Selling an Owner-Operated Motel

What a buyer is paying for

A motel earns its money from rooms, so a buyer begins with the room count and how often those rooms are rented. Occupancy is the share of rooms rented over a stretch of time. The average daily rate is what each rented room brings in. Multiplied together they give revenue for each available room, and buyers use all three to compare your motel against others in the area. Ask your property software for monthly reports going back several years, because a buyer will want to see them.

Then they ask who the guests are. Travelers on a highway behave differently from workers staying for a project, and both differ from a family that pays by the week because it has nowhere else to go. A motel near a hospital, a plant, a ski area or a fairground has a pattern of demand that a buyer can understand. Seasonality gets a close look, since a motel that fills in summer and sits empty in winter has a very different cash picture than one with steady midweek business.

Online travel sites bring guests and take commission. A buyer will ask how many bookings come through them, how many are direct, and what you pay. A motel with a loyal repeat base and a good rating on the main review sites keeps more of what it earns.

Extended-stay guests

Many owner-operated motels depend on guests who stay a week, a month or longer. That business is steady and fills rooms through slow seasons, which buyers like. It also brings wear on the rooms, more laundry and cleaning, and questions about how long a guest can stay before local rules treat them as a tenant. Rules vary by state and city, and your attorney confirms what applies to your property.

A buyer will want to know how many rooms are held by long-term guests, what they pay, how reliably they pay, and how you handle a guest who does not leave. They will also look at the effect on your reviews and your nightly rate. Be honest about the mix. A motel that is mostly long-stay is priced as a different kind of business than one that mostly serves travelers, and a buyer who feels misled by the description will drop the price or leave.

The manager's unit

Most small motels include an apartment for the owner or manager. For a buyer who plans to live there, it saves rent and shapes the daily routine. For a buyer who plans to hire a manager, it is the housing that makes the hire possible. Either way the unit is part of the story, and buyers ask about its condition, its separate utilities, and whether the owner's family uses it.

Be clear about what the motel earns when a paid manager runs it. Many owner-operators draw no salary for themselves and their spouse, and the profit figure looks high because of it. A buyer will subtract the cost of a manager and front desk coverage, and the number left over is what they will pay for. Our posts on seller's discretionary earnings and owner dependency explain how that adjustment works.

Franchise flag or independent

If the motel carries a brand, the franchise agreement is a central document. Buyers read the term, the fees, the required property improvements, the rules for transferring the flag to a new owner, and what happens if the brand leaves or the owner wants out. Some franchisors approve a transfer, some require a new application, and some use the sale to ask for upgrades. Start that conversation early, because the brand sets its own pace.

An independent motel has more freedom and less marketing support. Buyers ask who brings in the reservations, how strong the motel's own website and listings are, and what would change if the flag came off. Each choice has buyers. Be ready to explain yours.

The property

Motels are real estate businesses, and in most sales the land and buildings go with the business. See our post on selling a business with real estate attached for how that is priced and structured. A buyer or a lender will order an appraisal, an inspection, and often an environmental review.

Deferred maintenance is where most of the arguments start. Roofs, parking lots, heating and cooling units in each room, plumbing, the sign, the pool, the elevator if there is one, and the beds and furniture all have lives. Buyers walk every room and estimate what each will cost. If you have been patching things for years, the list of repairs becomes the price negotiation. Fix what you can before you list, and keep receipts for what you replaced.

The records a buyer will ask for

Expect requests for business tax returns, monthly profit and loss statements, a balance sheet, occupancy and rate reports from the property software, payroll records, utility bills, insurance history, and the filings for the lodging taxes you collect for the local government. Buyers compare the nightly reports against bank deposits and the returns. Cash rentals that never went through the system are a common problem in this business, and revenue that is not recorded cannot be counted in the price.

Permits matter as well. Motels typically hold health, fire and pool approvals, a business license, and in some places a lodging registration. Which ones transfer, and which need a new application, varies. Your attorney confirms what applies.

What tends to sink a sale

Motel deals break down over a few predictable things. Unreported cash. A franchise agreement that cannot move or comes with a costly improvement plan. Deferred repairs that the buyer's inspector prices higher than the seller expected. An extended-stay mix that a lender does not like. Environmental concerns on the site. A buyer who learns about any of these in the last weeks will want a lower price.

How to get ready

Start a year out. Run every room through the property software and deposit every dollar. Make the repairs you have been putting off, beginning with the roof and the rooms guests see first. Read your franchise agreement with a fresh eye. Count how many rooms are held by long-stay guests and write down the rules you follow with them. Clean up the manager's unit.

At Business Advisors of America we build a valuation from your numbers, prepare the package a buyer and lender will want, and screen buyers before they learn which motel it is. If you are thinking about selling a motel, a short call with us is the next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.