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Buying a Motel: A good or bad idea?
As always, the question is not whether to buy or not to buy…the issue is always: location, Location, LOCATION!!!
In general, Motels convey a terrific investment. One of the best parts about it is that a huge portion of the business is wrapped up in a single, tangible asset: The land and the building. With few exceptions, Commercial Real Estate has increased at a steady rate, for the last several decades. This provides the profitable Motel Owner, not only with ongoing cash flow through operations, but added equity in the property.
But there are a lot of concerns, and even negatives involved in acquiring, operating and holding onto a Motel. Perhaps the most easily noted is as a result of the recession that actually began in 2007, but was most readily noticed by the non–business community in 2008. During that time, gasoline prices were all over the place, but frequently rising more than falling. This caused vacationers to stay at home or take shorter trips, with the net effect being that they did not stay in Motels as frequently, or for as long as they had in previous years. Business travelers were also curtailed, in their travels. And business travelers actually make up a larger amount of the market in Motel stays, particularly in off-season and Monday through Friday occupancy. The convention market virtually died. And the hotel/Motel market depends on conventions, in many areas.
Gyrations in the economy definitely have an impact on the Motel business. But the bigger issues are probably a function of the way “flag” Motel chain Operators deal with their own Motel Operators. And there are a number of issues that should be of concern, for anyone that is looking to purchase or build a Motel.
The positive of dealing with the flag operation – and by flag we mean a chain operation it is branded in a regional or national manner, such as Holiday Inn, Choice, Best Western and so forth – is that the brand is recognizable and suggests reliability and good service, to the general public. These brands are normally segmented by the kind of building that is constructed, the quality of the furnishings and linens, and the general service that someone staying there can expect. That also suggests the kind of pricing that would be expected. A Days Inn is going to furnish rooms with a level of quality that is less than what would be found in a Hampton Inn. But the price of the Hampton Inn is liable to be twice that of what you would find at the Days Inn. It is not a matter of being good or bad, it is a matter of segmenting the market so that there are Motels available for people of varying budgets.
Most frequent travelers will deal with only one or two specific flags, because those Motels provide them with a balance between quality and price that they find acceptable. That is where being part of a major brand becomes an asset to you, the Motel Owner because when someone from Minneapolis wants to travel to Georgia, they can call the 800 number four the brand they prefer and make their reservations, without a huge amount of muss and fuss. If you own the Motel in Georgia with that brand, that is a tremendous benefit to you. And this is not only the case with Motels. Any franchise or licensing operation that carries a brand that is widely known, saves the individual franchise Owner from spending a mammoth amount of additional money out of his/her own, on advertising. This is one of the major reasons to purchase a franchise.
But this is also where some of the negatives start to come in. You pay for that advertising, in the way of franchise fees or marketing fees or percentages of what you receive from that referral, from the parent organization. This can be costly.
And there are all kinds of other types of referral systems, such as Expedia, Hotels.com and others. These have become invaluable as travelers (like everybody else in the world,) becomes more and more dependent on the Internet. But again, you pay for that! You pay either a set fee or a percentage of what you charge the traveler, or both. It adds up and it is not getting any cheaper.
Being an independent can save you money by not paying franchise fees. But again, a huge number of people in the traveling market depend upon those brands for assurance of quality, and they will avoid non-branded Motels in many, many cases. As a result, the majority of non-branded Motels can only compete by reducing their rates. They save the franchise fee, but they probably lose even more in terms of the discounted rates and lowered occupancy levels, than their branded competitors.
Another thing to consider when you’re dealing with flagged operations, is that the parent organization will dictate the kind of construction that can be used, and even the architecture that can be employed. And they can change their requirements, sometimes to the Motel Owners’ detriment. For example, years ago many Motels widely used what are known as “exterior corridor” designs. You have seen these all over the country. This is where the doors to all the rooms open to the outdoors, and the traveler walks up steps or takes an elevator to a walkway that surrounds the outside of the Motel. That kind of construction is frequently open to the weather, and therein lies part of the problem, as far as the parent company is concerned. Who wants to see someone staying at your Motel struggle up the stairs with suitcases, and then be pelted with rain and snow while they fumble for the keys, trying to get the door open? Security can also be more assured, in an “interior corridor” design.
So virtually all flag Motel operations have gotten away with new construction for these types of exterior corridor designs. Which is not bad, unless you happen to own and exterior corridor Motel with a flag, and when your agreement with the parent corporation expires, you are told that you may no longer use that brand because the corporation no longer wants exterior corridors for any of its Motels. Moreover, none of the other flag operations want that kind of architecture anymore, so it is not like you can simply go from a Ramada to an Econolodge, because Econolodge doesn’t want you either! Suddenly, you are non–branded, whether you want it or not.
That is a radical example, but one that has actually occurred. There are other designs that are less obvious, but no less damaging to the business Owner. We viewed one $10 million property that lost its flag because the corporate entity simply decided that the architecture was “outdated”. That Owner had not even finished paying off his construction note, and now he was going to take a radical discount by selling the building. Not only was it going to be difficult for him to find a company that would flag the Motel under its label, but this occurred in 2009 when the Motel industry was still reeling from the effects of the recession.
Another financial burden in dealing with flagged operations is that they will intermittently inspect the property and determine what, if any improvements need to be made. It is not unusual, for example for an inspector to come in and decide in March, that all televisions throughout the Motel must be replaced by the end of the year. If the Motel has 150 rooms, that can be a sizable outlay. A good innkeeper will keep those things in mind, put money aside for such improvements and anticipate how often items such as furnishings, appliances that might be in the rooms, bedding, signage and other things will need to be replaced. Sometimes the corporate office and the inspectors are terrific in letting you know that kind of scheduling well in advance; sometimes – not so much.
Perhaps the worst scenario we have seen is with a flagged operation that is doing very well, and the corporate entity decides there is business enough for additional rooms in the area, and decides to recruit a new innkeeper to go into the same market. We do some repeat business with an exceptional Motel Owner – we will call him “Joe” – who just had such an experience. The corporate office attempted to attract an innkeeper for a piece of land right next to Joe’s Motel, and offered a brand that represented cheaper rates than Joe’s current facility. When they thought they had such a recruit, they went back to Joe and told him of the situation, but conveniently leaving out the fact that they had actually, aggressively recruited this new Operator. The corporate office then offered Joe the opportunity to build that new Motel himself, which would then put him in the position of competing against his own Motel!
Most flagged operations and franchise companies promise a certain area of noncompetition. But when you have a flagged operation, they will frequently operate several distinctly different brands. Choice Hotels International, as an example, operates under Choice, Sleep Inn, Comfort Inns and more. A company like that can make a pledge that they will not compete with a given innkeeper under brand “A”, but that does not prevent them from operating under brands “B”, “C”, “D”, “E” and others…
In places along major interstate highways, particularly in many areas of the Southeast USA, land has been historically cheap, traffic is high and flagged hotel operations have flooded the market. This is why you see so many inexpensive Motels in some of these areas. (Cheap opportunities do not necessarily mean good opportunities! See our post on this subject at: https://combrokerbusiness.wordpress.com/2012/04/10/looking-for-a-cheap-business/)
What we are saying is NOT that buying or starting a Motel is a bad idea! We happen to think it’s a great idea!
But we also, firmly believe that like ANY business, research must be done, and understanding the market in general and your market in particular is vital.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)