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9 investing lessons I’ve learned from owning a business

In 2016, I took the plunge: buying a 51-room motel in south-west Sydney. It was a big bet, using most of my family’s savings (not the bank of mum and dad) to fund the purchase.

Since then, we’ve ridden the highs of initially owning a motel on the rise, to the lows of Covid where the accommodation sector suffered the equivalent of a Great Depression, and back again to slowly recover as domestic travel rebounded following the pandemic.

Through it all, owning a business has made me a better investor, and being an investor has made me a better businessman.

Here, I’d like to share the lessons from being at the coal face of a business.

The search

First, some context. I didn’t purchase the motel on a whim. I’d previously covered larger hotels as an equities analyst and portfolio manager. I’d visited hotels both in Australia and Asia, had spoken with management of listed hotel companies, and had thoroughly studied the financials of various accommodation businesses. Also, my wife had moved to Australia and entered the hotel industry, overseeing a portfolio of hotels. Combined, we felt we had a decent handle on the industry.

But we still moved cautiously. After all, hotels are different from motels. Analysing them from the outside is different to owning and running them. And spending your own money to buy one is different from spending other people’s money.

I remember going to a motel seminar in 2011 where a broker had various speakers present to an audience of prospective buyers. What struck me then was that most of the audience were want-to-be retirees. They weren’t in the industry yet were looking to buy a regional motel as a ‘lifestyle’ business – where they’d work and settle down into quasi retirement.

I sensed a potential opportunity as these weren’t sophisticated businesspeople and prices for motels at the time were reasonable.

Our plan was to buy a leasehold motel as a freehold one was outside of our budget. It would most likely be in a regional area because metropolitan ones weren’t often for sale. We wouldn’t operate it day-to-day and would have managers to do that. Invariably, that meant it couldn’t be a small motel because it needed to be large enough to pay these managers. Lastly, we preferred a motel closer to Sydney so we could regularly visit it and oversee the business.

I’d like to say that it was a quick process though it was anything but. We inspected about 25 motels over the next four years. We went everywhere from Eden, 6.5 hours drive south of Sydney, to Coffs Harbour, around the same drive time north of Sydney, and everywhere in between, from Orange to Goulburn to the Central Coast, and Sydney itself.

Early in 2015, we visited a motel on the outskirts of Sydney. It was quite large at 51 rooms. We were impressed, though the price was a little high. Soon, it was under contract with another buyer and the opportunity seemed to have passed.

Maybe six months later, the broker came back to us. The previous deal had fallen through and were we still interested? Yes, we were.

Buying a business isn’t a straightforward process. It took us nine months to complete the purchase. We learned a lot about dealing with finance brokers, motel brokers, banks, accountants, valuers, lawyers, and others who are needed to get a deal done.

For instance, our lawyer refused to insert a clause that we needed in the contract, and to this day, we don’t know why. We ended up having to do it ourselves! Suffice to say, getting the right lawyer is crucial.

Day one to year eight

Taking over an established business is never easy. The motel had 15 employees, including two managers who lived on site. The rest of the employees were mostly housekeepers or reception staff. My first job was to get to know these managers and to convince them to stay on to ensure continuity of the business.

I promised them a lot of autonomy as they were far more experienced than I was in the hotel industry (they’d both been working in it for 25 years). They expressed some scepticism as they had to run all the decisions through an HR consultant under the previous owners. It seemed an odd arrangement. And, therefore, one of my first acts before we officially took ownership of the business was to tell the HR consultant that we wouldn’t be continuing with her employment. A few months later, we also had to let go of another employer that we’d inherited. They were tough, albeit necessary decisions to make sure the motel was well run.

The previous owners were good operators and we hit the ground running. The motel catered primarily to tradies, who worked on residential and commercial projects in the area. It also had sporting groups, movie and television production crews (nearby has a large house and surrounds where many well-known local films and shows are shot), travellers, and others.

The first few years were positive. I recall the exhilaration of seeing the financial figures being sent to us in the evening and knowing that we were earning money while we slept that night. I know that when you own stocks and other assets that you also earn money while sleeping, but this felt different given we were sole owners of the business.

Then, there was Covid-19. Business dropped quickly by 95%. We were losing money fast. I’ll never forget the day when our motel had 2 occupied rooms out of the 51 available. We were close to closing the motel for a period. That was the low point.

Luckily, the initial Federal Government package for businesses was generous. Without it, we would have been lucky to survive.

Running the business was also challenging given the pandemic. We had to overhaul our procedures, change the way we cleaned rooms, and deal with employees and customers on edge. There was one time when one of our housekeepers heard a family say how they’d come off a plane from England, that they all had Covid, and were laying low in one of our rooms. The housekeeper freaked, and I had to politely inform the family that they needed to immediately depart. It was a strange time.

The second Federal Government package for businesses wasn’t nearly as generous. That resulted in 2021 being a real struggle. It was difficult to get employees motivated again after they’d been paid to effectively stay at home for a year. And people still were restricted from travel, which meant business was still poor.

It took the best part of three years for the business to get anywhere near back to what it was prior to the pandemic.

