Hotels and resorts are usually sold as operational entities. As such all operational agreements made with the previous owners are passed on to new owners to be honoured. This includes, for example, new bookings, equipment hire and staff contracts. This makes the sale of a hotel different from typical property transactions, where the property is sold without such complications.
Typically, staff and customers can get nervous if they know a hotel is being sold, especially if they find out second hand, rather than from the owner themselves. As such it is very important to work out how to address the sale process with the key customers and staff. If key staff leave or bookings are not made, it will have a negative impact on the price obtained for the property, as well as on the earnings generated before the sale completes.
In addition, the hotel requires stock to function. This is usually audited on the day of handover, and a separate amount of money is paid to cover this, over and above the agreed sale price. This is not standard for property transactions, but is absolutely vital to both the buyer and the seller, if the property is to continue trading as well as it should. If a fair price were not paid for the stock, then the seller would try to reduce the stock on site, which could lead to shortages and potential customer complaints. This would impact on trading for the buyer. As the income earned from the hotel remains with the seller until it is transferred this lower income would also hurt the current owner as well.
It is also worth considering the impact of sale upon a franchised or managed property. Typically, there are clauses contained in various agreements that mean the transfer of these rights is not automatic, and the sale can be halted if the wrong person looks to buy the property. Alternatively, there may be a right for the management company to terminate the management contract and claim compensation in such an event.
Agree what is Required, Fees and Terms & Conditions
The first step is for the owner and their agent to determine what is actually required, and then to agree fees and the terms and conditions of the instruction. It might be at this stage that it becomes apparent that a sale may not be in the best interest if the owner, or that a different approach may realise more value from the asset. It might, for example, become apparent that holding the property for a short while whilst changes are made to the business would allow the property to be sold for significantly more.
It is vital the terms of the agreement between the owner and the agent are agreed and are very clear from the outset.
The agreement may be for sole or multiple agency, it may be an off-market transaction or a full marketed campaign, and in certain circumstances certain buyers may be excluded from the process. It is important that all parties agree at the outset if the process is to be relatively trouble-free and uncomplicated.
Undertake the Initial Due Diligence to Ensure the Property will Attract Potential Buyers.
The due diligence work that is essential at the beginning of the sales process will include a full inspection of the property, so that “the good, the bad and the ugly” of the property are known to the agent. Opportunities to enhance trade will be discovered, as will defects or potential future problems.
Any defects can then either be addressed, or potential solutions can be considered, so the financial impact of such problems does not result in too low an offer.
The next step is to review, including details on the title (preferably a report on title), statutory documentation (including planning records), financial records and employment data. Any licences, sub-leases or agreements with third party operators will also be reviewed for their impact on the potential profitability, as well as looking at how these agreements may appeal or deter potential purchasers from buying the property.
Any treasure hunting opportunities will be sought out, and considered as to how they will best help sell the property.
Agree the Sales Process
The disposal method and process will be agreed, whether private tender, informal or formal tender of auction.
Private Treaty
The process of sale by private treaty is the method employed by most agents. It involves preparing descriptive details of the property and quoting a definitive asking price. Details are circulated and potential buyers may view the property and either agree to buy at the asking price or submit an offer to purchase. Agreement to buy at this stage is subject to formal contracts being prepared between the vendor and the purchaser and those contracts being signed and exchanged between the two parties. If several interested parties are introduced to the seller those parties will be invited for “best & final offer” thus ensuring the vendor receives the optimum price.
