Glossary
Due diligence
Due diligence is the set of checks a buyer and its advisers carry out before making a final commitment. It is based on the documents made available in the data room and on the vendor’s written answers to questions. Its purpose is to confirm the price and identify the risks to be dealt with in the sale and purchase agreement.
In the hotel sector
The usual workstreams of a hotel due diligence:
| Workstream | What is reviewed |
|---|---|
| Financial | Accounts and tax returns, monthly reporting, adjusted EBITDA, working capital |
| Legal | Title deeds, commercial lease, franchise or management agreements, permits, disputes |
| Tax | Returns, tax audits, latent tax in a share deal |
| Employment | Headcount, collective agreement, transferred contracts, disputes |
| Technical and safety | Condition of the building, fire-safety commission reports (ERP), accessibility, surveys, CAPEX required |
In a transaction
A first review takes place before the letter of intent. Confirmatory due diligence, in more depth, follows the selection of a buyer, often under exclusivity. Its findings feed into the final negotiation: price adjustment, conditions precedent, and the scope and level of the warranty and indemnity cover.
The vendor may also commission vendor due diligence before going to market. It then knows its weak points before the buyer does, can fix or disclose them, and shortens the buyer’s audits.
Not to be confused with
- A property valuation, which determines a value. Due diligence verifies information and measures risk.
- A pre-sale review carried out by the vendor for its own use and not necessarily shared.
A reasoned valuation helps identify early the points that will matter in due diligence.
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