At the start of 2022, things slowly opened up. Then, Australians couldn’t get enough of domestic travel. City motels like us didn’t benefit as much as regional areas from this initially. Later, people started to forego the regions to head to the capital cities. And we also benefited from a local area with a lot of development, both residential and commercial.

Eight years after buying the motel, we still have the same managers and the longest serving housekeeper has also stayed with us. We have a lot of new faces – casual employment offered by a motel like ours invariably means there is turnover of staff.

We still own the motel, and it has been quite a ride.

Key takeaways

Here are nine investing lessons that I’ve learned from owning the motel business:

1. Businesses are more than just numbers.

As a former portfolio manager, I was familiar with the numbers of accommodation businesses, and when I first took over the motel, I was therefore very numbers driven. What I quickly realised is that numbers are the result of numerous business decisions.

Yes, numbers matter. But the secret sauce is the decision making which drives the numbers that end up in the profit and loss and balance sheet statements.

I’ve met many sell-side analysts and fund managers, and my view is that a lot of them don’t pay enough attention to the qualitative factors that determine whether a business succeeds or fails.

2. The price you pay for a business matters … a lot.

The price that you pay for a business determines your future returns. The reason that we’ve made adequate returns from our business is because we negotiated a good price for it.

In the share market, negotiating a good price means waiting for the right price before buying a stock.

3. Customers first, employees second, shareholders third.

A business needs to have priorities and if customers aren’t at the top of the list, then something is wrong. Customer purchasing decisions and feedback are often the best ways for a business to know whether a strategy is succeeding or not.

Employees are obviously critical too. They are the ones that should put the customers first. To do that, they need to have a clear understanding of their roles and how to execute them.

Shareholders come last. Now I know there are many past and present ASX-listed companies that put shareholders first. But it’s best to be wary of companies over-emphasizing shareholder returns.

The world’s best companies, like Costco for example, get their priorities right.

4. Leaders need to know the nitty-gritty of their businesses.

There are businesses which hire leaders who’ve never worked in their industry. I think this can be an error.

I came from the finance sector to own our motel, and it would have helped immeasurably if I’d had hands-on experience working in the accommodation industry before the purchase.

Knowing the ins and outs of different jobs in a business and how they contribute to the whole operation is crucial to being an effective leader.

So, cast a sceptical eye on companies which hire leaders who have no experience in their industry.

5. Debt makes businesses fragile.

During Covid, the accommodation businesses that didn’t survive were mostly those which took on too much debt.

Now you might say that Covid was an extraordinary event, and these businesses were just unlucky. But unforeseen events happen often, and businesses need to be prepared.

In stock markets, leverage also magnifies the returns of companies, both on the upside and downside. It’s prudent to opt for businesses with sound balance sheets.

Investors burned by Star Entertainment over the past few years have learned this lesson.

6. Only the paranoid survive.

This phrase comes from a book by former Intel CEO, Andy Grove. There’s a lot of truth to it.

A business needs to be paranoid about competitors, employee turnover, known risks, unforeseen events, and the list goes on. Paranoia leads to businesses constantly innovating to improve themselves.

Invest in businesses where there’s paranoia and an emphasis on continual improvement.

7. Owners/leaders need wise counsel.

Businesses are team operations. Leaders will have certain skills and lack others. They need to hire people or get outside help with expertise in the skills that they don’t have. To do that isn’t a sign of weakness but strength.

A ‘star’ leader of a business who may be taking on too much should be a red flag.

8. Good leaders make fair deals that are win-wins for both sides.

I used to read books that told me that a good deal is one where both sides win, and I scoffed at that. I thought that there’d be winners and losers, and I’d want to be on the winning side!

Only with more experience did I see the merit in the cliché of a win-win. And that when negotiating a deal, it’s important to always think about what the other side wants from it.

Give a wide berth to leaders who boast of getting the better of a supplier or another business in a deal.

9. Quality businesses make tough decisions early.

Crises tend to separate good businesses from bad ones. I regret not moving quickly enough with a few decisions at the start of Covid. That cost us time and money.

I remember working at an Asian stock brokerage during the 2008 financial crisis. Very early, this firm cut the pay of all managers by 25%. It said that it did this to avoid firing people. Then, when things went further south, it used the same reason to propose a 20% pay cut for the remaining employees. That’s leadership.

In tough times, good companies make tough decisions and move quickly.

 

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au

 

18 Comments
Steve
January 23, 2024

One other story which I found very educational, clearly for lack of a better word.... A number of years we were travelling through a nice valley on a Sunday drive and happened on a small winery/B&B. The couple that ran it were retired and this was their dream retirement. And it looked bloody nice. Lovely high end B&B and a tennis court, vines etc. Definitely landed on their feet. So it was sad to see the same place a number of years later looking very shabby, weeds in the tennis court, vines dying etc. What happened? The husband got ill and was in a wheelchair and the wife simply couldn't cope on her own. If they had have sold a few years before they would have been golden. Not anymore... So the gigantic lesson here is if you have a small business and you run it as a family (husband/wife/partner) affair, your health is paramount. Be wary of starting a big venture in retirement with all of your super locked in. As Kenny says, know when to hold 'em but much more important, know when to fold 'em.

