How to maximise value when selling a hotel - Crowe Ireland

How to maximise value when selling a hotel

14/01/2020
How to maximise value when selling a hotel - Crowe Ireland

The sale of a hotel can be a complex one, as it involves selling a property asset as well as a trading business.

While most market analysts will look at a multiple of profit and yield when reviewing a hotel’s valuation, each hotel is a unique proposition and the various components of the asset and the business, along with the forecast of the purchaser, will ultimately determine the sale price.

In advance of putting your hotel on the market, it is important to stand back and take a critical view of your property and business from a vendor’s perspective to fully understand the relationship between the asset and the operation.

Here are five key areas that need careful consideration and will pay off in terms of enhancing value and speeding up the process.

1. Determining value
You should consider three key components that determine the value of your hotel:

Profitability: How much does the hotel make from operations? A vendor will look at not only the profit line, but also revenues and profit conversion.

A vendor will look at the various cost elements to determine if they can reduce these through purchasing agreements, centralised functions or improved operations. They will also review the revenues by department to determine if they can increase existing revenues or create new lines of business.

In advance of putting the business on the market, look to see if you can identify any areas for improvement. This will not only make your business more attractive to a potential purchaser, it will translate to a higher sale price.

Condition of property: How much money has been spent on the hotel over the last number of years and what is required moving forward? If a large amount of investment is required, it will affect the purchase price.

While ensuring the hotel is well kept, clean and organised may not influence the price significantly, it does show that the owners have had a positive focus on the maintenance of the physical property. The buyer’s impression of how well maintained the hotel is will influence their provisions for further investment and will affect the price they are willing to pay.

Location: ‘Location, location, location’ is often quoted as the most important consideration for any property, and it is a critical element in determining the success of a hotel business.

While you cannot physically alter the location of your hotel, it is important that you understand and maximise the value of where you are situated. Over the last number of years, as demand has increased significantly, Dublin city centre hotels have achieved the largest yields across the various types and classification of properties.

However, successful hotels outside of the city centre have come to understand the pros and cons of their location and use marketing to improve access and perceptions of their situation. With improvements in public transport, locations outside of tourist centres can have many benefits to visitors, especially in periods of peak demand or around major sporting, cultural or entertainment events. Similarly, hotels with locations previously off the beaten track have learnt to engage with regional tourist initiatives like the Wild Atlantic Way to fill lower occupancy times and improve year-round profitability levels.

2. Due diligence
A potential vendor will typically undertake various forms of due diligence relating to the property and business in advance of purchase. The level of due diligence will vary based on whether they are buying the entire business or just the property.

Legal due diligence will involve a review of all contracts, including licenses and agreements, leases, employment, customers, suppliers, etc. In addition, any ongoing or potential litigation will be reviewed.

Property due diligence will include a review of all the property aspects. The hotel title and any statutory documentation, including planning records, will be reviewed. In advance of a sale it is worthwhile checking that all is in order, as any issues with title or planning in particular will delay or cancel a sale.

A building survey and technical due diligence could highlight issues with the structural integrity of the building or lack of statutory compliance, for example with updated fire regulations, which has affected the timing of hotel sales in Ireland over the last number of years.

It will be imperative for a potential vendor to have pre-empted due diligence requirements before launching to the market. This includes financial records, employment data and any licenses, as well as sub-leases or agreements with third-party operators. All of these can affect profitability and potentially deter potential purchasers from buying the property.

It is advisable that a data room be set up to collate and hold soft copies of documents and reports that will be required to support the sale.

3. VAT
If you are selling the hotel property, you will need to establish if you are required to charge VAT and/or if there is any VAT clawback. Alternatively, if you are selling the company, while VAT will not be charged on the shares, the purchaser is likely to insist on being given the full VAT history of the underlying property. The VAT history of a hotel trading company can be complicated. For VAT purposes a property will have a 20-year VAT life. Refurbishments on the other hand have a 10-year VAT life.

It is important to have expert advice to navigate this complex area and ensure that appropriate VAT clauses are included in the sale contract

4. Asset versus share/company sale
A potential purchaser will consider whether to purchase the asset or the company. There are several considerations in determining this – legal, financial, tax and operational.

For example, under normal circumstances the acquisition of a hotel property would attract stamp duty at a rate of 7.5%, whereas in a hotel company purchase, where the shares in a trading company are acquired, they might expect to pay only 1% stamp duty.

It is important to get expert tax advice in relation to the rate of stamp duty that applies to your hotel sale. Any tax efficiencies that the purchaser can achieve will have an impact on the price you could achieve.

The purchaser will carry out due diligence on all aspects of the property and business to satisfy themselves as best they can that there are no hidden tax or other financial liabilities that could have an adverse effect on the business post acquisition.

Capital gains tax (CGT) will need to be considered. CGT will be charged on any gains arising on either the disposal of the shares in the company or the disposal of the property itself, and at a rate of 33%, this can be sizable for any seller. Where there is a large latent CGT liability within the company, the seller may prefer to sell the company as opposed to the property. This, however, may not always be in the best interests of the purchaser.

There may be certain CGT exemptions available on the disposal of hotel properties purchased between 2011 and 2014 where the property has been held for more than four years. Prior to 1 January 2018, the holding period was seven years.

It is important to fully understand all the different tax liabilities arising from the potential transaction. A specific tax document should be prepared and included in the data room to support the sale process.

5. Financial data
One of the key considerations in any hotel purchase will be the profit and loss account. Any potential purchaser will want to understand the financial performance of the hotel.

The Uniform System of Accounts for the Lodging Industry was first published in 1926 and has become the basis for accounting within the hotel industry. While not all hoteliers use this method, much of the analysis and key metrics have become a benchmark for the industry. By analysing your P&L in detail, you may uncover areas of inefficiency that can be improved in advance of putting the business on the market.

Many buyers will use borrowings to support the transaction and lenders will require financial information. Banks will benchmark against industry standards and other hotels on their books, so providing your information on the same basis streamlines this process for the buyer and the bank. It also avoids the risk that income or costs might be misallocated and wrong conclusions drawn as to the strength of the business.

Finally, because a hotel is a trading asset, there are times when an off-market transaction may be optimal. For example, in the case of hotels with an active wedding business, a public sales process could damage confidence and have a negative impact on business. Similarly, a potential sale could affect the hotel’s ability to secure staff in what is a very tight labour market.

In conclusion
There is a wide range of factors to take into consideration before selling your hotel. In this article we have highlighted five key areas to consider. It is important to plan ahead and to get your house in order as much as possible so that you can maximise your sales price.

With over 75 years’ experience in the Irish hospitality industry, our hotel, tourism and leisure team is uniquely qualified to add value to any hospitality project or hotel sale. Contact a member of our HTL team to find out how we can add value to your business.


Naoise Cosgrove, Managing partner - Crowe Ireland
Naoise Cosgrove    
Managing Partner
Corporate Finance
Partner, Corporate Recovery - Crowe Ireland
Aiden Murphy  
Partner
Corporate Recovery
Mairea Doyle Balfe, Director, Hotel Tourism & Leisure - Crowe Ireland
Mairea Doyle Balfe
Director, Hotel Tourism & Leisure