Need for Due Diligence –

Anyone interested in acquiring a business enterprise needs to conduct a thorough investigation related to the business proposed to be acquired covering all aspects. The crux of due diligence remains same as shown in the above chart though aspects to be covered vary depending on the type of industry.  In this discussion the focus is on hospitality industry. The pandemic situation has turned the business scenario for hotels upside down. Thanks to many businesses either shutting down operations permanently/ temporarily there has emerged a whole set of companies wanting to exit business and find a buyer. This is more pronounced in Hotel Industry which depended heavily on corporate houses for its business. Many hotels are thus put up for sale. It is here that effective investigation and due diligence assumes significance.  

Steps for Due Diligence –

First and foremost party proposing to enter into any sort of agreement for due diligence need to execute a non disclosure agreement (information receiving party) with the organization where due diligence is conducted. Such agreement broadly covers-

1. All information received will be kept confidential. No documents will be copied, shared, or disclosed to any one without the prior permission of disclosing party.
2. Access to confidential information will be restricted to those of the employees or officers who are supposed to know the same.

Due Diligence Process & Types of Due diligence –

Due Diligence process related to hotel will cover a host of items and need discussion in two parts. In the first part, following areas are covered.  

Legal Due Diligence –

 Covers Compliance by the hotel of all legal aspects like-

1. License required to run the operations like Food License/ Liquor License/ 
2. Liquor license for special events 
3. License for running the hotel
4. Rating certificate issued by the Ministry of Tourism
5. Operating License
6. Approval from Fire Department
7. Public Liability Insurance
8. Compliance with all applicable laws including Labor Laws and filing of Returns

Tax Due Diligence –

Very important element in Due Diligence Process. Nonpayment/ Delayed payment of statutory dues can result in heavy penalties including imprisonment. It also damages the reputation of the Hotel. Any slackness in following the Due Diligence Process relating to Tax can have serious implications. Ensure that the Hotel has availed all tax benefits available. 

Operational Due Diligence –

This covers the following area-

1. Due diligence of operational aspects will help in establishing operational efficiency including wastage in operations like, Food Wastage, inefficient use of lighting, power, water, lack of proper control in procurement which may result in poor quality, delay in deliveries, poor quality etc. Due Diligence must cover audit of each area to throw deficiencies if any in operations. 

Conclusion –

Properly planned and executed due diligence is the key to successful conclusion for any business deal. 

Author – C A P. G. Subramanian is Principal Consultant with Surymerlin Hospitality and has over 15 years of experience in hospitality industry.