Manage Risk: Due Diligence

← Smart And Careful Due Diligence

Your due diligence for a hotel acquisition you are considering will test the investment by gathering critical information and analyzing it to determine if the acquisition meets your criteria for a wise or advisable investment. You as well as your bankers, management company, franchise company, investors and every other stakeholder will do their own due diligence. Some things may get studied more than once because everyone, including you, does due diligence with their own interests in mind. At the core, due diligence is about discovery which will enable you to make many decisions about the investment opportunity such as whether to proceed at all, how much to pay, how much debt you can carry and on what terms, whether you need equity partners, and how much working capital you will need until the hotel is cash positive. This article focusses on due diligence for an acquisition. For new development, there are additional steps and experts.

Thorough due diligence will highlight the following for you:

When you want to pursue a hotel, you start working with the broker or hotel representative. Then you do your own due diligence to decide if you are interested enough to dig deeper. This process of “digging deeper” involves identifying experts, negotiating for their services, overseeing and coordinating their work, listening and asking questions until you really understand the asset enough to do the necessary investment analysis. The kinds of information you will collect, working with your experts, include the following:

Some due diligence gives you facts, like there is a leak in the roof or mildew in guest room 310, or the lobby bathroom is ADA compliant, or there are no unpaid property taxes. Other due diligence gives you estimates, projections or expert opinions like “the hotel is projected to operate at 80 percent occupancy in year 3” or “the estimated value is $15 million”. Estimates and projections give you an idea of a future that is reasonable. However, estimates and projections may or may not come to pass so your analysis should accommodate different scenarios. Think of each estimate or projection as a possibility and expect that actual results will vary depending on a host of variables from weather to war.

You are not expected to be an expert in all things and even experts bring in other experts to provide the best (and unbiased) information and opinions. Consultants who specialize in various aspects of due diligence for hotels can be found at www.ISHC.org. The International Society of Hospitality Consultants (ISHC) is a professional organization known for its highly regarded members. When you need a specialist, you can also get referrals from brokers, architects and designers, your brand representative, other consultants, your management company, other operators and other research. In each case, you should get 2 to 3 proposals and make a determination about whether you really need the service (sometimes you don’t) the quality provided, pricing, and ease of working with the specialist.