Hotel sales in the '90s: tactics for success

Facing a sale of a hotel is like waiting for out-of-town relatives to arrive. You know they will poke into every corner of your home; they may stay longer than anticipated; and, of course, you will be exhausted when they leave. Nevertheless, when the heralded day arrives, you -- as the ever-polite and gracious host -- will smile warmly and offer the welcome mat.

A successful sale, however, can be tackled with the same principles as the arrival of an on-slaught of house-guests -- be prepared and get organized.

Exposing the hotel to the buyer's due diligence is both a risky and daunting prospect. Proper preparation before anyone sets foot on the property can minimize both headaches to you and the chance of a failed sale. The confidentiality agreement and the indemnity agreement should be in place before the buyer's due diligence team arrives.

A myriad of individuals will be seeking information. Preparation should be done in advance. Now is the time to do 'house-cleaning,' from both an economic and a physical plant perspective.

Begin examining every aspect of your operations, starting with your books and records. Some purchasers or lenders will require that the books be converted to a "gaap" basis (generally accepted accounting principles). Detailed operating statement, for at least the last three years, should be ready with necessary backup.

One of the most difficult questions to answer in the middle of a sale is: "who owns the personal property?" Personal property may belong to the manager or may be leased or subject to personal property liens. Avoid any confusion. Prepare a detailed inventory of all personal property that will be included with the sale. If the property is leased or financed, clearly indicate the terms. This information can be prepared, an presented, in advance.

Be prepared to deliver copies of operating documents to the due diligence team. A detailed index of management franchise agreements, loan documents, service agreements, leases, reports and title exceptions will be helpful.

If money has been tight and the property maintenance has slipped, correct it before the hotel goes on the market. First impressions are often lasting ones.

Missing a key economic point early in the game can cost the acquisition, many items can be addressed in the early stages.

The letter of intent outlines the parameters for the transaction. If one is used, make sure it is carefully crafted, otherwise misunderstandings will arise and a negative negotiation atmosphere will be created. Don't forget to make sure that the letter of intent expressly states that it is not binding on the parties.

Any significant issues should be disclosed upfront. If it is a deal breaker, better to find out early in the game. Are there physical defects in or environmental concerns for the hotel? Is the loan non-transferable? Is there significant prepayment penalty? What about the management agreement -- can it be terminated -- if so, without penalty? There are a variety of other issues that may hinder the completion of the transaction such as liquor licenses and the WARN Act (Federal Worker Adjustment and Retraining Notification).

A hotel is an ongoing business which is management intensive and a rumor of a pending sale may harm the enterprise. Controlling the dissemination of information is vital to the completion of the transaction and the viability of your hotel.

Both the seller and the buyer should agree to plan which outlines how and when information is released. One challenge is keeping the senior level management personnel involved in the due diligence process to allow a prospective purchaser to 'learn' the business while maintaining the personnel's incentive to continue running the hotel, particularly if they fear for their jobs.

Finally, your attention must be turned to the documents that will ultimately, and legally, finalize your transaction. Even before you sign the letter of intent, consider the risk you are willing to take by providing representations and warranties. Some sellers prefer to take a 'hit' on the purchase price rather than having any significant post-closing exposure for a breach of a representation or warranty.

Others, who may be comfortable with the amount of due diligence that has been completed, believe that the risk of a lawsuit is minimal or are simply less risk adverse, will make stronger representations.

At a minimum, most buyers insist on receiving the routine representations and warranties relating to due authority, good title to personal property, statements that indicate there are no agreements relating to the hotel other than those presented, whether there is any pending litigation and whether the seller is in material default under any of the agreements relating to the hotel.

Other representations that may be desired by the buyer include: no hazardous materials impacting the property, the hotel is in good condition and repair and the hotel complies with all laws, rules and regulations.

The atmosphere surrounding a sale is stressful. Although not evil spirited, the buyer's due diligence team's job is to uncover and analyze the economic and legal defects associated with your hotel. Avoid becoming defensive. Instead be well-informed and prepared.

Ensure that your legal team is following the same game plan. First and foremost, your lawyer must understand your business objectives, as well as, the risks you are willing to take to complete the transaction. More than one horror story has been traded about the lawyer that killed the deal. Make sure your lawyer can not only accomplish your goals in a cost efficient manner, but he or she understands the spirit of the deal.

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