Like any business, hotels have several moving ‘parts’ that need to work together so that the machine runs smoothly. If you are thinking of buying a hotel or similar hospitality business, make sure you are familiar with these unique features before you sign on the dotted line.
Here are our top 5 things to think about before agreeing to buy a hotel or pub:
1. Getting finance
Whether you can obtain finance for the purchase can make or break your dream of owning a hotel. If you need to borrow money from the bank to fund the purchase, having prior experience in the hotel industry will be a big factor in securing finance.
If you do not have any prior experience in the industry, make sure that you are able to formulate a business plan for your lending adviser to look at. You will need to demonstrate that the business will be viable. A bank is unlikely to lend you a large sum of money if the business is likely to be an unprofitable liability. If you have an accountant, they should be able to assist you with this.
As part of this process, you should do some due diligence investigations of your own, and look at the financials of the business, and take particular note of the hotel’s trading history, cash-flow, and balance sheet. The vendor should be happy to (and in some cases, they are required by law to) provide you with that information before you sign any purchase documents. If not, consider it a big red flag!
Another way to get over this hurdle is to partner with someone who does have experience running a pub or hospitality business.
2. Stock and Valuation
Do you know exactly what you are buying? If not, then one of the first things you should do is ask the vendor. It is important to know exactly what is included in the purchase price, to avoid any nasty surprises on your first day of trade.
An inventory should be prepared that outlines every item of stock that is included in your purchase. If an inventory has not yet been prepared, you should find out when it will be prepared and by whom. Ideally, an inventory will be prepared and presented to you for consideration prior to any sale documents being signed. In some cases, the inventory may not be prepared until after signing, but you should still be able to get out if the inventory is more than you can afford (i.e. you should still have the benefit of a ‘subject to finance’ condition).
Prior to finalising the purchase, you should be fully comfortable in your knowledge of what is included in your purchase price. If you have any doubts, you should discuss these issues with the vendor before signing any documents.
Valuation of stock is an important part of the business sale process, as a component of the purchase price will be allocated to stock value. You should find out who is actually going to value the stock.
Often the quickest and easiest way for stock to be valued is for the vendor and purchaser to simply agree on value. This is usually more cost effective than engaging a third party to do the valuation, and is a good opportunity for you to attend the premises and have a good look at the stock you are contracting to purchase.
If the hotel is being sold through a broker, it is possible that the hotel broker may wish to be engaged to value stock. You should ensure that if this is the case, you are informed of any commission the broker may expect to receive, keeping in mind that if the commission is a fixed percentage of the stock valuation, there may be a conflict of interest. The business sale documents may have the broker written in as the stock valuer – you should keep in mind that you are under no obligation to proceed in this manner if you and the vendor think you can value stock yourselves and are happy to have the contract amended to reflect that.
The last option for valuation is an independent third party valuer. You should find out what the valuer’s fees are before you engage them. It can be useful to have an independent third party valuer as a back-up option, if you and the vendor do not agree on valuation. An independent valuer is a better option than the broker, as the independent valuer will not have the conflict of interest to potentially overvalue the stock you are purchasing.
Licences attached to the business will be one of the most important things you need to consider. Imagine going to the pub only to be told you can’t purchase a beer!
The most common licences for hotels are liquor and gaming, though in some cases, a hotel may have a branding or intellectual property (IP) licensing agreement with a major supplier (think any of the big breweries) to use their branding, barware and stock exclusively, in return for a commercial association with that brand.
You should ensure that all of the hotel’s licences are current and are not subject to any restrictions that will unreasonably impact your business. The licences should be transferred over into your name, so that they are effective on and from the settlement date.
If you wish to have gaming machines at your hotel, make sure that you are familiar with how gaming machines are controlled in your state or territory and the entitlements to acquire a licence or buy/sell machines.
You also need to check that your employees have the appropriate licences to serve liquor and work as gaming room attendants. The liquor and gaming regulator in your state or territory can help you with these checks.
Do you know whether the assets of the business are free from liabilities? A check on the Personal Property Securities Register should confirm whether there are any registered security interests on any of the hotel’s assets. This could include trading stock supplied under supply agreements, bar taps or plant and equipment used in the hotel business, just to name a few.
Prior to agreeing to purchase the business, you should confirm that you will receive clear title to all of the assets (or you have specifically agreed to take on any outstanding liabilities) to avoid frustrated creditors knocking on your door later down the track.
5. Information hand over
What kind of information about the business is being handed over to you at settlement? This may seem like a simple question to ask, but unfortunately, we have seen new business owners unable to log-in to suppliers’ websites or to the business’ email accounts, because log-in information was not handed over at settlement and the vendor has no legal obligation to hand over that information.
Your purchase contract should provide for the vendor to hand over online account details, financial, trading, and any other sensitive information that you will need to hit the ground running from settlement date.
There will probably be be several other issues that you need to think about. Every hotel has its own character, and its own unique quirks to consider.
The information contained in this post is current at the date of editing – 26 July 2023.