Motels: An Open Book
- Posted By Andrew Morgan
There are many good reasons why motels are an excellent investment option for those looking to buy a business. This edition is not about all those good reasons, but simply one. It’s not a high return on investment or lifestyle reason that is often head of the list, but one that makes quick decision making a lot easier.
Motels are not difficult businesses to understand. In their simplest form, they rely on “backsides in beds”, as it is often either more, or less, eloquently phrased. Motels require rooms to be occupied to be successful. To that end, they are largely an open book, and one doesn’t need a “deep dive” analysis to determine their accuracy or legitimacy. This means that practical and important information to determine the general status of the business is easily accessible, and therefore not a lot of investment via time and money is required investigating the business in the initial stages of consideration.
Every investor of a business will complete a due diligence to their own depth and satisfaction. The point here is that it is very easy to get to the heart of the matter when confirming what is being presented is truly accurate. This not only refers to financial data but extends further to the information or source that came to produce that financial data. It also extends further to the physical property and asset.
The entire process of buying a motel business starts with the initial information that has been presented such as an Information Memorandum (IM). Next may involve the financial statements of the business. At this step there are some quick items to look at to gauge the legitimacy of the financial data being presented. It can be a simple comparison of numbers between what expenses are presented, income produced and industry standards. Some entries of interest include, Laundry/Linen, Electricity, Wages and Cost of Goods Sold. These items provide a lot of comparable information immediately, without having to dig too deep for answers. In addition, but also in conjunction with, a simple calculation to determine if the presented income/revenue aligns with what would be expected of such a property given its size, quality, location and other factors. Reconciling that with some of the variable costs mentioned will provide a correlation or otherwise. Ultimately usage determines these variable costs and provides answers. If units are being occupied, they have to use linen, electricity and cleaning is required.
Next may be a physical inspection of the property. An in depth assessment here would be a building inspection/report by a qualified builder. Initially or alternatively, common sense items that stand out upon one’s own inspection. Let me qualify that I am not a builder, but if looking for some quick “tells” or useful information upfront, then regarding the integrity of the structure, it may be cracks in the block/brick work, state of the roof, joints or windows that are not square, wood rot to beams or water damage. As an example, block and brick cracks are common and can be easily determined as either superficial or otherwise that requires further investigation.
Beyond the structural side of things, maintenance issues and repair items tell a story. If walls have been poorly painted and not cut in correctly, this should raise eyebrows. It would be a concern in that no care and attention has been taken and clearly a professional painter would not have completed such a job, one would hope. Repairs that have not being carried out correctly or completed in a less than professional manner should set off an alarm to dig deeper. Beyond these things, cleanliness is another easy way to tell how a property has been looked after and whether or not you may find other issues. External back or side areas of any motel can tell a lot about how the property is maintained and looked after. If the spaces behind the buildings where the public generally don’t go is an overgrown forest or dumping ground of old furniture, equipment, rubbish, etc. If this area (generally between the back or side exterior walls and property line fencing) is concreted or pebbled and is clean and tidy, and the public can access without issue, it is highly likely the entire property is being looked after just as well or better.
Finally, completing the due diligence process under contractual arrangements in order for the Seller to provide access to any additional information required to confirm all the data, and bottom line profit that has been presented. This may or may not require a “deeper dive” depending on how the initial investigations as mentioned above went.
No one involved in the sale and purchase process wants a Contract to collapse, especially as a result of the due diligence process. The result is wasted time and cost to both buyer and seller, not to mentioned loss of credibility of both parties, notwithstanding who was a fault. Therefore, being able to minimise the risk of a contract being terminated well into the contractual process by making relatively accurate determinations early in the process is very valuable.