As featured in the latest edition of the QHA Review
Whether buying or selling a hotel, undertaking appropriate due diligence can help the parties understand the transaction and identify potential issues before they arise.
In this two-part series, part one focuses on the information buyers should consider requesting, and sellers should be prepared to provide, before entering into a contract. Part two will consider searches and other investigations that can be undertaken as part of the due diligence process.
Starting with an RFI
An important part of pre-contract due diligence is the request for information (RFI), generally issued by a prospective buyer or its advisers seeking information and documents about the hotel, its business and operations.
However, sellers need not wait for an RFI to arrive. Before going to market, a seller can anticipate the information prospective buyers are likely to request and begin compiling it in an electronic data room. This can help identify missing documents or potential issues before a sale, while allowing prospective buyers to undertake their initial due diligence efficiently.
What information should be considered?
While every transaction is different, common types of information include:
- Liquor and gaming – Relevant information may include liquor and gaming licences, approved plans and conditions, approved trading hours, gaming entitlements and details of any compliance or enforcement issues.
- Property and occupancy – For leasehold hotels, the lease will be a critical document. Other leases, licences, subleases and occupancy arrangements should also be identified, including those relating to detached bottle shops forming part of the business and any arrangements under which third parties operate or occupy parts of the premises.
- Business assets – Details of the plant, equipment and other assets included in the sale should be obtained, including any asset registers. Assets that are leased, financed or owned by third parties should be clearly identified.
- Material contracts – These may include beverage supply arrangements, equipment leases, maintenance and service agreements and other important contracts. Consideration should be given to their key obligations, whether they can be transferred or assigned and whether the other party’s consent is required.
- Employees – Relevant information may include employee details, terms of employment and accrued entitlements.
- Financial, compliance and other matters – Financial statements, management accounts and other information relevant to the financial performance of the business will ordinarily form an important part of due diligence and should be considered with the appropriate accounting and financial advisers.
Buyers should also consider requesting relevant development and building approvals, details of significant alterations to the premises and information concerning complaints, notices, regulatory action, insurance policies and claims or current or threatened disputes.
Look beyond the documents
Due diligence is not simply about populating a data room. Done well, it can make the transaction more efficient and help the parties identify and address key issues at an early stage.
For sellers, preparing the information before going to market can help identify missing documents or potential issues while there is an opportunity to address them. For buyers, the information provided should be carefully reviewed to ensure it reflects the hotel and business they expect to acquire. That review may prompt further RFIs or identify matters requiring further investigation or contractual protection, such as appropriate warranties.
In part two, we will consider the searches and independent investigations that can be undertaken after the parties have entered into an agreement.
If you are considering buying or selling a hotel and would like assistance with the due diligence process, please contact Curt Schatz at Mullins Lawyers.
