Pacific Rim Business Brokers Pty Limited

8.  SWOT Analysis

If you approach the motel you wish to purchase using the methodology of a professional valuer you will save a lot of time and effort and should be able to secure bank finance.  Remember that the capitalisation method, direct comparison method and hypothetical lessor and lessee’s interest provide guidelines only.  You must also take into account all aspects of the property that will increase or decrease the price.  A number of valuers neatly summarise these aspects using a SWOT analysis (Strengths, weaknesses, opportunities and threats).

Factors That Add Value to the Motel (Strengths, Opportunities)

Factors That Detract From the Value of the Motel (Weaknesses, Threats)

Neutral Factors

The performance of the motel relative to other motels may be important from an operational point of view, but it should not affect the value.  If, for example, the average occupancy rate in the town is 55%, and the motel is only achieving 45% this may mean that a good operator has scope to improve the business, or it may mean that 45% is all the motel is likely to achieve.  Either way, the net profit is the more important indicator.

 

While occupancy rates are widely used in the motel industry they are misleading indicators of profit.  Take two similar 20 room motels – Motel A and Motel B.  Motel A has an occupancy rate of 70%, achieved by discounting its average room rate to $50.  Motel B has an occupancy rate of only 35%, but enjoys average room rates of $100.  The revenue of both the motels is therefore the same.

 

Motel A – 20 rooms x 70% x $50 x 365 days = $255,500

Motel B – 20 rooms x 35% x $100 x 365 days = $255,500

 

Motel A, however, has to clean and service twice the number of rooms cleaned and serviced by Motel B.  Therefore Motel A’s costs are higher and profits lower, although its occupancy rate is twice that of Motel B.