Selling a motel or small hotel in Canada

A motel or small hotel is two things at once: a business that sells rooms every night and a piece of real estate. Buyers and their lenders look hard at both. Here is what to expect, how to prove your numbers and how the taxes usually work, with British Columbia examples.

What buyers look at first

Most motel buyers ask the same questions early. Have clear answers ready before you list:

• Room revenue. Three years of sales by month, with occupancy (the share of rooms sold) and average daily rate (the average price per room sold).
• Other income. Any long stay or monthly guests, crew and contract bookings, a restaurant or coffee room, laundry, parking or rentals of a house or suite on the property.
• Costs. Wages, housekeeping supplies, laundry, utilities, property tax, insurance, booking site commissions, franchise fees and repairs.
• The property. Room count and mix, the age of the roof, boilers, hot water and heating, recent room renovations and any known problems.
• Where bookings come from. Booking sites, a brand reservation system, walk ins, repeat guests and corporate or crew accounts.
• Your time. Whether you live on site, how many hours you and your family cover and who runs the front desk at night.

Buyers will check these during due diligence, so it helps to gather them now. Our list of documents needed to sell a business is a good start.

Proving the numbers

A motel's property management system (the software that tracks bookings and rooms) holds most of the proof a buyer wants. Keep monthly reports of rooms sold, occupancy, average rate and revenue, and make sure they match your bank deposits, booking site payout statements, your PST and MRDT returns and your tax returns. Cash from walk in guests should be recorded in the system and deposited like everything else. If you cannot show a sale on paper, most buyers and lenders will not pay for it.

Lenders usually look at net operating income, which is the profit from the property before financing and owner wages. If you and your family cover the front desk, housekeeping or night shifts, list those hours and what it would cost to pay someone, and show any personal costs run through the business as add-backs with proof. A buyer who must hire staff to replace unpaid family work will price that in.

The land, building and furnishings

For most motels the land and building are a large part of the price. Gather the title, survey, zoning, BC Assessment notices, property tax bills, building permits for past work, fire inspection reports and any environmental reports. Note any underground fuel tanks, septic or well systems, and the age of major systems, since buyers and lenders often order building and environmental reports of their own.

Make a list of furniture, beds, televisions, laundry machines, kitchen equipment, vehicles and signs, with ages and whether anything is leased or financed. If there is a mortgage or equipment loan, plan how it will be paid out at closing; see selling a business with debt. Our guide to selling a business and the building covers how the price is split between property and business. If you lease the land or building instead of owning it, the lease term and landlord consent matter a great deal; see your commercial lease when selling.

Franchise, booking sites and the guest list

If the motel carries a hotel brand, the franchise agreement usually needs the brand's approval for a new owner, may require upgrades on a sale and may charge a transfer fee. Ask early, since this can take weeks and can change what a buyer must spend. See selling a franchise business.

Booking site listings, the website, the domain, the phone number, reviews and any corporate or crew accounts are part of what a buyer pays for. Check what each booking site needs to change the owner and payout account, write the handover into the purchase agreement, and plan how guests with future bookings and deposits are dealt with at closing. Our guide to transferring contracts, licences and permits has a checklist, including the business licence and any liquor licence for a lounge or restaurant.

The Province of BC says hotels and motels, typically one property owned by one person or company, are exempt from its short term rental legislation and do not need to register. Strata titled hotels and motels are treated differently, so check this early if your rooms are strata lots.

Staff and guest information

A buyer will want to know who works there, their pay and hours, and who is likely to stay, especially a reliable housekeeping lead and night auditor. In British Columbia, section 97 of the Employment Standards Act says that when a business is sold, the employment of an employee is considered continuous, so a buyer who keeps your staff takes on their years of service. See what to tell employees.

Guest records and staff files include personal information. In British Columbia, section 20 of the Personal Information Protection Act lets a business share personal information with a prospective buyer without consent, but only if it is needed to decide whether to go ahead and the buyer agrees to use it only for the deal. Share totals and summaries first, under a confidentiality agreement, and hand over full records at closing.

Taxes on rooms and on the sale

The Province says 8% PST applies to short term accommodation in BC unless an exemption applies, and in participating areas the Municipal and Regional District Tax (MRDT) of up to 3% applies in the same way. A buyer and their accountant will check that these were charged and filed correctly, and the buyer will need their own registration to collect them from the first night they own the motel.

When the land and building are sold, the buyer pays BC property transfer tax when the title is registered: 1% of fair market value up to $200,000, 2% from $200,000 to $2,000,000 and 3% above $2,000,000. It is based on the land and building, not goodwill or furniture, which is one reason the price split matters. Share sales can be taxed differently, so ask your lawyer. See asset sale vs share sale.

GST/HST on a motel sale can be complex because commercial real property, equipment and goodwill are often treated differently. When a registered buyer acquires all or substantially all of what is needed to carry on the business, the section 167 election on Form GST44 can often remove GST/HST on the sale, and a registered buyer of commercial real property often accounts for the GST/HST on the property themselves rather than paying it to the seller. In British Columbia, PST generally applies to taxable goods in the sale such as furniture and equipment, but not to goodwill, and the Province says a buyer should get a PST clearance certificate before buying a business. Your accountant should work through this for your deal; see GST and PST when selling and taxes when selling a business.

A simple worked example

These numbers are made up and rounded for illustration only. Your own deal, timing and tax will differ.

Questions to take to your lawyer and accountant

• Should this be an asset sale or a share sale, and how does property transfer tax apply either way?
• How should we split the price between land, building, furniture and equipment and goodwill?
• How does GST/HST apply to the real property, and can we use the section 167 election?
• Were PST and MRDT charged and filed correctly, and how does PST apply to the furniture in the sale?
• Does the franchise agreement need approval, upgrades or a transfer fee?
• How are future bookings, deposits and booking site payouts handled at closing?

Rules and rates change, so confirm current requirements with the Province of BC, your city and the Canada Revenue Agency before you set dates. For more, read what your lawyer and accountant do. Selling a restaurant or coffee room on its own? See selling a restaurant in Canada. Managing rentals or strata buildings for owners? See selling a property management company. Running a campground or RV park as well? See selling a campground or RV park. This guide is general information, not legal or tax advice for your situation. Questions about listing with us go to hello@sellmybusinessdirect.com.