Lisa
January 22, 2024

All sound principles! I ran my own graphic design studio in Sydney for over 20 years. To keep me on track I created a mission statement to provide the highest quality design and production in the fastest possible time at the most competitive price. An edge worth considering is that taking advantage of all that technology offers can really improve overall product delivery.

Patrick Kissane
January 22, 2024

Prepare a Budget and Cash flow at the beginning of each year.

Pete L
January 22, 2024

Can I add just one observation, after having been in a kitchen manufacturing business with a “partner” and being “dudded” whilst I was still in Government employ.
Don’t enter into a partnership…….unless you are sleeping with them !

Nic
January 19, 2024

Great article. Love the 'client first then employee, then shareholder' focus. I also love that you have managed to keep the Managers and focus on making decisions that work for all/both parties. Well done! Do you still have the same type/category of clients stay at the motel or is it more niche?

James Gruber
January 20, 2024

Hi Nic,


Great question. Motels and hotels rely on consistent demand across a week. In CBDs, they typically rely on corporates during the week, and travellers (interstate and intrastate) on a weekend.


Our motel was always different. It had tradies during the week, and initially weekends were quiet, barring the occasional large wedding or sporting group. It's never been a tourist destination for travellers.


The mix has changed, though. We still rely on tradies during the week. These tradies are doing more infrastructure projects given the development in the area.


On weekends, weddings have died down. It's interesting because pre-Covid, wedding guests used to stay for 2, 3 or 4 nights. Nowadays, it's more often 1. Probably down to the expense of it.


We are also getting more sporting groups. The advantage of being on the edge of a metro area is that you have more space, and over time, sporting fields, netball courts, and fancy bmx bike tracks are built.


And as residential homes are built out our way too - it's one of the few areas in Sydney where there is still land to build on - we're seeing more families coming back to the area to visit loved ones.


So, our weekends are more full than they used to be. Also, we used to have a distinct lull in the summer months, yet that hasn't happened over the past few years.


Best, James

Steve
January 22, 2024

Sometimes the bleeding obvious isn't.... My wife used to work for a major corporate hotel chain outside Washington DC and they also did mainly weekday business travellers. One can expect a high repeat rate from these type of travellers, much more than one off trips like weddings etc. So, what struck me was the corporate approach, same as US airlines to overbook assuming a certain level of cancellations, but nearly every night my mentioned they had to "walk" a customer over to a competitor hotel as they were full. Not what you want at 10 pm after a flight etc. If it was me I would never book into a hotel that had done that to me, and given the expected high repeat rate of these travellers, how much lost business occurred?
The biggest lesson I saw with businesses in the US was small local businesses (like your hotel) were usually top class for service. Large corporates were very poor. Large corporates who had little international competition were by far the worst. And it all came down to customer service. Businesses are generally woeful at calculating opportunity cost, so it basically gets ignored.

James Smith
January 19, 2024

Just stick with writing finance articles. Running a business a like searching for fool's gold.

David
January 19, 2024

Excellent article.

Andrew Smith
January 19, 2024

Good read, reminds of an owner of English colleges in SE QLD on stresses of small medium business, talking about 'lying awake at night wondering how to make the payroll the following day'.....

Graham
January 19, 2024

A great article. I believe the right price for a business is that price, where if finance is sought, is that price where you can afford repayments during an extended downturn.
How long does a downturn run?
Do your risk assessment and borrow accordingly.
From an experienced business owner who came off second best borrowing from a big hearted big 4 prior to the GFC. Not another bank.

John
January 19, 2024

James, I admire those who give owning a business a red hot go, but I've never had the willingness to take the risk with a single asset. If you had simply put your money into US Big Tech, here are some examples of 5 year capital gains: AAPL 365%, MSFT 262%, META 145%, AMZN 79%. Modest dividends on top. What net return have you seen over the last 5 years, does that compensate for the time you have had to devote to it and would you do it again?

Ian Lange
January 20, 2024

It’s not always solely about making money, although any business needs to in order to survive. Owning and operating a business is also a challenge and a lifestyle that many people seek. Owning good stocks and doing well over time is great, but real life lessons come from doing what James has done.

Glenn
January 18, 2024

I’d also say understand what you buying…. I used to get amazed at the numbers of like new owners that didn’t know whether they had freehold or leasehold…. Didn’t know how much if any of the fixtures/ fittings/ equipment ( literally the beds and the tvs in the rooms) where going to stay; refused to have a lawyer look through the contract as that might cost a couple of grand….

Good read though.

Peter
January 18, 2024

Point 2. The price you pay is important. What is a good price? The price is always going to be variable due to changing economic circumstances.

Dr David Arelette
January 18, 2024

This is a first class practical list, well explained with actual cases - I will use in the coming semester in my Masters degree lectures - PhDs can fall into saying the same things in a complex way and make it a whole lot less useful.

Keith Brodie
January 18, 2024

I would add one more - cash is king. Make sure you've got more coming in than going out.

Angus Boyd
January 19, 2024

Agree

 

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