Due Diligence, what is its importance when buying a hotel?

When making commercial transactions such as the purchase and sale of assets in the hotel sector, there is something that we cannot overlook, and that is the fact of carrying out a thorough study on the property we want to buy. This study is called Due Diligence.

If this has interested you, we invite you to continue reading this article where we explain what Due Diligence is for and why it is important when buying a hotel.

What is Due Diligence and what is it for?

First of all, we must know what Due Diligence is. This term, which in Spanish means “Due Diligence”, is defined as a process in which an investor carries out detailed research on a certain company or property (in our case it would be a hotel) that he intends to buy.

However, this term can also be used to refer to the candidate company’s research on the investor.

The investigation carried out is focused on reviewing and verifying information about the state of the company. That is, knowing about its financial, fiscal, operational and technical situation. Once this information has been reviewed, the interested parties will carry out the negotiation.

The main function of Due Diligence is to study the advantages and possible problems when purchasing a property. To do this, the aspects of the past, present and foreseeable future of the company are found out. So, the main focus should be directed at the risk-return aspect.

To have greater clarity about what Due Diligence is, we must say that it is not only an analysis of financial statements and contracts, but its function is also to be certain that the company’s strategy and the transaction go hand in hand.

This study must define if the business plan is viable, and if it is not, evaluate possible opportunities to build a new strategy.

Importance of Due Diligence in the purchase of a hotel

Knowing what Due Diligence is is knowing that it is a very important measure to successfully carry out the purchase of any company (which also includes hotels). Therefore, this measure is vital if you want to buy or invest in a hotel, since the risks involved in carrying out the transaction are considerably reduced.

Many times investors do not correctly analyze their investment, they do not carry out Due Diligence, but rather it is based on their experience or intuition and their emotional relationships. They carry out the negotiation without having detailed information and end up losing significant amounts of money and time. Problems that can be easily avoided with “Due Diligence”.

Furthermore, in relation to what Due Diligence is, we must affirm that it is a phase in the purchase and sale operation of your hotel and that it can be the difference between the success and failure of the acquisition.

What you should take into account for adequate Due Diligence

Financial aspect and taxes

Financial Due Diligence is one of the first steps that must be taken to have a correct hotel acquisition. For this, aspects related to whether the hotel has its tax obligations up to date are evaluated, that is, whether or not there are debts.

On the other hand, historical financial records should be reviewed. This includes profit and loss, depreciation and amortization. Indicators such as EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) are studied, which are earnings before interest, taxes, depreciation and amortization.

Legal aspects

This has to do with permits, licenses, contracts and agreements that the hotel has and that place a mandatory issue on it.

These obligations may be rental contracts, contracts with suppliers, permits for the handling of food and beverages or agreements with independent services (laundry, general cleaning, among others).

Additionally, the hotel’s compliance with service staff contracts or the protection of customers’ personal information should be reviewed.

Operational aspects

Reference is made here to the hotel’s business plan; to performance indicators; to enterprise resource planning; to the analysis of reserves to date; to the state of the facilities and furniture; and to study the competition.

The potential that the hotel has to generate more profits and income is also analyzed.

Revenue Management

In this case, the set of techniques that the hotel has to sell the ideal product, at the ideal price, at the ideal time and to the ideal client is studied. To do this, we must work on important aspects such as market segmentation, demand, distribution channels, prices, among others.

Visibility on the internet

It should be verified whether or not the hotel has a strong presence and reach on the internet. Here, elements such as the website, reservation channels, social networks, database, online reputation, among others, are touched upon.

There are other aspects that must be taken into account such as the appraisal, the energy certificate and decision making, to carry out a good Due Diligence.

As we can see, Due Diligence is a necessary and essential process if you want to successfully buy a hotel.