the vendor to be more open about his business.
The vendor, however, will
only respond positively if he believes the purchaser is genuine.
Every motel you inspect increases your
knowledge of the industry and helps you assess and compare
properties currently on the market.
You will probably inspect at least half a dozen
properties before finding one that almost suits your
requirements. You
are very unlikely to find a motel that suits all of your
requirements, but you are very likely to find one that fulfils
80% of your requirements.
You must then decide whether your complete requirements
are unrealistic in the current marketplace, or whether you can
transform one of the motels you have inspected into your ideal
property.
There are a number of potential purchasers
on our books who have been looking for motels for over five
years.
Unfortunately, they will never buy a motel because they cannot
accept the sad fact that there will always be something wrong
with every property they are likely to inspect.
While other buyers purchase, improve, resell and realise
substantial capital gains these “professional lookers” see
opportunity after opportunity slip through their fingers.
The questions you must ask are:
What is wrong with the motel?
Can I fix it?
If I can’t fix it will it affect future
business?
Many motels with small problems such as an
inconvenient configuration, secondary location, substandard
manager’s residence, trade very profitably and change hands for
prices that reflect their profits rather than their minor
inconveniences.
h.
Checking Figures
You and your accountant will require
sufficient supporting evidence to prove that the figures
presented by the vendor are genuine.
It is important to be diplomatic when you request
documents that will substantiate the figures.
Many vendors feel buyers request too much information, or
information which is not relevant to a purchasing decision.
Many purchasers request information in a way that leaves
the vendor in no doubt that they distrust him.
This often results in a breakdown of the sale process.
When requesting documents to substantiate
the vendor’s figures it is preferable to use the services of an
accountant.
Accountants can generally request documents diplomatically and,
if they have experience with motel accounting, can quickly
establish the veracity of the figures.
To substantiate motel revenue, accountants
rely on the Profit and Loss statement, the Business Activity
Statements, reports from the motel’s computerised booking
system, bank statements and the quarterly statements sent to the
Australian Bureau of Statistics.
Bank Statement Revenue = Motel Sales less
adjustments for debtors.
However, note that not all moteliers are
scrupulously careful when keying data into their computers.
A motelier, or his receptionist, may, for example, enter
a coach group as a lump sum, rather than divide the revenue
between accommodation, food and beverage, park entry fees etc.
Motels tend not to have many debtors, but
this does not mean that annual revenue will always equal
banking. If a coach
group pays a deposit in one year for a booking in the following
year, bank deposits in the year the deposit was paid will be
higher than sales revenue.
These adjustments are not difficult to
trace, but some motel buyers get tied up in knots when they try
to decipher trading figures.
Food and beverage purchases are generally
around one third of food and beverage sales, although this can
vary considerably.
If food and beverage purchasers are substantially higher than
one third, there is a good chance the motelier is “living out of
the business”. Some
motel accountants indicate this with a “Good Own Use” account.
Others overlook it.
Motel expenses can be divided into fixed
and variable. Fixed
expenses do not depend upon revenue, variable expenses do.
Land tax, rates and insurance are examples of fixed
expenses. External
laundry charges, guest supplies, food and electricity are
examples of variable expenses.
Monthly variable expenses should follow the pattern of
monthly revenue. If
they do not there may be an error in the accounts.
Fixed expenses such as council rates and
insurance seldom go down.
If there is a substantial variation from year to year the
motelier may have paid three quarterly bills in one year and
five in the next.
It is quite legitimate for a motelier to
add back certain expenses.
Valuers regard the net profit of a motel as the profit
before interest, depreciation, the owner’s wage and any one off
non repeatable expenses.
Interest is an obvious add back.
The vendor’s level of borrowing will be quite different
to the purchaser’s level of borrowing, so it makes sense to
consider the net profit before interest.
Adding back depreciation also makes sense.
Take two motels, A and B.
Both have a net profit before depreciation of $250,000.
Motel A has brand new furniture and fittings that are
depreciated at $80,000 per annum.
Motel B has no depreciation.
Its furniture and fittings are on their last legs.
It is clearly ridiculous to value Motel A less than Motel
B, when A’s depreciation helps keep tax down, and the owner of B
will soon need to completely refurbish his property.
| Motel A | Motel B | |
| Net Before Depreciation | $250,000 | $250,000 |
| Depreciation | $80,000 | $0 |
| Net After Depreciation | $170,000 | $250,000 |
The owner’s wage add back can cause
difficulty. One
owner might work incredibly hard, thereby keeping down other
staff costs. Another
owner might work part time only, and therefore run the motel
with additional staff.
Most 15 to 40 room country motels are run
by a couple, and a valuer will generally adjust the wages so
they reflect the staffing requirements of a reasonably hard
working husband and wife or partnership.
One off, non-recurring expenses are
legitimate add backs.
But if they crop up every year then they may not be one
off.
Many discrepancies in motel accounts are
the result of minor honest errors.
If they do not affect the net profit they can, in some
cases, be overlooked.
Unfortunately, a small number of motel accounts contain
major dishonest errors, and if you come across properties in
this category it is best to look for alternate propositions, or
make an offer that reflects your opinion of the true net profit.
i.
Making Offers
While a number of moteliers place a price
on their property and refuse to negotiate, the majority expect
potential purchasers to make offers.
Many buyers make the mistake of not making an offer for a
motel that interests them.
They feel that the vendor will be insulted by their offer
and, rather than take the matter further, they back away from
the deal. These
buyers are often surprised when they discover a few months later
that the property in question sold for the price that they were
too timid to offer.
Very few motels sell for prices outside the
market price and very few moteliers expect to get offers outside
the market price. A
motelier with a property worth, say $1,000,000, may start with a
price tag of $1,200,000, but will eventually accept an astute
purchaser’s offer of $1,000,000.
If the motelier gets fed up with the time his property
has been on the market, he may accept a price below the market
level. Only buyers
who are not afraid to make offers secure these bargains.
You should decide on your offer price based
both on the trading record of the motel, and what you believe
the motel can achieve.
The latter is very important.
The majority of buyers look at past figures only, and do
not take into account the potential of the property.
The few buyers who take both into consideration make the
best decisions and secure the best capital gains on resale.
The top five clients of Pacific Rim Business Brokers who
secured the highest capital gains when they resold their motels
all purchased properties that were running at a loss.
Had they only taken into account past trading they would
not have achieved their spectacular capital gains.
Do not be timid when submitting offers.
If you are dealing through a broker he will submit the
offer on your behalf.
Brokers are not concerned about submitting low offers – a
broker has the hide of a rhinoceros.