As seen in this month’s QHA Review – March 2019
This month we spoke about the issues sellers should consider when preparing their hotel business for sale. This article will approach the transaction from the buyer’s perspective. Some of the matters to consider in preparing to buy a hotel are:
Who is buying?
Often buyers find themselves in competition for limited stock and accordingly time is of the essence in securing a binding commitment for sale from the seller. One of the issues we find parties are sometimes unsure about is the purchasing entity and structure which they should use in a particular transaction. Buyers should obtain legal and financial advice to ensure that the appropriate structure and entities are in place when they are ready to make an offer. Consult your solicitor and accountant and put them on notice that you are in the market for purchasing a hotel and make sure that you have your advisers available when the time comes to commit to a transaction.
Seller’s commitment to sell
Another important issue for buyers is to try and secure a binding commitment from a seller. As often buyers are competing for limited hotel stock, the quicker a binding commitment from a seller is achieved, the more certain the deal will be. There is often a delay between completing negotiations and executing a contract. What can a buyer do to secure itself during this interim period?
Our advice to buyers is to require a seller to sign a short-form Heads of Agreement document incorporating the fundamental commercial terms that have been agreed and that pending the execution of the sale contract, the seller grants the buyer a period of exclusivity where negotiations with other prospective purchasers are suspended. Securing these sorts of commitments will assist a buyer in holding the seller to the transaction where otherwise the seller may be open to other offers. While the Heads of Agreement will not bind a seller to a contract, it can serve the purpose of holding it to promises about exclusivity.
What is the buyer getting?
What assets, liabilities and risks will be part of the deal? To answer these questions, a buyer will usually engage their solicitor or accountant to undertake certain investigations or due diligence. Due diligence is of most benefit when it can be completed before the final decision to proceed with a particular transaction is made. It may be conducted before signing the contract or alternatively the buyer may contract to buy the hotel but have the right to later terminate the contract if the results of the due diligence are unsatisfactory.
As we have said earlier the preferred position is to negotiate and execute a binding commitment with the seller and then have the right to undertake due diligence investigations. Types of investigations a buyer may decide to carry out may relate to many of the following areas: Financial; Structural and environmental; Liquor and gaming compliance; Heritage listing; Tenure and Leases (including for bottleshops); Local authority compliance; Employees; and Claims and litigation.
Who will be running the hotel?
The buyer will need to consider who will be the manager and nominee for the hotel and ensure those individuals are eligible based on their personal history. They will also need to (or to have completed well before settlement) all training required by the OLGR.
What practical training do we need?
The buyer should consider what help they expect or will need from sellers or their staff to ensure a smooth takeover of operations. It is generally most helpful for the buyer to be given access and training prior to takeover on settlement day to ensure the business can continue to trade with minimal disruption. The buyer will need to make sure that supply lists, service providers and the like are fully documented to make day-to-day operations easier following take over, particularly if key staff are not being retained. We have just mentioned a couple of major items here. The purchase process does involve many more steps than these, and we strongly recommend you getting comprehensive advice across the full range of issues when looking to buy.
If you are in the market to purchase a hotel for the first time, it’s important to ensure you have the opportunity to ask the right questions, and can make a fully informed decision. If you need any assistance in managing this transaction, please give me a call on 07 3224 0230.