Introduction
We have set out in this note some things to consider before you enter into a contract to buy a motel or tourist park.
We hope they assist.
For more detailed information, please visit our website and download/print our comprehensive guide for buyers of motels and tourist parks and/or give us a call.
1. Engage Industry Specialists
Deal with industry professionals who have significant experience in the motel and tourist park industries (as applicable). Ask them about their experience and for examples of recent deals they have worked on.
An industry specialist should make the process of identifying and buying a park/motel less stressful, cost less and should mitigate your risk of buying a lemon.
Typically you will use:
- A real estate agent – to help you refine your search parameters, identify possible motels/parks, and find the right investment for you.
- An accountant – to assist you with structuring, checking the seller’s books and verifying the financial performance of the business.
- A finance broker – to identify and approach the right financiers to arrange for a loan.
- A lawyer – to negotiate the contract documents, carry out legal due diligence on the land, improvements and business and ensure those are conveyed to you free of encumbrances on settlement.
2. Choose the Right Park/Motel for You
Industry professional: agent.
Don’t rush your search.
Work out your key criteria for a motel or park before you start the search. Discuss these in detail with the agents, who will likely be your first point of contact with industry professionals.
A good experienced industry agent will:
- listen to you, advise you on whether your key criteria are workable and then work within the parameters you set;
- give you relevant and current information on the industry and the locations in which you wish to look (or refer you to resources with that information);
- show you a portfolio of parks/motels to consider (be wary of an agent showing you one or two parks/motels only, particularly where they don’t fit your criteria); and
- recommend other industry professionals; and
- assist with documenting a term sheet between you and the vendor.
3. Choose the Right Ownership Structure
Industry professionals: accountant and lawyer.
Consult your accountant and/or lawyer prior to signing a contract so you decide on the right entity or person to hold the legal and beneficial ownership of the land, improvements and business assets which comprise the park/motel.
The type of structure you use may be a company, a discretionary / family trust, a unit trust, a partnership, an individual or a combination of these.
- Your accountant and/or lawyer will:
give you advice on structures that will minimise tax liabilities and maximise asset protection; and - prepare the documents necessary to create the company / trust (as required).
4. Insist on a Term Sheet
Industry professionals: agent and lawyer.
It is always a good idea for you and the seller to agree and sign a simple one/two page document recording the key commercial terms of the deal—e.g. price, deposit, buyer conditions and time frames. This is often referred to as a “term sheet” or “heads of terms”.
Having a term sheet signed confirms both you and seller understand the terms of the deal agreed and can avoid lengthy and costly negotiations down the track when the formal contract documents are prepared and negotiated.
Good agents and lawyers know this and will encourage the parties to enter into a term sheet. Be wary of lawyers that quote you a fixed fee to prepare the contracts, but say they can’t control the level of negotiation that will be required and therefore have to charge hourly rates for negotiations (rather than a fixed fee). This sort of arrangement incentivises the lawyer to make agreeing the contract documents difficult.
5. Use the Right Finance Broker and Bank
Industry professional: finance broker.
Find a finance broker who specialises in the industry. They will be able to advise you on:
- the banks that are familiar with industry;
- the banks that offer the best finance packages to acquire motels or tourist parks;
- what finance you will be able to access; and
- the timeframes associated with and the costs of getting that finance.
If you go with a banker who is not familiar with the industry it will very likely cost you time and money and mean you can borrow less.
Make sure your broker knows the timeframe allowed under the contract to obtain a satisfactory finance approval and has your lawyers contact details. A good broker will work with the bank to ensure that timeframe is met.
6. Know What Qualifications / Licences and Service Contracts You Need
Industry professionals: agent and lawyer.
Talk to the agent, your lawyer and the seller at the outset about:
- what qualifications and/or licences and/or service and supply contracts you will need to operate the motel or tourist park; and
- the costs, obligations and timeframes associated with obtaining these.
Things you may need include:
- State government liquor licence;
- Local government food licence;
- State and or local government approval to operate;
- industry group or franchise memberships (eg. BIG4, Star rating); and
- service and supply contracts (eg. cleaning and linen contracts, booking software programs, rubbish collection, electricity, gas, water, telephone, email supply contract eftpos machine etc.).
Some of the licences and service / supply contracts held by the seller will be able to be transferred to you. Others will not be able to be transferred and you will need to apply for new ones.
Make sure:
- the contract is conditional on you obtaining key licences before completion (e.g. a liquor licence for motel that services alcohol);
- the contract requires the seller to transfer licences / service supply contracts it holds which you wish to take a transfer of;
- you understand the terms of any service or supply contract you are taking on;
- you get your applications for new licences in earlier enough to have them in place by settlement; and
- you contact suppliers and services providers earlier enough to have arrangements in place by settlement.
7. Employees are Key
Industry professional: lawyer.
Try to interview the seller’s employees prior to deciding whether you want to take them on – not only will this shed light on the employees themselves, you may also gain helpful insights into how the business was run by seller.
Make sure your lawyer checks the contract to ensure it doesn’t oblige you to take on the seller’s employees (if you don’t want to) and the seller pays out at least 70% of any entitlements owing to employees that will transfer to you.
