How to buy a motel business in New Zealand
New Zealand has a shortage of tourist accommodation, so the prospect of buying a motel business is a tasty one. While the location of the motel will impact its level of occupancy, demand around New Zealand is generally high.
At the end of 2018, Stats NZ reported:
- total guest nights in New Zealand rose 3.9 percent to 3,268,000
- domestic guest nights rose 6.0 percent to 1,954,000
- international guest nights rose 0.8 percent to 1,314,000.
It’s a lifestyle, not a job
The tourism game is not a walk in the park, however a commitment to customer satisfaction will help to overcome the risks and long hours. With today’s online review environment, you have to work hard to maintain your Trip Advisor and Google ratings. You’ll need an outgoing personality, an eye for detail and a commitment to a great customer experience to ensure your motel business thrives. Happy customers equal good reviews.
Inspecting the property
When you visit a motel with a view to buying the business, you need to think about the built environment, the numbers and the peculiarities of the lease. Here’s a step-by-step guide to assessing a prospective motel purchase:
- First appearances: Begin by noticing the street appeal of the property. Does it look welcoming, smart and clean? If it doesn’t have a level of attractiveness, could the issues be fixed inexpensively? If the motel passes this first test, you can move onto step 2.
- Reception area: When you inspect the motel’s office, put yourself in a tourist’s shoes first. Is the reception area up-to-date and organised? Are there useful brochure racks and is it easy to gain the attention of the motel manager? Then, put yourself in the manager’s shoes. Would you be happy to work behind the counter? Can you see what’s going on around the complex?
- Motel grounds: Before you inspect the guest accommodation units, take a stroll around the grounds. Notice things like street access, traffic flow around the complex, parking, gardens and any extra amenities, like barbecue areas, swimming pools and play areas. Make notes about your observations. Can you see any big, expensive problems?
- Guest accommodation: Now it’s time to slip back into those tourist shoes. As you inspect each accommodation unit, think about whether you’d be happy to stay as a guest and whether the nightly charge represents good value. Do the units smell OK? Are they clean? Is the décor faded or up to date? Does everything work? Then, look at the units through the eyes of a motel manager. What sort of people would stay here? What easy fixes would make the motel more attractive and useful to them?
- Your accommodation: Motel owner/manager accommodation is usually behind or above the reception office. Take a tour around and see if you can imagine yourself living here. If updates are required, would they be expensive?
Inspecting the books
Before you consider making an offer for a motel business, you need to understand its financial position and potential for growth. You should ask to see:
- at least three years of annual financial reports, as filed to the IRD
- GST returns for the last 12 months or longer
- occupancy figures for the last three to five years
- tariff reviews for the last couple of years
While you’ll be able to learn a lot from this information, an accountant who understands the motel sector will be able to tell you even more. It’s sensible to sit down with your numbers person to distil key facts from the financial reports. Looking closely at the occupancy figures and tariff reviews will tell you whether there’s potential to lift the motel’s profitability.
When you’re analysing the expenses in the annual financial reports, pay special attention to costs that you might be able to eliminate or reduce:
- Advertising – is there anything here that you might dispense with, such as newspaper or magazine advertising, sponsorships or directory listings?
- Entertainment – are the claims in this category essential or discretionary?
- Insurance – what policies are claimed and are they all necessary?
- Interest charges – these won’t apply, unless you’re borrowing money to purchase the business
- Legal costs – these are often one-off charges
- Power/telephone/internet – how much could you save by changing providers?
- Repairs & maintenance – are these regular or one-off expenses?
- Subscriptions – would you need to continue these?
- Vehicle – does it include personal use?
- Wages – who’s being paid to keep the motel running? Would you potentially fulfil some of these roles yourself?
Understanding the lease
Most motel businesses in New Zealand involve a commercial lease. Unlike commercial leases for retail properties, commercial leases for motels, hotels and lodges require much longer lease periods, to give the operators more security. In most cases, this lease is registered. A registered lease has advantages, not only for security of tenure but also usually for the ability to mortgage the leasehold interest, which could be helpful if you need to borrow to buy the business.
Ask for a copy of the lease early on, preferably before you do the property inspection. You need to read the lease thoroughly and understand it; involve your accountant and/or lawyer if it doesn’t make sense to you.
Motel leasing has been around for nearly four decades. There are practical reasons for separating commercial property investment and business ownership, so this model of motel business ownership is likely to be here for some time.
Things to figure out:
- How many lease years remain? Motel businesses are usually set up new with a lease term of 30 to 35 years. Sometimes the number of years remaining can affect the sale-ability of the business. An experienced motel finance lender will let you know if the lease term is long enough to cover their lending criteria. It might be possible to extend the lease. The price for acquiring extra years is something you would have to negotiate.
- Who’s going to pay for existing maintenance problems. Capture in writing all liability for maintenance issues with the landlord and outgoing motelier before you sign any agreement to purchase. This detail needs to cover exterior cladding, painting (inside and out), fencing, driveways and parking areas, plumbing and wiring, bathroom amenities, kitchens, hot water and heating, telephone systems. Most arguments about leases arise from lack of contribution from the landlord for maintenance.
Assessing the marketing
Part of working out how much value you can add to the motel business will involve looking at their current marketing practices. Does the motel have a modern, responsive website? Is it listed on the various online accommodation booking platforms? What’s the photography like? How are they pitching the accommodation, in terms of written descriptions? What additional advertising do they do? Are they active in social media? How about outdoor advertising? Is the motel signage attractive and eye-catching?
If any of these aspects of marketing is lacking, you have the chance to implement marketing improvements that could help to lift occupancy – especially at slower times of the year.
Working out what to offer
By now you’ll know the asking price of the motel business you’re considering. You might also have access to a recent registered valuation, which will throw even more light onto the subject of ‘how much to pay?’
The value of a motel is usually assessed by working out the earnings (profit) before interest, depreciation, drawings and taxation. The profit is then multiplied by a factor consistent with other market sales evidence. This factor is referred to as the ‘capitalisation rate’ or the ‘multiplier’. The rate or multiple used depends on a number of factors, including the location of the business.
As you would when buying a house, you also have to look at all the pros and cons to work out what your opening offer will be. What needs doing around the place? Who’s going to pay for that? Is there scope for increasing profitability by lifting occupancy during off-peak and low-season times?
In the real estate world, they say that negotiation is the art of moving two parties closer together to a point of compromise they can both accept. You might feel like you’re paying a little too much and they might feel like they’re not getting quite enough. That’s generally where the deal settles.
Sales of motels are usually handled by real estate agents who specialise in selling businesses. You’ll find listings on Trademe under the ‘accommodation’ heading. Motels are also listed on a variety of other websites, including nzbizbuysell.co.nz, linkbusiness.co.nz and coffeys.co.nz
Whether you’re starting a new venture or growing your business, AMI offers tailored insurance options to help keep your business flourishing.