Motels and hotels provide lodging to visitors, and these businesses are located in practically every city. Owning a motel can become a lucrative business. But not every motel will succeed. If you are considering buying a motel and running the business, do your homework to determine whether this is the right business venture for you.
The decision to buy a motel is often about more than earning profitable returns. Many motel owners say they really enjoy the lifestyle. They are able to live where they work, can usually reduce their cost of living and enjoy working with the public. If after a few years you decide to sell in order to upgrade or move on to something else, there is always a market for motel sales. Before committing yourself to buying a motel, though, there are some practical approaches you need to take.
- Prove to a lender that you are capable of running a motel. Even if you are interested in purchasing a small motel, in addition to general management skills, you will need to understand basic bookkeeping and accounting concepts, be able to create a budget, keep accurate financial records, promote a favorable public image of the motel and communicate well with people.
- Find out as much as you can about the motel you are interested in buying. Ask how long the motel has been in business and how long it has been under the management of the current owner. Ask why the owner is selling. Ask for the motel’s financial records for at least the past three years.
- Get the advice of an accountant or attorney who can examine any financial documents related to the day-to-day operation of the motel. Choose someone knowledgeable in the hospitality industry who can help you determine the value of the business. Take a look at other motels in the area. Educate yourself as much as you can about the local competition.
- Make an offer once you verify the financials. Make the purchase contingent upon you getting the financing. Know what you can afford going in. This is also the time to specify any other conditions of sale. For example, you might request that the current owner make certain repairs or alterations before the date of closing. The overall condition of the property is a critical factor in determining the price.
- Negotiate a sale price, amount of deposit and a settlement date. A sales contract signed by the seller gives you the option to buy the motel subject to each of the conditions as specified in the contract. Don’t be afraid to negotiate the selling price. While most sellers expect to receive offers lower than what they are asking, be both realistic and fair in the offer you make. Although the final price a seller will accept varies in each situation, some sellers will accept as much as 20 percent lower than the asking price.
- Secure financing. Even though a lender will consider the motel itself as one form of collateral, you may have to put up your house as additional security. Aside from having good credit, the lender will want to see proof that the motel will generate enough cash flow each month to pay the bills, including any loans secured to purchase the business. If you can show that the motel takes in more income each month than the money it pays out in expenses, you should be able to qualify for a loan. Lenders typically consider the motel industry a safe investment.
In steps process is as follow:
Get pre-approved for financing. If you will need a bank loan to purchase a motel, submit your application and other required documentations (tax returns and bank statements) and get approved for financing first.
Plan an overnight stay to help you assess the quality of the motel. Motels that offer poor service and uncomfortable accommodations or those with a bad reputation will not thrive.
Contact the city planner’s office. Before bidding on a motel, speak with someone in the city planner’s office to discuss plans for the area or roadways close to the motel. Upcoming road expansions or construction projects can have an impact on future business.
Ask for financial statements. As a potential buyer of the property, you can request to review the motel’s financial records from the past three years. These documents will disclose occupancy information, operating expenses and available cash.
Know the competition. To grow a successful motel business, staying competitive is key. Perform research on other hotels and motels in the area. Obtain information on average occupancy rates, reputation and accommodation.
Negotiate a price. Based on information received from your research of the competition, the city planner’s office and the property inspector, offer a fair price for the property. Work with your broker and Realtor to determine a price. The current motel owner will either accept or submit a counteroffer. Include in your bid a clause that states “subject to satisfactory inspection.”
Schedule an inspection. Buying a motel involves being responsible for repairs and other unexpected expenses after the purchase. Have a professional check the property to ensure areas such as the electricity, plumbing and structure are safe and functioning properly. Inspectors also provide an estimated cost for repairs. Proceed with the purchase if the motel doesn’t need extensive repairs, or ask the current owner to make repairs before the sale date.