Pros
- Price is determined by the market
- Can generate higher sales prices than other methods
- Most buyers are comfortable with the process
Cons
- Very reliant on a good agent
- No transparency in the transaction
Auction
The property is advertised for sale by Auction, rather than at a fixed price. Those interested in buying attend a competitive auction, conducted by an Auctioneer, at which the person who bids highest buys the property. The successful bidder is legally bound to purchase when the Auctioneer’s hammer falls on his bid. He pays a 10% deposit there and then and has to complete the purchase on the stated completion date – normally 4 weeks after the auction date. The buyer has to arrange finance and make any enquiries (including carrying out a survey) before he bids. It is too late afterwards. Properties sold by auction usually only when there is likely to be strong competition, negating the problems that some potential purchasers may not be able to attend the bidding process.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- It appeals to cash buyers
- Speeds up the sale process
- It is good for properties with serious defects, where buyers might pull out
- Where the sale price cannot be predicted this can help ensure the property is not sold too cheaply
Cons
- Potentially difficult for potential buyers to attend, so may lower the competition for the property
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
Informal Tender
Sale by Informal Tender is a process where written offers will be invited (sealed bids) and a closing date for such offers published. All offers are opened at the same time. Generally, the vendor is not committed to accepting the highest or any offer. The offer is not binding and on acceptance of any offer the transaction proceeds subject to contract.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- Sets up a fixed timeline for completion of the process
- Good for prperties with major defects
Cons
- Unusual method of disposal which can deter those unfamiliar with the requirements of the process
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
Formal Tender
When a property is sold by formal tender, as with an informal tender, the sale will be advertised with a deadline by which prospective purchasers must submit their bid. Each tender document from the bidders must include the full legal contract for sale and all bids have to include a bankers draft as a deposit on the contract. The bids are opened by the vendor or agent (representative). As soon as the “best bid” is selected, the bankers draft is accepted and contracts are automatically exchanged. The successful bidder is then committed to the contract and will have to complete the sale on the appointed date. If the successful bidder fails to complete the sale they will forfeit their deposit and further costs may be incurred. Generally rarely used due to its complexity.
Pros
- Transparency of process (it can be demonstrated that the best price was achieved)
- It tends to be used mostly for land disposals, where the formal use is as important as the price raised
Cons
- Does not always generate prices comparable to private treaty
- Very dependent on the quality of the agent
The specific marketing strategy and potential buyers will be discussed in detail, with a particular plan designed and followed by the parties.
One specific area that needs careful consideration is the choice of a “guide price”, which is outlined later in this chapter.
Preparation of the Supporting Materials
This will involve the production of any marketing collateral (including brochures and advertisements) and preparing the “data room”. A data room is typically an online area where access can be granted to specific parties so they can fully evaluate the opportunity, while still retaining a level of confidentiality for the seller. Typically, it will include legal documentation (leases, title documentation, operating agreements, statutory licences and consents, for example), financial reports (with full historic and budget management accounts), a property’s details (floor plans, surveys, report, valuations, photographs), general market information (data on the local area and local market) and employment sector (staff details and sample contracts).
Marketing
The next stage of the sales process is to run the marketing campaign along the agreed lines, making any changes to the initial strategy as are required to help ensure the highest and best price is achieved.
Ideally the marketing campaign will generate strong interest from at least three or four parties, resulting in a bidding war, to drive the price above the initial offers received.
Review Offers and Determining the Most Suitable Buyer
The next step is to review all offers and determine which offer is the most favourable to the seller. This may be the highest offer, the quickest, or the offer that has the least risk (unconditional offer, or an offer from a reliable source).
Certain buyers have a reputation for offering the highest bid and then at the due diligence stage reducing their bid to much lower levels. The risk of “chipping”, as it is sometimes known, can lead to certain buyers offers being excluded from the process at the outset.
Completing the Transfer
Typically, the seller will provide an exclusivity period (if not entering a contract race) to the purchaser, whilst they work through the financial, legal, valuation and condition due diligence. A contract race is when an agreement is made to sell a property to whichever potential buyer can exchange and complete the transaction quickest. This will involve more than one party spending significant amounts of money on due diligence, and is only usually possible when a property is particularly desirable to investors, or when the seller offers to reimburse the losing parties of their costs if another party completes ahead of them.
The next stage is to exchange contracts with an agreed completion date (and deposit paid).
There will usually be a stock audit on day of hand over with additional sum paid on basis of actual stock, prior to the completion of the transfer.