Finanical Diligence Can Help Avoid Buyer's Remorse

Finanical Diligence Can Help Avoid Buyer's Remorse from Hospitality Partners Association

By: Hospitality Partners Association  10-07-2013
Keywords: Financial, Financial Planning, Property Investment

According to results of the TBCSA FNB Tourism Business Index (TBI) compiled by Grant Thornton for the second quarter of 2013, it’s business as usual for the travel and tourism sector with comfortable trading overall.Pam Golding’s review of the Hotel Industry Performance for June 2013 is also showing marked improvement in both occupancy and room rates – (read it here) from the lows of 2011.

With positive signs in the tourism market likely to drive hospitality M&A appetite in the future, buyers are reminded to give careful consideration to the financial due diligence process when looking to make acquisitions.

Buying a hospitality or leisure property (hotel, resort, spa, golf estate, etc.) can be a complex and risky process as it involves the acquisition of full operating business and the related real estate.

Some of the most common buyer’s regrets include:

1. “I wish I had known this problem/liability/risk existed before I made this acquisition”; and 2. “If we had known this earlier we could have saved money and have walked away sooner”. The above regrets are attributable to the lack of reliable information early in the acquisition process. In order to adequately understand and evaluate a potential investment, due consideration needs to be given to the financial due diligence findings.

Financial due diligence includes an investigation of the:

  • 1. Tangible assets;
  • 2. Markets & environment,
  • 3. Operating business; and
  • 4. Historic and future financial performance.

The key driver in the assessment of potential investment return is the reliability of forecast earnings. The assumptions underlying the potential earnings of the target need to be assessed for reasonability and achievability before concluding negotiations.

Should the tangible assets be in good condition and the market environment be favourable, analysis of historic financial performance can provide a strong basis for the assessment of the forecast assumptions.

Further, financial due diligence procedures should be tailored to identify and communicate likely deal-breakers early in the acquisition process. These procedures should include obtaining and assessing the seller’s warranties, confirmation of ownership/title, review of reservation agreements, deposits and leases etc.

A well planned financial due diligence process will result in meaningful feedback being obtained early in the acquisition process in order to reduce costs and increase negotiating power.

It is vital to involve a qualified and experienced financial due diligence team early in the acquisition process in order to achieve the most favourable outcome at the least cost.

For more useful articles on financial trends in South Africa visit

Keywords: Financial, Financial Planning, HPASA, Investment Planning, Pam Golding, Property Investment,

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