Times of Uncertainty Can Complicate the Process
By Dimitris Mittas , Alex Sogno and Fabio Bianchetti
The value of real estate can be protected and enhanced when negotiating post-closing price adjustments. After legal closing, the purchase price true-up occurs, to adjust for any difference between the purchase price, which is determined on a transaction’s closing date and based on estimated financial metrics, and the actual purchase price, which is determined using financial metrics that become known only after the closing date.
Potential issues surrounding post-closing price adjustments are exacerbated during times of uncertainty, especially in some specific markets. So preparation and strategy becomes even more crucial. Be strategic from the start and deploy independent auditors or asset managers who know the potential pressure points and provide a solid start in terms of reporting, monitoring and control for the future development of your hotel assets.
Here are some tips to ensure the value of your hotel asset is enhanced in post-closing arguments:
1. Buyer To Drive the Critical True-Up Period:
- Implement a detailed forensic balance sheet review immediately to unlock value opportunities during the true-up period.
- Ensure that the bank accounts are reconciled, and no outstanding amounts are available on a transit account.
- Review the accounts receivables ageing for old outstanding invoices and make sure the seller has built up a realistic bad debt accrual.
- Confirm that the seller has enough accruals to cover the staff holidays, 13th month, and other benefits the buyer will have to pay in the future.
- Check whether the buyer has already built up enough accruals for all the costs that occurred in the period before the purchase but have not been invoiced yet.
- Certify that the seller has not committed to any unpaid works without informing the buyer previously.
2. Align Corporate Strategies with the Hotel Operational Team:
- Evaluate the existing hotel operational team and check whether it complies with new expectations. If not, make sure the seller terminates the contracts of those you don’t want to keep.
- Quantify the staff seniority and review the selling price of the asset.
- Verify the upcoming budget whether it considers the changes the buyer wants to implement.
3. Maximize Profit and Loss Opportunities:
- Review with the directors of finance the complete cycle of invoices for three months and question all payments/contracts.
- Ensure there are enough controls in place to achieve high productivity and reduce staff where possible.
- Verify a detailed P&L is in place with the correct ratios, which will help to identify immediately any areas to improve.
4. Establish Full Control Over the Cash Flow:
- Ensure an accurate and detailed cash flow is prepared, including all the future payments, and there is no need for cash injection.
- Set up all the necessary policies and procedures to receive the accounts receivable payments on time
- Control that all the debts included in the city ledger of the seller are current debt and not old outstanding ones
- Calculate the future committed payments (i.e., loan, works, etc.) correctly and ensure they are included in the cash flow to prevent errors before presenting to the board of the new ownership company.
Dimitris Mittas is vice president of finance at Global Asset Solutions; Alex Sogno is CEO of Global Asset Solutions; and Fabio Bianchetti is a student at Ecole Hôtelière de Lausanne.
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