It can be difficult to dedicate time to tasks uninterrupted when operating a motel like...reading the Sunday Star Times. Today's effort was not helped by the front page revelations the former PM, Helen Clark was reported as being a 'sex bomb." It has taken a while, but I have finally managed to recover and return to the job at hand by delving past the startling front page revelation and have stumbled across an interesting article on "Checking out the Motel Game" (buying a hotel or hotel) by Greg Ninness - Sorry, no link.
Overall, the article is fairly simplistic, however hopefully this will motivate further action from couples that are contemplating the dream of owning their own motel business. The article starts off with some basic differences between leasehold and management rights, however seems to focus solely on the management rights structure. It is interesting to note however that the rules of thumb appear to be similar for both structures.
The points covered are:
- Accommodation business purchase has the advantage of the inclusion of owner's accommodation. The article points out that the family home can be used as equity to buy a business and become your own boss.
- Accommodation businesses are usually split into two parts - The land and buildings / The going concern (The operational business).
- The going concern is usually structured as a leasehold interest.
- Increasingly popular is for the going concern to be structured as management rights.
- The main differences between a leasehold interest and managements rights is that leaseholders usually own the business chattels such as furnishings and bear the cost of maintaining them.
- With management rights the owner usually owns the chattels and maintains them.
- Leasehold interests and management rights usually have a fixed term of 20-30 years.
- Management rights should return 20-25% of purchase price after deducting operational costs including rent, but before interest and tax.
- Management rights usually decline in value once they deflate less than 20 years.
- It is possible to negotiate an extended the term with the landlord that can cost betwwen $5,000 to $10,000 per year of extension.
- If the owner managed to improve the businesses profitability, that will increase the value of the management right upon sale. Of course a loss upon sale can occur if the profitability of the business declines.
