Due Diligence

Due Diligence

Owning a pub is still one of the great Australian dreams, but ensuring you have the right advice before making any substantial investment is critical. Sounds simple, right? It is easier than ever to borrow heavily, and our friends at the banks are happy to lend, but ensuring thorough due diligence can save you both financial and emotional stress. It would be easy to assume that neglecting due diligence is an error only made by newcomers to the hotel and hospitality industry, but this is not the case.  Even experienced hotel business operators are often failing to conduct appropriate due diligence and this can prove to be an incredibly costly oversight. 

Expert advice in this area ensures that all aspects of the business are thoroughly investigated – for instance, contracts, warranties and indemnifications – not just financial accounts. Are there any exclusivity agreements? What contracts are in place, are there leases on buildings or equipment? These contracts could include ATM facilities and any suppliers to the business. If there are contracts in place, how may these be affected by a change of ownership, e.g. do these existing contracts and agreements become void and payable upon change of ownership? How is the venue operated? Do you have enough information to ensure that the venue continues to operate smoothly through and beyond the ownership transition? Is there information on staff, performance reviews, past records and future projections on reservations? Expert due diligence advice can answer all of these questions and with over 50 years experience in the hotel and hospitality industry DFK Crosbie has the expertise to advise.

Thorough due diligence will also help you optimise the operation of your business. For instance, it will provide you with litreage information from the major brewers, allowing accurate comparison of the venue’s achievements against known industry averages. Breweries rebate contracts based on volume – if contracts are in place with an existing owner, have you considered renegotiating the contract? Gaming machines and jackpots can also leave you exposed. Does the venue have an existing jackpot? If so, has the jackpot sum been put aside? Don’t spend your overdraft on a nasty surprise the very night you exchange contracts! A hotel may look great on paper but there are always areas to be identified and reviewed. What do you know about the venue’s gaming income? Gaming duty is paid monthly – is it up to date? These are just some of the questions that industry experts can answer with the implementation of due diligence, but there are others that can affect your business and opportunities to thrive. 

Fluctuations in the economy may be out of your control but they can produce changes in your business’s LVR (loan-to-value ratio), with the potential to place your business at risk if you are carrying heavy debt. The location of your business may increase its vulnerability to seasonal events, patronage, and so on. Specialist industry knowledge can help you determine any potential risks to your purchase and is therefore a great investment in itself. It is vital to seek this knowledge before agreeing to a purchase. Your bank will also require this due diligence to include forward income streams and existing debts and commitments. We can also assess loan covenants. 

 Specialist knowledge also proves its value with ongoing business and operational advice. The hotel industry is one of the last cash industries and unfortunately can still be vulnerable to theft and loss. Ensure you have strong cash controls and procedures to provide an audit trail.

Due diligence will protect you from nasty surprises and provide you with information that may affect your purchase or even make you re-think the transaction. On the other hand, the information due diligence exposes may also, allow you to negotiate with the vendor and adapt your offer to purchase. No matter how attractive a purchase may seem, put your head before your heart and seek expert advice from DFK Crosbie before you buy into that dream. 

Derrick suit  Derrick Eube is a Partner at DFK Crosbie with over 20 years experience in taxation, accounting and business advice to the hotel industry. Email derrick.e@dfkcrosbie.com.au