One of the most challenging and thus frustrating steps for the first-time hotel buyer is being selected or awarded the opportunity to purchase a specific asset. All hotel owners were first-time buyers once. Some built their reputations and gained experience as buyers while working for established companies, which eases the first-time process. However, many owners navigated their first acquisition with the assistance of brokers and attorneys. You can make yourself more likely to be awarded a deal by understanding the buyer selection process.
The broker’s process
To do the job well, the broker who is looking for the highest price the market will yield from the buyer with the greatest certainty of closing, will advocate for a particular buyer. The broker:
- First goes to preferred buyers with whom he/she has closed deals with in the past and who have repeatedly performed as expected. By your second or third hotel, you can be a preferred buyer.
- Also goes to a larger universe of buyers with the hope of creating a larger market and pressure to bid higher prices and better closing terms.
- Interviews buyers and often checks in with his or her network to evaluate how a particular buyer performs – do they re-trade, are they on-time throughout the process, are they easy to work with, do they deliver on their commitments, can they get financing, have they closed.
- Verifies what he/she can – reasonably identifying the location of existing equity, talking to the buyer’s prospective lender, checking references provided, touring hotels that the buyer owns, etc.
Navigating the first-time hurdles
The First Time Buyer is clearly challenged but still in the game and able to navigate well defined hurdles.
- Learning curve: There is a lot learn in the process of acquiring a hotel. Every hotel deal is at least a little different so there is a learning curve with every acquisition. But the first acquisition takes an extra willingness to ask, listen, research and act in unfamiliar ways. It isn’t rocket science but learning takes diligence. As a first-time buyer:
- Invest more time and work into due diligence before being selected – making the broker and thereby the seller more comfortable that you’re ready.
- Share your due diligence summaries and deal assumptions with the seller and broker – proving your competence and that your work strongly supports your decision to buy.
2. Credibility: Sellers, lenders and brokers want the deal to close. They expect the best odds of closing to come with the most credible buyer. Buyers who have failed to close get a reputation and may not be the favored candidate when there is a choice. However, buyers who have strong balance sheets and have closed on time in the past, have an advantage. As a competitor for a hotel acquisition, particularly as a first-time buyer, you need to build credibility. This includes presenting yourself as willing and able to close. Whatever your inner feelings at any moment of uncertainty, this means presenting yourself as professional, confident, reasonable and competent.
- Make a desirable offer for the property to qualify as the purchaser who will get the broker and seller the highest price the market will bear. This may be a premium over the price a preferred buyer might offer – though painful, it may be realistic to get your first deal.
- Consider doing your first deal with a partner – this may be an equity investor that has more experience or an operating partner on your team – the goal is to bolster your credibility.
- Consider offering hard earnest money – putting a significant non-refundable financial commitment on the table speaks loudly to your deal commitment to the owner and broker.
- Be very careful about re-trading. Sometimes circumstances require an adjustment, like a material restatement of financials or an undisclosed necessary repair like substantial mold. But do not get a reputation for getting into contracts you intend to change.
- Capability: No one wants to get close to closing and find out that the buyer doesn’t have the funds. The earlier and more clearly you can demonstrate to the broker that you have more than sufficient funds, the more desirable you will be as a prospective buyer. Realism is part of this. If you can raise $10 million, it isn’t credible to reach for a $20 million hotel. Hotel prices may or may not be negotiable depending on the seller, the competition among buyers, and how realistic the asking price. But be realistic about your negotiations or you will lose credibility.
- Provide proof of your equity to remove the concern that you won’t be able to close. It isn’t realistic to raise your equity after selection.
- Identify your lender to the seller/broker and ask the seller/broker to call your lender and discuss your qualifications. This bolsters your reputation as a qualified businessperson and removes another concern about your ability to close. If experienced buyers don’t choose to do this, it improves your position relative to the competition.
- Compete for hotels for which you can be a competitive buyer. Hilton, Marriott, Hyatt, and other premium products are likely to have more major players competing for the acquisition. Discuss the level of competition with the seller’s broker and let that help form your decision.
4. Promptness: There is a truism that “time kills all deals”. The longer a deal is in process, the more likely it is that something – change in the market, change in hotel operating performance, change in the lending environment, or cold feet on the part of the buyer or seller – will cause the deal to tank. So, everyone shepherding the deal to completion including you, the broker and the seller, should be interested in moving the process along. This means you keep everyone on your team on track and moving forward promptly including accountants, management, appraisers, lenders, surveyors, other due diligence specialists, and attorneys. You stay professional, call them periodically with questions or to check-in, but it’s your role to keep them moving. If you wait until the due date to check on progress, you will miss every deadline.
5. Decisiveness: You are supposed to question yourself throughout this process. That’s why you do due diligence – to make sure that that this is a good deal for you and your investors. However, to be a successful buyer, once you get your questions answered to the extent practical, it’s time to make the decision to move forward or exit the deal. It is especially hard for first-time buyers to step off that cliff and decide to close on the sale. Dithering doesn’t help. When it’s time to make the decision, act decisively and with confidence.