Tough Times Create Creative Selling Strategies

Tough Times Create Creative Selling Strategies

Reprinted from Advanstar
Hotel & Motel Management Magazine
September 10, 1990
By Jeff Wilder
Wilder Group, L.L.C.

In these days of restrictive hotel lending and tight equity capital, it is often hard for an owner of marginally profitable hotels to "sell." I put the word "sell" in quotes because I really mean the motivated transfer of operational or ownership responsibilities to another person.

Owning a hotel demands the acceptance of significant legal and financial obligations. When times are good and cash-flow is rolling, or when you're playing with someone else's capital, then an owner or general partner accepts the responsibilities that hotel ownership and operation imply.

However, these are not lodging's halcyon days. These are days of sweating out a profit and balancing accounts payable that can't be serviced from cash flow.

Today it's difficult to locate hotel-business acquirers with either the stomach or the cash to take over lodging facilities on terms that both sides of the deal can live with.

Since the tax laws changed in 1986, it has become much more difficult for hotel operators to raise limited-partnership equity.

In 1990, hotel buyers must husband their cash carefully and have solid operating-capital funds set aside for a rainy day. Naturally, down-payment money on hotel sales is dropping significantly. Payout (or purchase money) financing also is being held for longer terms at lower repayment levels by sellers.

Often, the tax implications of a straight sale by current owners are uncomfortably severe, and the emotional shock of reduced hotel value is too great for all but the most motivated sellers to accept.

Therefore, several new approaches to creatively transferring business responsibilities are appearing. One of the favorite new approaches to hotel acquisition that I've seen is the partial-interest acquisition combined with transfer of management responsibility.

Some Equity Sold

With this approach, owners sell a portion of their equity position, usually together with the management contract, to raise cash. Hotel operators then receive equity by paying down burdensome business debts to more comfortable levels, by investing fresh capital in necessary modernization or by giving sellers modest levels of available cash for a portion of their ownership.

Payouts, or purchase-money financing, for the balance of available ownership are set up at very conservative levels, often with profit kickers if the income justifies payment. Often hotel buyers will buy 25 percent to 50 percent of a property, with options to acquire the balance down the line. Option prices for future equity acquisition usually are easier to negotiate.

A hotel operator's cash limitations, however, need not deter a transaction from occurring. Naturally, the operator must have sufficient cash to solve a business's true current needs. In other words, if a hotel needs $500,000 for immediate upgrading, to fund a bankruptcy plan or for necessary operating capital, and the hotel operator has that cash, alternate deal theories should be examined. However, if the operator doesn't even have adequate cash to cover the minimum financial needs of the business, don't waste time or close an under-funded plan.

The most important ingredient for an operator to mix into the acquisition's stew is unfettered business control. A clean sale of 100 percent business ownership is preferable to partial acquisition, but times require openness to new ideas.

However, a rock-solid tenet to adhere to is that one person should be the managing partner. If that person has his fresh capital on the line, then he deserves control of the business.