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Updating: Buying a Motel; Is Now the Time?

January 12, 2019

Markets change.  What seemed like a good idea several years ago, may not be the best investment today.  Consider the CB Radio – for those of you old enough to remember – which were purchased by a huge number of drivers…until the mobile phone became affordable and crushed the CB market!

Magazines and books have taken a hit as well, also because of technology and in particular, the Internet.  Magazines and books have increasingly gone toward electronic media, which sharply reduces advertising revenue, which in turn has served to undermine the profitability and doomed many magazines, as a result.  Brick and mortar stores are not doing as well as they once did in some areas and for some product lines, in general and for the same reason.

Technology is not the only reason for changes in the market.  Rising interest rates can threaten any leveraged investment that requires the Buyer or Owner to go to the Bank or SBA for financial support.

Cultural changes can also affect the market.  People are dining in lesser numbers in “white linen” restaurants, favoring fast food instead.  To combat the situation, chain Restaurant operations in particular are advertising incredibly low pricing for their entrees.  A full meal for $5.00 is not unusual.  Of course, the Restaurant’s strategy is to lure the Customer in with that $5.00 offer, then “upsell” them with beverages, appetizers, side dishes and desserts, all of which can add up to a total bill that is equal to what the Customer paid historically.  But the diner FEELS as though he/she has gotten a deal!

In turn and as of this writing, the fast food chains have been forced to counter that with their own discounting strategy.  McDonald’s offers a “$1 $2 $3 DOLLAR MENU”; Burger King provides a “Value Menu” of low-cost items; Wendy’s, the current leader in the “Burger Wars”, is offering a “Value Menu” as well, which is not really much of a discount.  It simply provides sandwiches without French fries or other additions, in an effort to provide the diner with lower priced options.  But calling it a “Value Menu” again gives the Customer the impression that he/she is getting a deal.

Gas Stations used to be hot items for investment.  But with increased prices in gas over the past years, a large portion of the population has altered its driving patterns, reducing the amount of gas that is purchased, in general.  Combine that with enormous strategic moves to construct larger pump volumes in each Station location, along with huge Convenience Stores and prepared Food Service offerings, and the small-time operator cannot compete.  At one time, a 6-pump Gas Station might have cost a maximum of $1.2 million to build, including the cost of land; now, the average 18-pump Station with a 10,000 square foot Store is closer to $4 million.

What does this have to do with Motels?

A lot!  The Airbnb industry has had a profound impact on the entire Hotel/Motel industry.  Where it will end is difficult to say, but so far it has had a more critical impact in resort or vacation areas than with business-oriented travel destinations.

The cost of property itself has had an enormous affect, not just in Motel development, but in resales as well.  In order to justify the development of Motels, the cost of the land has demanded that more and more rooms be constructed on the same footprint, in order to justify the initial investment.  And of course, one has to fill those rooms.  As for resales, some speculators in larger metropolitan locations are looking for marginal business operations, including Motels, as an option to re-develop the property.  Today’s small Motel could well be tomorrow’s Office Building, or even a Parking Garage!

Flag or Motel Brand operations have come into increasing pressure.  The increased Motel competition of the past decade has made the Flag Parent organization more demanding on the individual Operator.  Continual increases in expenditures for updated furniture, fixtures, and (especially, electronic or entertainment) equipment are being made on an increasingly more rapid basis.  This is something that has always been a concern to Motel Buyers, but the speed with which these demands are being made makes it an even more critical subject.

The source of Guests is also impacting the business.  Travelers booking from Internet travel Web Sites are reducing Motel Gross Profit because of the commission the Web Agent charges.  The potential growth of bookings from these sources could adversely impact the Motel Owner’s profitability.

Finally, also as of this writing, the “Real Estate bubble” and the potential for a major economic recession are both of great concern, especially to Banks.  Lenders have suddenly made a concerted decision to deny loans for any new Hotel/Motel development.  The purchase of currently operating Motels is only slightly better; but the Motel must demonstrate an extremely strong and stable history, in order for an acquisition loan to be approved.

Does this mean Buyers should stay away from purchasing a Motel?  Absolutely not!  But it does mean that the Buyer needs to be extraordinarily careful in researching the acquisition, knowing its business history, the source of its Guests and any number of other issues are vital for making a purchasing decision.

A wise Buyer not only needs to know the details of any specific acquisition candidate, but the nature of the entire market, as well.

(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.)

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