By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
9 January 2013
Hotel Lawyer with the due diligence wakeup call.
As an introduction to today's article on due diligence, I would like to reprint a portion of my blog from December 31, 2008:
Bernard L. Madoff -- Maybe the Madoff debacle provides the quintessential anecdote. In what is clearly the largest Ponzi scheme in history -- probably involving $50 billion -- one man seduced the elite of the elite in the financial world. Who would think that Henry Kaufman, former Chief Economist of Salomon Bros. would be hoodwinked by a Ponzi scheme for several million?
And how did respected institutions like BNP Paribas, Royal Bank of Scotland and Nomura Holdings get tagged for around $500 million each? Or HSBC and other professional investment firms for more than $1 billion each?
The answer to these questions is pretty simple: It was a fundamental failure to perform due diligence.
I think one commentator at dealbreaker.com recently summed up the syndrome best that became an international epidemic. It was his answer to the question of how someone could trust their entire fortune to Madoff. The answer?
Goldman did due diligence in 2001
["no we didn't", "yes you did"]
and gave them a pass.
That kind of sums it all up. No one wanted to say that the emperor had no clothes. No one wanted to do all the due diligence when it seemed like someone else must be doing it. Everyone just "assumed" that it must be OK. Who needs due diligence anyway?
You do (on every hotel acquisition)! Here are some tips.
Due diligence tips for
your next hotel acquisition
Catherine DeBono Holmes | Hotel Lawyer
What is due diligence?
Particularly in the context of a hotel acquisition, "due diligence" generally refers to the investigation conducted by a potential buyer of the hotel that is the target of the acquisition. The investigation covers both the physical asset (i.e. the hotel structures, parking, systems, equipment, inventories) as well as the operating business conducted at the hotel facility, and the relevant markets and environment.
The purpose of the investor's due diligence is to understand and evaluate the potential investment in the hotel. It is the analytic review of the real and personal property, the business operations and potential of the specific hotel. This effort all seeks to validate the investor's reasons for buying the hotel and to avoid surprises after the purchase has closed.
Perhaps the most significant element in the buyer's calculation of a bid or purchase price is the analysis of the potential earnings to be derived from the hotel. To develop the proposed acquisition price, the buyer must make assumptions as to future market conditions and the hotel's performance within that market. These assumptions will be reflected in a discounted cash flow on stabilized operating projections. Thus, a preliminary business plan which reflects assumptions as to physical facilities and condition, management, affiliation and other factors must be developed in order to assess the potential acquisition realistically.