Selling your Hotel business: A Guide for Family Offices

Before embarking on the sale process, it’s essential to have a clear idea of what the process involves. In our previous article Preparing for the Sale of your Hotel business: A Guide for Family Offices we looked at actions a seller can take to get the business in shape ahead of a sale. In this article we take a closer look at the key steps in a share sale, the most common transaction structure we see. 

Pre-sale tax planning 

This complex area can raise a number of issues for sellers depending upon their personal tax arrangements and how shareholdings are held. For more see Preparing for the Sale of your Hotel business: A Guide for Family Offices and Investing in Hotels – UK tax considerations: A Guide for Family Offices.

Preparing the company / business for sale

As Benjamin Franklin said, “by failing to prepare, you are preparing to fail” and once a sale is contemplated, and structuring work commenced, we strongly recommend that sellers take stock of the business and carry out any necessary steps to prepare the company for sale. This will help to give buyers a good initial impression of the business and, with issues flushed out ahead of time, minimise delays to the transaction process. Preparing for the Sale of your Hotel business: A Guide for Family Offices looked in more detail at the issues to consider in this tidying-up process.

Heads of terms in Hotel Sales

Also known as a term sheet or letter of intent, the head of terms is a preliminary document that outlines the key terms and conditions agreed upon by the parties. It serves as a framework for negotiating the final, legally binding share purchase agreement, helps to flush out any key areas of disagreement early on and typically establishes a timetable for the transaction. However, at this stage we advise keeping things relatively simple – parties should resist getting into the weeds of the deal, otherwise you risk essentially negotiating the deal twice!

Confidentiality / Exclusivity in Hotel Sales

Confidentiality obligations of the parties, often included in a non-disclosure agreement, require them to keep information related to the transaction private and not disclose it to third parties. Confidentiality is crucial in protecting sensitive business information and maintaining trust between the buyer and seller during the negotiation process. For hotels, safeguarding guest data and operational strategies is particularly important. There are however limitations on the effectiveness of such obligations, and we can advise prospective sellers on additional steps they can take to protect business information.

Exclusivity refers to an agreement that the seller will refrain from engaging in negotiations or discussions with other potential buyers for a specified period. A buyer will typically insist on exclusivity before committing real resources to the deal, as due diligence can be time-intensive and costly.

Due Diligence in Hotel Sales

Due diligence is a comprehensive review process undertaken by the buyer to assess the company's business, financial, legal, and operational aspects before completing the acquisition. The primary aim is to identify potential risks, liabilities, and opportunities associated with the purchase, ensuring that the buyer makes an informed decision regarding the acquisition. 

In hotel transactions, specific areas of focus for due diligence may include:

Property

The buyer will want to fully investigate the any properties used in the running of the business, this review will include a review of the freehold and/or leasehold title of the properties and, alongside the legal due diligence, may include a structural survey, environmental audit and formal valuation. When hotel properties have been built by the company, construction documents will also need to be reviewed. Hotels operating in heritage properties, with their unique architectural features, may also have protected status or preservation incentives that need to be considered.

Intellectual property and Brand

A hotel’s brand is one of its most valuable assets. Therefore, the buyer will thoroughly investigate the intellectual property rights related to the hotel's brand, including registered and unregistered intellectual property rights, licensing of such rights (either to the company or to third parties) and any disputes or alleged infringements related thereto.

Loyalty schemes

Many hotels operate loyalty schemes for frequent and VIP guests. A review of the arrangements and terms of such schemes may be conducted to ensure these can continue to operate post-completion. In cases where loyalty schemes are operated at a group level and a particular hotel brand is being transferred out of the group, the parties may need to consider entering into a transitional services agreement to ensure loyalty schemes are serviced post-completion and VIP guest relationships maintained

Contractual Agreements

The buyer’s lawyers will typically review the terms of key commercial contracts entered into by the company. These will include:

• Hotel Management Agreements: Hotel management agreements are crucial as they define the relationship between the hotel owner and the management company responsible for the day-to-day operations. These agreements typically cover aspects such as management fees, performance standards, and the scope of services provided. For buyers, understanding the terms of these agreements is essential to assess the operational efficiency and profitability of the hotel. They also need to evaluate the flexibility of these agreements, especially if they plan to change management strategies or companies post-acquisition.
• Franchise Agreements: Franchise agreements are important for hotels operating under a recognised brand name. These agreements allow the hotel to use the franchisor's brand, marketing resources, and operational systems. Buyers must review these agreements to understand the obligations and fees associated with maintaining the franchise, as well as any restrictions on operational autonomy. The strength and reputation of the franchise can significantly impact the hotel's market position and guest loyalty, making these agreements a key consideration in the due diligence process. Similarly, where the company is itself operating a franchise model, the buyer will want to review the arrangements and identify any matters that may be an issue for the company in its role as franchisor.
• Partnership Agreements: Partnership agreements can include collaborations with local businesses, tour operators, or service providers that enhance the hotel's offerings. These agreements might cover joint marketing efforts, exclusive service provisions, or shared facilities. For buyers, assessing these partnerships is vital to understand how they contribute to the hotel's value proposition and guest experience. The continuity and terms of these partnerships can affect the hotel's competitive edge and ability to attract guests and retain guest loyalty.
• Supply Agreements: Supply agreements govern the procurement of goods and services necessary for hotel operations, such as food and beverages, linens, and cleaning supplies. Buyers need to review these agreements to ensure they are cost-effective and reliable, as disruptions in supply can impact service quality and guest satisfaction. Additionally, buyers should assess the terms for flexibility and scalability, especially if they plan to expand or modify the hotel's offerings.
• Standard terms and conditions: Standard terms and conditions outline the hotel's policies regarding bookings, cancellations, liability, and guest conduct. These documents are crucial for managing guest expectations and protecting the hotel from legal disputes. Buyers should review these terms to ensure they are up-to-date and compliant with current regulations.
• Employment Agreements: Employment agreements define the relationship between the hotel and its staff, including terms related to compensation, benefits, and job responsibilities. For buyers, understanding these agreements is essential to assess the hotel's labour costs and workforce stability.

