What is a Hotel Acquisition?
A hotel acquisition is the process of one party purchasing a hotel business from its current owners. These types of transactions can be asset purchases (e.g., buying the real estate, furniture and fixtures, supplies, etc.) or entity purchases (e.g., buying the actual business entity ), depending on how the deal is structured.
Hotel acquisitions has become a popular strategy for many large hotel operators, since an acquisition allows them to buy an operating business without the initial building costs, and leverage their existing operations to improve efficiencies to create more profitability. For example, a large hotel operator can buy a smaller hotel or hotel group, and add that hotel to their online booking engine to increase revenue and exposure for that hotel.
When buying a hotel, it is important to work with a lawyer that has experience within the hospitality and leisure industry that has worked on similar transactions before. A lawyer with this experience will know the due diligence needing to be done, as well as handle the purchase agreement and necessary closing documents to make sure the deal closes smoothly and all parties are protected.
Steps Involved in Hotel Acquisition
Successful purchasers will follow a series of steps in a logical process to acquire a particular hotel in the United States despite numerous variations. These include the following:
- Determine the Acquisition Criteria. From a purely business standpoint, the ownership rationale can differ from active to passive involvement. A few owners position strategically for the short term, while a few others take a longer view. In other instances, some owners prefer to base their investment on return requirements. This is usually based on alternative investments available, strategic considerations, and other important factors.
- Identify Potential Acquisition Targets. After the acquisition criteria have been decided upon, the buyer will inform the market that he or she is interested in acquiring hotels. However, the respective buyer must also meet the specified criteria. Asset managers, hotel companies, brokers, and industry consultants are among those contacted.
- Assemble the Acquisition Team. Did you know that a hotel operates both as an operating business and as real estate? That is why an investor must always seek advice from those familiar with the hotel industry. This person will assemble a team of professionals who will assist in evaluating a hotel property before the acquisition process.
- Evaluate Potential Targets. Many properties will be ruled out during the initial screening process. It is usually based on a review of earlier submitted offering packages, knowledge of the buyer or consultant, and the acquisition criteria itself.
- Calculate the Bid Price. Perhaps the most important element in the respective buyer’s calculation of a bid is the analysis of the potential earnings. Most of them will be derived from the hotel itself. The buyer must make assumptions regarding future market conditions and the hotel’s performance within the same market to develop the proposed acquisition price.
Elements to Include in a Hotel Acquisition Agreement
A hotel acquisition process must always be followed by a legal document that acts as a contract between both parties. The things to include in this agreement are:
- The purchase price and any adjustments
- Third-party financing details
- Purchase-money financing by the seller
- Condition of the premises
- Limitations on title and possession
- “No shop” or “standstill” provision
- Default by either party
- Indemnifications
- Items included in the purchase price
- Items excluded from the price
- Prorations
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Deal Points to be Discussed During Hotel Acquisition
- Property Description: A description of the particular property being sold or leased should be a major point of discussion This is not just a legal description but is sufficiently detailed so that both parties understand the nature of the specific transaction.
- Selling Price: A description of the terms of the hotel acquisition transaction, the payment, and the financing structure.
- Due Diligence : The purchaser is always allowed to perform documentation, review, and analysis of the hotel before the acquisition process. The seller must always give the purchaser access to its property for such matters.
- Contingencies: Specific circumstances that allow either party to void the deal for the hotel acquisition process.
- Seller’s Representations: Representations that are made regarding the respective hotel owner’s legal ability to complete the dates to close the deal.
Members of a Hotel Acquisition Team
As we mentioned earlier, interested investors must assemble a team of professionals before they start the hotel acquisition process. These professionals will have extensive knowledge of the hotel management industry, including its legal aspects. The members of this team include:
- Broker: This particular professional may represent either the buyer or seller of any kind of lodging property. The broker helps market a specific property and brings the seller and buyer together. The same person also helps negotiate and facilitate a sale. A broker’s fee is a percentage of the total sales price of the hotel.
- Appraiser: It is advisable for the investor to select an appraiser, a professional who has appraised similar properties, or those in the market in question.
- Accountant: This professional’s review of the property’s books and records will help determine whether funds have been applied. It also helps check whether there are adequate financial controls and reporting systems.
- Market and Financial Consultant: This professional is also called upon to ascertain how a hotel might perform. The person also helps analyze what it would take for the hotel to achieve desired profit or investment goals. Such consultants evaluate all the prevailing market conditions and prepare projections for both the market and the property. The financial consultant can further review revenues and expenses to assemble a perfect business plan.
- Hotel Attorney and Legal Consultant: Attorneys specializing in hotel work can formulate the acquisition strategy. They can also assist in identifying and coordinating acquisition team members and spot “show-stopper” issues. These professionals further advise on the terms and structures of transactions. They deal in legal and due diligence issues related to some pending or threatened litigation and regulatory matters, including contracts and title issues.
- Architects or Designers: The architect will be reviewing all the specifications set forth by the owner. This applies if the acquisition is to involve renovation or upgrading of the property. This professional architect can coordinate the activities of all other members of the team who will work on the physical property. Examples include engineers and interior designers. The architect can review existing and potential compliance with all building codes by analyzing the existing property and any planned renovations.
- Engineer: A qualified engineer and the associated team should review all the physical components of the property. This includes mechanical, plumbing, electrical, and structural elements.
Key Terms for Hotel Acquisition
- Allocation: The action or process of giving or sharing something, like tasks or money, for different reasons.
- Bid-ask Spread: The amount by which the asking price often goes on to exceed the bid price for an asset in the respective market.
- Global Distribution System: An important system that links reservation inventory under a single computer-based network.
- Average Daily Rate: A system that measures the average rental revenue that someone earns from an occupied room per day.
- Length of Stay: A specific figure derived by dividing the total number of room nights by the number of room bookings.
Final Thoughts on Hotel Acquisition
Hotel acquisition is not an easy process and often requires careful consideration. That is why investors analyze every single point before proceeding forward with buying the specific property. Meanwhile, the acquisition process involves certain steps that must be followed rigorously to ensure a smooth process. Now, the question is - will both parties be able to accomplish the acquisition process without any external help? The answer is no. Each party must seek help from a professional lawyer to ensure the hotel acquisition process is completed efficiently.
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