09 Apr 2013
Words Tim Admin

Motivations for Buying an Accommodation Business

One of the great things about Australian accommodation businesses is the sheer diversity of people that they attract. As anyone with even a small amount of interest in the sector will testify, owners can come from all walks of life and from all corners of the globe. They all have something to offer and something to gain. Equally as diverse as the people who own businesses are the motivations that attract them to purchase in the first place. The beauty of buying an accommodation business in Australia is there is genuinely something for everyone. Regardless of what your work and life ambitions are, if you look hard enough you will be able to find something that fits. For some this is easy, for others it might take a bit of time. This article aims to take a quick look at some of the main motivations that attract people to buying into our sector, and the types of businesses that best fit with those motivations. Even for experienced buyers, it might open your eyes to another suitable area of investment. As agents, perhaps the most common type of buyer we come across are those driven by return on investment. Buyers in this category will usually have a limited amount of equity available. They want to make sure that the income they receive from their investment is as high as possible. If they are purchasing management rights, this will often mean making sacrifices on the manager’s unit or even searching for a ‘business only’ opportunity. These buyers will also look to pay as low a ‘multiplier’ as possible. This might mean purchasing a less desirable complex, perhaps slightly dated or in a lower-demographic area. If you are purchasing a motel lease, this will mean looking for a business showing a higher than average yield. Generally, this will mean concentrating on more regional or remote motels. Given the turbulent state of the world’s stock markets, an increasingly popular source of motivation is those looking for a solid passive investment. The most common channel for passive investment in the accommodation sector is through the purchase of freehold motels. The investment is arranged so an active manager (lessee) will lease the motel from the freehold owner on a long-term basis. The freehold owner does little except for collect rent at the end of each month. Another popular area for passive investment is through a ‘syndicate’ purchase of large management rights businesses. This describes the situation whereby a number of parties pool their resources to facilitate a large purchase. One of the parties will be the ‘active’ partner and will receive a salary as well as their share of the profits. The remaining parties will become silent investors and will receive their share of the profits after the active partner’s salary has been deducted. One incentive for purchasing an accommodation business that has perhaps become less prevalent since the GFC is that of lifestyle. Nonetheless, it is still a major driver, particularly within management rights. Those seeking lifestyle opportunities will generally concentrate on location, facilities and owners accommodation. They will often also look for a business where they are not required to do a huge amount of work. This might mean buying a small business with a light workload, or alternatively a large business with an income big enough to support staff. Lifestyle purchasers will typically look for fantastic accommodation, perhaps on the waterfront or with stunning city views. They will also look to be in a first-class location, maybe in a major city CBD or right on the beach. As lifestyle requirements will often work against the financial strength of a business, purchasers in this sector will often be more financially established than your average purchaser and less driven to make large monetary gains. One of the most exciting reasons for investing is to achieve large capital growth. Some buyers are interested primarily in the increase they are likely to achieve between the price they purchase a business for and the price they sell a business for. As most would appreciate, this is perhaps the least secure reason for investing and the most difficult to get right. Nonetheless, for an astute purchaser there are often some incredible opportunities to make windfalls from the purchase and sale of accommodation businesses. In order to be successful in this, the key is to be extremely open-minded in what you are looking for. You never know what the next opportunity will be, not where it will be located. You might find a motel lease in the middle of the outback with poor trading figures; however, a new mine is opening in the area and is likely to fill rooms and drive tariffs for years to come. You might find a management rights under poor management, with numerous externally managed units and a short term remaining on the agreements; can you buy it at a cheap price and regain the favour of the owners and the committee, driving the income back up in the process? In reality, most purchasers are open to a variety of motivating factors when they are searching the market for their next (or first) investment. In an ideal world, most buyers would like to satisfy all the criteria discussed above, and often more. I would not argue for a second that many businesses on the market will be fall into a more than one of these categories. Indeed, that is the beauty of investing the accommodation industry. However, as anyone who has bought a motel, management rights, caravan park or resort will testify…you are unlikely to tick all the boxes. For that reason, it is important to have a grasp on what it most important for you. What are you really aiming to achieve out of your investment?