High value assets

Luxury hotels often have high-value assets, such as artwork or designer furnishings, which may require particular attention during the due diligence process to ascertain ownership and ensure that appropriate insurance policies etc are in place.

In addition to the legal due diligence carried out by the buyer’s lawyers, the buyer will also engage advisors to carry out financial due diligence and in some cases commercial due diligence, though some buyers may do this in-house. Commercial due diligence in this industry may include reviewing occupancy rates, existing bookings and evaluating guest satisfaction metrics, to provide insights into the hotel's market position and brand reputation. When engaging advisors, it is essential to ensure that the respective scope of their due diligence is complementary and doesn’t overlap, and that advisors work cohesively to ensure the buyer gets a full picture of the company and business it is acquiring.

Engaging with the due diligence process can be very time consuming for sellers and taking the preparatory steps set out in Preparing for the Sale of your Hotel business: A Guide for Family Offices can help to make this process run more smoothly.

Share Purchase Agreement in Hotel Sales

The share purchase agreement is a lengthy document that sets out the main terms of the transaction. Typically, a seller will not be able to make a completely clean break at completion. Key points for negotiation for a seller will include:

Warranties

Statements made by the seller about the company which they will be required to confirm are true. Warranty schedules are typically very comprehensive and run to tens of pages. For transactions involving hotel businesses, specific warranties may cover aspects such as compliance with hospitality regulations, the title to and condition of the properties, and the accuracy of guest booking data etc.

Tax Indemnity

The seller will be required to pay the buyer a sum equal to any tax liability arising as a result of activity pre-completion.

Restrictive covenants

Limit the seller’s future ability to perform certain actions. In the hotel sector, these covenants will typically address the seller's ability to open new, competing hotels within a certain geographic area and the poaching of employees, with the aim of protecting the hotel’s brand.

Deferred consideration

Refers to a portion of the purchase price that is paid by the buyer to the seller at a later date, rather than at the time of completion. This can take various forms and is often subject to substantial negotiation.

Payment terms, generally

Any upfront payments, earn-outs, or deferred payments need to align with the ultimate beneficial owners’ wider cash flow needs and investment strategy.

Earn Out

Refers to a mechanism for structuring part of the purchase price based on the future performance of the company. It involves the seller receiving additional payments contingent upon the company achieving specified financial or operational targets after the sale has been completed.

Limitations on the seller’s liability

The scope and extent of the seller’s post-completion liability should be clearly defined and limited. This includes financial caps, time limits – for claims under warranties, tax indemnity, restrictive covenants – and other limits, such as limiting liability for matters within a buyer’s knowledge. 

Disclosure

Disclosure is the process by which the seller provides disclosures against the warranties set out in the share purchase agreement, by providing information and/or documents which contradict the statements contained in the warranties. Matters “fairly” disclosed by a seller effectively limits their liability for matters covered by the relevant warranties.

Warranty & Indemnity Insurance

Warranty & indemnity insurance is an insurance product that can be purchased to reduce the risk of sellers having to hand back money to the buyer following a claim for breach of warranty. It is typically structured as a seller-initiated buy-side policy so that buyer has direct recourse to the underwriter. Which party bears the excess and pays the insurance premium will be a matter for negotiation. For family offices, this can be a key strategic tool in protecting legacy assets. We work closely with both warranty & indemnity insurance brokers and underwriters to assist clients with the process of putting such policies in place.

Completion

Completion is the final stage of the transaction where the ownership of the shares in the company is formally transferred from the seller to the buyer. Whilst the parties’ attention may may be on this end goal, it is important to retain focus on the underlying business - ensuring a seamless transition, particularly where there are changes in management, this is crucial to maintaining the hotel’s operational efficiency, reputation and guest experience.

Regardless of whether your family office is just beginning to explore opportunities in the hotel industry or you’re looking to sell your hotel business, our team at Charles Russell Speechlys is here to provide expert guidance and support. We understand the unique challenges and opportunities that family offices face in the hospitality sector, and we are committed to helping you navigate the complexities of this fast-paced industry. We invite you to contact James Broadhurst or your usual contact to discuss how we can assist in achieving your strategic objectives.