Asset deal or share deal: selling the property, the business or the shares

Selling a hotel does not always mean the same thing. Depending on how the hotel is held and what the owner wants to achieve, the transaction may cover the real estate, the operation, both, or the company that holds them. The choice of structure determines what is transferred, which risks the buyer takes on, the timetable, the tax treatment and, ultimately, the price.

This guide sets out the four usual structures, what each means for the buyer and which sellers each one suits. It is no substitute for advice from your lawyer, notary and chartered accountant, which remains essential at the time of the transaction.

Two approaches: the assets or the company

Every hotel sale follows one of two approaches.

In an asset deal, the seller sells assets: the property, or murs, the business, or fonds de commerce, or both. The buyer chooses what it acquires. The seller’s company remains in place, with its liabilities, its disputes and its history.

In a share deal, the seller sells the shares of the company that holds the hotel. Nothing changes legally at hotel level: the company remains owner or tenant, employer and party to the contracts. Only its shareholder changes. The buyer takes on the whole company, with its assets and liabilities, known or not.

This distinction shapes everything else: what has to be transferred, who has to consent, and what has to be warranted.

Property and business together

This is the case of an owner-operator who holds both the building and the business, directly or through two separate companies. A sale of the property and business transfers the whole hotel: building, clientele, trading name, furniture and equipment, website, transferable contracts.

For the buyer, the attraction is full control of the asset. There is no landlord, and the buyer alone decides on works and positioning. In return, the investment is at its highest, and the sale of the building requires a notarial deed.

Two points need attention:

• The allocation of the price between property and business. It has tax consequences for both parties, because transfer duties do not follow the same rules for the building and for the business. It must be consistent with the value of each component.
• The formalities specific to the business: publication of the sale, a period during which creditors may object, and part of the price held in escrow during that period. The notary or lawyer sets the timetable.

The business only, property retained

The owner keeps the building and sells the operation. Two situations arise: the operator is already the tenant of a third-party landlord, or the owner-operator wishes to keep the property as an investment and grant a commercial lease to the buyer of the business.

The buyer acquires the business and the leasehold right. The lease then becomes the core of the value: remaining term, rent, indexation, permitted use, allocation of works and charges, renewal conditions. A business backed by a short lease, or by a rent that is high relative to revenue, is valued less favourably.

Depending on its terms, the lease may make the sale subject to the landlord’s approval or require the landlord to take part in the deed. That consent drives the timetable: it must be anticipated without disclosing the transaction too early. The guide selling a hotel business and its commercial lease covers these points in detail.

Shares: the operating company or the property company

A share sale can concern different companies, and the difference matters.

Shares of the operating company

The buyer acquires the company that runs the hotel, usually a tenant of the property. The lease stays in place, since the tenant does not change. Employment contracts continue with the same employer. Permits, the licence and the classification remain attached to the establishment.

This structure avoids transferring each contract one by one. It does not remove the need to review change-of-control clauses: a lease, a hotel franchise agreement, a management contract or a bank facility may require consent, prior notice or give a right to terminate if the shareholder changes.

Shares of the property company

Where the company owns the property, alone or together with the business, a share sale transfers the building indirectly. The tax treatment then depends on the nature of the company, in particular whether it is predominantly a real estate company. The notary and tax adviser confirm it at the time of the transaction.

What else the buyer takes on

In every case, the buyer takes on the company’s liabilities: debts, disputes, past tax and employment risks. It also inherits the company’s tax position. The company keeps the historical tax value of its assets: a share sale does not allow them to be stepped up. The latent gain on the building or the business stays within the company and will be taxed on any later sale of the assets. As a rule, this latent tax is negotiated into the share price.

Hence two mechanisms specific to share deals:

• The share price is derived from the value of the hotel, less net debt and adjusted for working capital, either on accounts drawn up at completion or through a locked box mechanism based on reference accounts.
• The warranty and indemnity package (garantie d’actif et de passif) protects the buyer against undisclosed liabilities that predate the sale. Its cap, threshold, duration and any counter-guarantee are negotiated.

Sale and leaseback

In a sale and leaseback, the owner-operator sells the property to an investor and immediately leases it back. It keeps the operation, the staff and the clientele, and releases the capital tied up in the building.

The investor is not buying a hotel to run but an income stream. It looks at the strength of the tenant, the fixed term of the lease, the allocation of works and whether the rent is sustainable for the operation. The rent-to-revenue ratio and the coverage of rent by EBITDA are central to the analysis.

For the seller, the point of attention is the mirror image: the rent it agrees to will weigh on its operation for the whole term of the lease. A high price for the property obtained in exchange for an excessive rent moves the problem rather than solving it.

What the buyer takes on, structure by structure

In every structure, the transfer of employment contracts or the change of shareholder may require employees to be informed in advance, depending on the size of the business and the nature of the transaction (the so-called “loi Hamon” rules). Your lawyer organises that timetable, which must fit with the confidentiality of the process.

Key point: the structure is chosen before the hotel goes to market, not during negotiations. It determines who must consent, what the buyer must check and what the seller will have to warrant.

Which structure for which seller

No structure is better than the others. Each answers a particular situation.

• An owner-operator who is stepping back and wants no further link with the hotel will look at selling the property and business, or the shares if everything sits in a single company. The exit is clean, subject to the warranties given.
• A family that wants to keep a property asset without running the hotel sells the business and keeps the property, granting a lease. The quality of the lease then drives the value of both assets: the business sold and the rent received.
• A shareholder of an operating company whose lease, contracts and permits are hard to transfer often has an interest in selling the shares. It must, however, accept a warranty and indemnity package and a more extensive due diligence.
• An operator or group seeking to fund its growth without leaving the hotel will look at a sale and leaseback, provided the operation can sustain the rent over time.
• A group rationalising a portfolio often combines several structures depending on the assets. Each asset is then handled on its own terms.

The choice also depends on the target buyer. An institutional investor often looks for property and rental income, a hotel group for the operation, and a family office for either one, depending on its horizon. The chosen structure narrows or widens the pool of potential buyers.

Deciding with your advisers

The structure is decided on four elements: the existing holding structure, the seller’s wealth objectives, the tax treatment of the transaction and the profile of the buyers likely to come forward. The first two are for the seller, the tax treatment for the notary, lawyer and chartered accountant, and the last for market knowledge.

A prior reorganisation (contribution, demerger, separation of property and business) is sometimes considered to make the hotel easier to sell on good terms. It takes time and must be studied well before the sale. The guide preparing the sale of your hotel sets out the timetable, and the guide how a hotel is valued explains how each component is valued.

RR Hôtels & Finance defines the sale strategy, property, business or shares, from the valuation stage and before the mandate, in coordination with the seller’s advisers. To find out more: our hotel sale advisory.