What is ‘hotel due diligence’?
Hotel due diligence is the thorough and wide-ranging investigation into a hotel property when considering for acquisition. It is an essential step for would-be hotel buyers as it analyses all aspects of a hotel’s business. This lets the buyer know each and every aspect of the hotel and helps avoid any surprises that could come later. Ultimately, it informs the buyer’s purchasing decision, and can help guide hotel strategy.
In this article we look at the five main areas to consider when carrying out your own hotel due diligence. Before we begin, it must be said that hotel due diligence should never be rushed or compromised in any way. It is a crucial step of the hotel investment process that must be all-encompassing and analytical. If not, it can negatively impact your ROI.
The 5 essential hotel due diligence areas:
All of the hotel’s contractual obligations, including licensing, permits and agreements should be examined by a lawyer to ensure that everything is legal and in good order. This can include property contracts, rental and/or mortgage contracts, supplier agreements, food and beverage licenses and outdoor seating permits.
Due diligence should also assess the hotel’s compliance with employment law, health and safety and guest data protection. It should also examine any pending court cases against the hotel.
You will want to view and thoroughly inspect all areas related to the hotel’s operational structure. This should first include a review of the hotel’s business plan. This extends to an analysis of all data on reservations to date, employees and suppliers. It extends to the hotel’s competitiveness, the maintenance status of the hotel property and operations forecasting.
Operational analysis can also include the potential for increased business, through reservations (an increase in price, decrease in cost or increase in number), or other forms of revenue generation.
Does the hotel have a revenue management system (RMS) in place? If so, does it provide optimal results for the business or is there room for improvement? What resources have been invested in RMS? Is the hotel’s system outsourced or internal? Has there been demonstrable historic purpose to improve and refine the RMS in pursuit of continued improvement?
An analysis of the hotel’s RMS structure will provide insights on the importance that driving revenue has represented for management.
Taxes and Finance
This area of focus is arguably the most urgent of all. The financial and tax positions of the hotel can make or break your interest in an acquisition. Is the hotel up to date with all tax obligations? Are there possible tax reduction routes that the hotel has not implemented? What are the forecast tax increases in line with projected increase in revenue? Historic copies of all tax records should be included as part of your due diligence.
Historic financial records are essential here, including profit and loss statements and data on the earnings before interest, tax, depreciation and amortization (EBITDA). The due diligence step must also include a scrutiny of all major KPIs used by the hotel. These typically include gross operating profit per available room (GOPPAR) and total revenue per available room (TREVPAR), among others.
Digital Footprint and Mobilisation
With the dominance of the internet for the hospitality sector, a hotel simply must have a strong presence and digital reach. Hotel due diligence here includes a review of all customer engagement channels. This includes email marketing (and customer database management), social media accounts, and of course, the hotel’s own website (including inbound marketing/sales strategy in action).
An analysis of the hotel’s presence on third party booking and review sites is also crucial. This step should also include an analysis of any SaaS systems that the hotel uses, website traffic analysis and digital marketing footprint (domain strength, keyword rankings and so forth).
The final word
Due diligence gives you a much better understanding of the hotel and uncovers any surprises, be they good or bad. It is highly risky to forego this step. Once complete, you will be able to better evaluate your offer to reflect the due diligence findings, or revoke your interest entirely.
More info: www.vojo-ventures.com
Patrick Landman @ Vojo