Do Your Homework (Due Diligence) Before Buying a Hotel

Before purchasing any hotel or motel property, a prospective buyer should always establish its assets – both real and intangible – and liabilities to evaluate its commercial potential. Here are the basic steps that should be undertaken:

Make a Physical Inspection

Everything structural from the foundation through the walls to the roof should be inspected by a professional. Do not simply trust your own eyes. In addition, master tradesmen should be brought in to give you an idea of the condition of the plumbing, the electrical and the HVAC systems. While it does cost something to have these inspections conducted, it is money well spent as any major issues can be addressed in the purchase price.

Run the Numbers

Obviously, the purpose of buying the property is to derive income from it. Having an accountant verify the revenue stream versus the costs will allow the calculation of the actual net profit. From there, you can determine a fair price – or at least one that you are willing to pay. Running the numbers is also an excellent – and balanced – way to compare disparate properties in locations far removed from each other.

Complete a Thorough Inventory

There are a lot of items contained in a hotel of any size – furniture, tools, gym equipment and even artwork in some instances. Typically, these items are included in the sale of the building unless specifically excluded in the contract. Usually, this aspect of the sale does not become an issue. Still, someone in your organization should detail in an itemized list everything – inside and out – that will be purchased with the property.

Meet the Staff

While the staff is not usually considered when the purchase price of a hotel is determined, they are – in may ways – your most valuable asset. Getting to know them can yield some very valuable information about the property from non-evident maintenance issues through recurring vendor issues to customer concerns. In addition, you will begin the task of evaluating your team and begin to understand who you can rely on and who you can do without.

Check the Property’s Local Reputation

Certainly, the internet and other marketing tools will draw visitors from near and far but the property’s reputation in the area will also determine what locals say about the venue if asked by a visitor. If the current owner has not really fulfilled his obligations to vendors and customer’s you will find it difficult to get off to a good start even if you post an “Under New Management” sign. In other words, “goodwill” is a true asset and should be considered when valuing the property.

Do Not Forget Your Own Responsibilities

As the owner – even if you have a full-time manager – will ultimately be called upon to make the final decision on all major issues. It will be your money and your livelihood on the line, after all. When visiting the property, take a look at what the general manager is required to do and then consider that you will have additional responsibilities such as dealing with the vendors and the lending institution. Running a hotel is not a “sit back and relax” situation. It usually requires a lot of hands-on effort. Be prepared for the work or do not take on the task.

For further information on conducting a due diligence audit on your potential hotel property, please contact us at directly at 415.523.0393.

Next Article in the Hotel Owner's Tool Kit: Do Your Homework & Due Diligence

View Article

By |2017-06-05T16:14:36-07:00August 8th, 2016|Hotel Owner's Tool Kit, Hotel Scouting|Comments Off on Do Your Homework (Due Diligence) Before Buying a Hotel

About the Author: