Top tips in the

diligence process
What investors need to know

M&A can transform your business, providing new sources of

growth and creating synergies with existing operations that can
reduce costs and drive revenues. Investing in a new business,
however, is an uncertain process and the risks of failure and
value destruction - are significant.
Due diligence is therefore an essential part of the M&A
process, which every investor should carry out when looking to
invest in a business. It is designed to uncover the important
issues that need to be considered, help test your investment
rationale and ensure that you pay the right price for the
business that you intend to acquire.

Due diligence process 10 common issues in hotel deals

1. Quality of earnings
Are the reported numbers inflated by a number of one-off items or
provision releases? What are the profit drivers and are you valuing the
right profit stream?
2. KPIs
KPIs are a barometer of health, but may also reveal opportunities for
improvement. What are the trends in occupancy, ADR, REVPAR,
GOPPAR and conversion and how does REVPAR compare to other
hotels of the same ranking in the same region?
3. Management agreements/Franchise Agreements
What are the terms and financial impact of the agreements in place? If
they are to remain in place, do you understand the cash flows and the
relative incentives of brand operators and owners to drive different
aspects of the business?
4. Interaction with in-house third parties
How does the hotel interact with third party operators, for example

of restaurants, concessions and car parking? Do you understand the

terms and financial contribution of these arrangements?
5. Quality of the asset and Legal ownership
Will significant investment be required post acquisition? Have you
factored costs of refurbishment into the price you are willing to pay?
Does the business operate a FF&E reserve and how has it been
utilised?
In case of acquisition of a joint-venture company, does the jointventure agreement regulate that the companys fixed assets will be
transferred to the Vietnamese party by the end of its operating period
at no cost?
Private ownership of land is not permitted in Vietnam, foreign
investors in Vietnam obtain LURs (a) by way of a JVC to which a
local Vietnamese partner contribute LUR as capital contribution, or
(b) by way of land leased directly from certain permitted lessors such
as the State.

6. Operational leverage
A high fixed cost base can reduce flexibility in the event of a
downturn and increase the risk of losses. Interest on borrowings can
be significant following hotel acquisitions and refurbishment. Are the
sensitivities fully understood?

8. Net debt
Are there items on the target's balance sheet that should be for the
account of the vendor (e.g. corporation tax accrued on profits up to
completion, guest deposit liabilities, bookings and long-term
residents).

7. Levels of working capital

What was the historical requirement to deliver reported profits and
what will it be going forward - will the target deliver sufficient
working capital at completion or will further funds be needed? Will
business on the books be sufficient to carry the business through
seasonal low periods?

9. Tax
Historical compliance and planning deficiencies can lead to future tax
liabilities.
10. In-house systems
How robust are front and back of house systems? Are they fully
integrated and how often are they reconciled?

Due diligence process key areas for focus in our experience

Contractual relationships

Working Capital and cash flow

Understand the relationship in respect of the

HMA or franchise agreements, F&B contracts, and
any other concessions/tenancies

Normalised historical working capital

Identify the cash flows and financial contribution

for each of the above

EBITDA to cash (CFADS) conversion

Seasonality in working capital requirement and

intra-month cash flows

Assess the recoverability of balances between

parties

Lease arrangements/status

Accounting and control environment

Revenue recognition policies
Management incentive (charged to operating
expenses or the bonus reserves in case of selfmanaged hotel)
Capitalisation policy
Provision for bad debts, slow moving or obsolete
inventories
Control environment, including key reconciliation
procedures
Management information systems (MIS) not in
place
Lack of the interaction of front and back office
systems

Forecasts/projections
Reasonableness of Base Case trading and cash

flow assumptions
Projected capex

Taxation
Status of tax audit and the result of tax audit in
prior years
Status of submission of tax returns (including any
current enquiries)
Potential tax risks/tax opportunities on or after
completion
Impact of proposed transaction structure

Historical trading/operational KPIs

Revenue and gross operating profit by

department/channel impact of OTAs
Revenues by customer type (transient vs.
corporate) and by nationality
Principal KPI analysis, namely RevPAR
(including occupancy and ADR), GOPPAR
and comparison to relevant industry
benchmark
Impact of seasonality and one-off events
Impact of any long-term residencies
Current overhead cost structure
Quality of earnings and normalisation
adjustments to reported EBITDA
underlying earnings

Historical net assets

Hotel ownership structure and nature of intragroup relationships, including intercompany
balances
Fixed assets historical renewals/renovation, and
future plans
Hotel operator/F&B tenant payables and
receivables
Deposits and income received in advance
Financing structure, including key terms and
hedging instruments
Net debt items for the account of the vendor, and
contingent liabilities

About Grant Thornton (Vietnam)

The due diligence process needs to be robust and balanced, prioritising the key transaction risks. At Grant Thornton we offer a wide spectrum of
services helping corporates, banks and private equity houses to make well-informed strategic decisions around investment and growth. We support both
bidders and vendors, assessing the operational risks and opportunities in a target business to help give our clients an 'edge' in their M&A transactions.
The hotels sector is one of our core areas. In our experience there are a number of areas that are critical when focusing on investment and we have
provided these below. If you would like to discuss any of these issues further please do not hesitate to contact us.
Nguyen Thi Vinh Ha
Advisory Services Partner
E VinhHa.Nguyen@vn.gt.com
T +84 4 3850 1600
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