Maximising the Value of your Hotel Sale
Selling your venue can be a stressful and anxious time as you prepare to realise the value of one of your largest assets that you’ve worked at building for many years. In preparing for this, a little planning goes a long way – and many of the steps you take represent good housekeeping anyway.
By taking a few essential preparations, you can minimise time on market and minimise transaction costs for both parties, leading to an easier transaction and a potentially better net result.
Quality Financial Information
Making sure your financial information is complete, accurate, reliable and timely is an essential starting point in the sales process. Any purchaser coming through and doing due-diligence on your hotel will be looking to build confidence that the financial earnings history is credible and that the purchase price he/she is paying is sustainable.
Consider the quality of the monthly reports and whether they are detailed enough for a purchaser to gain a good understanding of each department of your hotel. For example, a purchaser should be able to clearly see the contributions from each department such as bars, food, accommodation, retail liquor and gaming. The departmental reports should show the sales, allocated cost of goods sold, direct labour and direct expenses applied. Likewise, the hotel’s budget should also be presented in the same way with detailed assumptions that demonstrate the future potential of the business - ideally referenced to industry benchmarks to give credibility to the forecasts.
If your financial reporting is basic, implementing a new accounting system and management reporting regime does not need to be complicated nor expensive. All businesses can benefit from timely and accurate financial information to aid decision making.
Most purchasers reviewing your hotel will want to get an understanding of the likely future performance of the hotel and a well presented business plan will assist them with this assessment.
This plan should encompass each area of the hotel and cover:
- Detailed SWOT analysis identifying areas of improvement and leverage for the business.
- Functional plans with measurable goals for marketing, operations, finance and people.
- Departmental plans for each of your bars, food areas, retail, accommodation and gaming.
- Capital expenditure plans and likely returns – for both maintenance style capex (e.g. routine gaming machine upgrades) as well as business improvement capex (refurbishment of areas or new business additions such as detached bottleshops).
- A detailed budget for the hotel broken down by department and phased monthly to take into account the seasonal nature of the business.
The way you present your venue for inspections is really important. As they say “you never get a second chance to give a first impression”. Before you list the venue, consider any outstanding repairs and maintenance issues that need to be addressed so that your business looks its very best when potential buyers come through. Remember also that it is not uncommon for some potential buyers to visit your venue “undercover” during a sale campaign to get an independent feel for your business.
If you have rooms or storage areas cluttered with unnecessary equipment, consider selling it or storing it off-site. Likewise, if you have areas that are currently not used by the business, consider cleaning these up so that a potential buyer is able to consider options for these in their assessment of the future opportunities for growth.
The hotel industry is a people-driven industry and the venue performance is inextricably linked to the quality of your team. Moreover, hotels demonstrating professional and high levels of customer service will achieve a higher sales price.
Presentation of a strong and capable team to a purchaser will give confidence in the future earnings potential of the hotel and lowers the risk profile around staffing. Additional value is also achieved if a potential purchaser is able to gain certainty that key employees will remain with the organisation post sale.
To keep momentum moving when you have someone interested in buying your hotel, it is important to have all of the relevant information readily available for both a high level review and the more detailed due diligence. Your sales agent will be able to assist you with the collation of data that can be stored in a cloud based directory. As a minimum, you should include 13 essential items on hand to produce upon request from a prospective purchaser. Visit www.hanrickcurran.com.au/hospitality for the detailed list of the essential vendor data room documents.
It is extremely important to get detailed tax advice on the structure of the sale agreements before they are entered into (and even before an offer is agreed with a purchaser) to ensure you get the best possible outcome and minimise your capital gains tax exposure. A mistake here can be very costly.
This is a complex area of tax law that requires careful consideration; particularly if you have multiple entities that run the business/freehold and you are potentially eligible to claim the Small Business Capital Gains Tax Concessions. A detailed analysis of all your assets and liabilities is required as most venues with gaming easily fail the small business turnover test and need to revert to the “maximum net asset value” test.
Negotiation Strategy and Contract Structuring
Prior to entering into a negotiation on price and terms for the sale of your hotel, be very clear about your expectations and how you arrive at your asking price. In particular, if you are presenting a view on current earnings and earnings potential, then make sure your representations are backed up with credible assumptions and schedules that show how they are made up. Any add-backs need to be properly explained and be realistic. An unrealistic price expectation that is poorly explained will damage your credibility in the market and could turn away potential purchasers.
As negotiations progress regard should be had to the structuring of the contract to ensure optimal taxation outcomes for yourselves, including GST free sales of a going concern and timing of relevant CGT events.
Pre-completion review of settlement calculations is essential to ensure correct adjustments are made for items such as employee entitlements, accrued rebates and correct cut off for debtors and creditors.
If you are considering the sale of your hotel in the short to medium term, then seek the assistance of one of our specialist Hotel advisors, to ensure you secure the highest after tax proceeds from the sale. In Brisbane contact Kim Hanrick Tony Hunt or Peter Maletz on 07 3218 3900 to arrange a complementary discussion of your plans and needs.