Preparing the sale of your hotel 12 to 18 months ahead

Most difficulties in a hotel sale surface during due diligence, even though they were known, or easy to identify, well before. A lease nearing expiry, an unfavourable opinion from the fire safety committee, accounts that are hard to reconcile, a franchise agreement that prohibits a change of control: each of these can be dealt with in a few months before the sale, and each is paid for in the negotiation if the buyer finds it first.

This guide describes what to prepare, and in what order, when a sale is envisaged within 12 to 18 months.

Why start early

There are three reasons to begin well in advance.

• Some issues take time: renewing or renegotiating the lease, clearing fire safety reservations, carrying out works, reorganising the holding structure (separating the property and the business, for example). They are not resolved in a few weeks.
• The last financial years count: a buyer generally reviews three years of accounts and the last twelve months. Management decisions taken during that period show directly in the figures presented.
• Confidentiality needs preparation: a sale prepared in a hurry leaks more easily. Preparing ahead makes it possible to gather documents without alerting staff or partners.

Start with a saleability review

Before any approach, a saleability review sets out the points that will weigh on price and on due diligence: quality of the accounts, lease position, compliance, works to come, key contracts, dependence on the owner. It is carried out from the buyer’s point of view, with the buyer’s questions.

It produces a prioritised list: what to fix, what to document, what simply to disclose. A reservation disclosed in the information memorandum costs less than one discovered during the audit. It also informs the choice of structure, between the property (murs), the business (fonds de commerce) and the shares.

Accounts a buyer can read

The buyer values the hotel on adjusted EBITDA (EBE in French accounts) and recalculates each adjustment from the supporting documents. Preparation is therefore about making the accounts readable and verifiable:

• annual accounts and tax returns for the last three years, reconciled with operating reports
• consistent monthly reporting: occupancy, average daily rate, RevPAR, revenue by department, payroll costs
• a clear separation between the owner’s personal expenses and the hotel’s operating costs
• a list of the intended adjustments (owner’s remuneration, intra-group rent, non-recurring items), each with its supporting document
• the current year’s budget and tracking against it

A chartered accountant specialising in hotels and restaurants helps present the figures in a form buyers recognise. The guide how a hotel is valued covers the indicators and adjustments in detail.

The lease, the first due diligence topic

For a hotel run in leased premises, the commercial lease is often what weighs most on the value of the business. Priorities to check:

• the remaining term: a lease close to expiry worries the buyer and its lender. An early renewal or a new lease is negotiated before the sale, not during it.
• the rent: its level relative to revenue, its indexation and the risk of change on renewal, to be reviewed by your lawyer.
• the permitted use: it must cover every activity carried on (accommodation, food and beverage, bar, meetings).
• the allocation of works and charges, particularly major repairs.
• assignment clauses: landlord approval, landlord’s participation in the deed, joint guarantee by the outgoing tenant, and change-of-control clauses if a share sale is envisaged.

Relations with the landlord must be handled with care: consent has to be obtained at the right time, without disclosing the transaction prematurely.

Compliance, technical condition and capex

A hotel is a building open to the public, or ERP (établissement recevant du public). The buyer will ask for:

• the fire safety committee’s minutes, its latest opinion and evidence that any requirements have been lifted
• the accessibility certificate or the progress of the scheduled accessibility programme
• periodic inspection contracts and reports (electrical, gas, lifts, smoke extraction, fire safety system)
• technical surveys and, where relevant, the energy audit
• the hotel classification decision and its expiry date

For works, two steps go together. First, document the capex carried out over the last five years, with amounts. Second, cost the works to come through quotes or a technical audit. It is not always wise to undertake major works before a sale: a costed and documented programme may be enough, with the buyer reflecting it in its price.

Contracts and dependence on the owner

Key contracts

Review the contracts that bind the operation beyond the sale:

• hotel franchise agreement or management contract: term, expiry, fees, exit conditions, change-of-control or assignee approval clauses
• distribution agreements and booking channels
• key suppliers, maintenance, equipment rental, leasing: term and termination conditions
• insurance policies and open claims

The team and the owner’s role

A hotel whose running depends on the owner’s daily presence is harder to take over. Preparation means structuring the management team, handing over relationships with key clients and suppliers, and formalising procedures. On the employment side, gather the applicable collective agreement, company agreements, an anonymised staff register and the status of any disputes. No personal employee data circulates before the advanced stage.

Choosing advisers and keeping it confidential

A sale draws on several skills: a transaction adviser, a lawyer (M&A, commercial leases, tax), a notary for the real estate, and a chartered accountant. They work better together if they are appointed early. Tax strategy in particular should be studied before the structure is chosen.

Confidentiality has to be organised from this stage: a limited number of people in the know, documents gathered without involving the staff, no contact between buyers and the hotel. Depending on the size of the business and the nature of the transaction, the sale may require employees to be informed in advance (the so-called “loi Hamon” rules): your lawyer organises that timetable. The guide selling without weakening the operation deals with these questions.

Key point: preparation is not about presenting a flawless hotel, but a file without surprises. Whatever the buyer discovers on its own, it negotiates.

Indicative timetable and checklist

The timetable below is indicative only. Every hotel has its own pace, depending on the state of the file, the lease and the chosen structure.

• 12 to 18 months before: saleability review, choice of advisers, initial thinking on structure and tax, starting the longer workstreams (lease, reorganisation, fire safety reservations).
• 6 to 12 months before: upgrading reporting, costing works, reviewing contracts, structuring the team, gathering documents.
• 3 to 6 months before: reasoned valuation, sale strategy, mandate, preparation of the teaser, the information memorandum and the data room.
• Then: approaching buyers, visits, offers, letter of intent, audits, preliminary agreement and completion.

The detailed structure of a data room is the subject of the guide the data room in a hotel sale.

RR Hôtels & Finance carries out a saleability review before any sale, on which the valuation and strategy are then built. To find out more: hotel valuation.