This article was originally published on LinkedIn in June 2017
As with any sector, the hospitality industry faces many challenges when if comes to growing by merger and acquisition. Many of these are common to any sector, but Hotels, Restaurants and Bars have their own challenges when it comes to M&A.
It is possible to maximise the value you can achieve from your deals. It’s also possible to do this value quickly with minimal risk. However, without appropriate planning and preparation, you risk both failing to achieve your acquisition goals, and damaging the wider business.
Business and Acquisition Strategy
If you are growing your bar, restaurant or hotel operation through acquisition, the first consideration should always be the strategic reason and direction for this plan.
For example, do you want to focus and extend your capabilities in similar geographic or service areas? Alternatively, are you seeking to diversify or extend the business by developing new markets or products. You may be considering how to respond to new external threats or opportunities, such as disruptive new players, e.g. Airbnb, Deliveroo and OneFineStay. You may even be looking at vertical integration by acquisition of your suppliers.
Understanding these establishes the Strategic Rationale for the deal. This provides guidance and direction for all the activities to follow. It is a central point of reference for any fundamental questions around the acquisition strategy and approach.
A further consideration is whether this will be an ongoing strategy for the business. If so, it can be worthwhile investing in the development of an M&A Playbook. This is the set of standardised methods, processes, tools, templates, roles, etc., which significantly simplifies the process of doing further deals. If this is not in place, then each deal is treated as an ad-hoc activity, which often means that valuable lessons learned are not applied subsequent deals.
Identifying & Assessing Targets
Once the strategic direction is clear, you can start to review potential targets in a more effective manner. Instead of considering each potential opportunity on its own merits, you can apply filtering criteria to screen out obvious mis-matches. For the remaining opportunities, prioritisation criteria can be applied to determine which should be investigated in more detail.
For example, if the strategic rationale for acquisitions is to expand business in the local geographic area, but without impacting on the existing portfolio, the filtering criteria might be:
- Area of operation (e.g. local business - Yes/No)
- Clash with existing portfolio (review against current portfolio - Yes/No)
- Troubled Business (Yes/No)
The last of these criteria may filter targets in for a turnaround specialist, or filter out for a regular acquirer.
Once screened, the remaining opportunities may be prioritised in for action, e.g. in terms of:
- Clientele / Demographic / Audience
- Preferred location
- Potential for improvement of the business
- Likelihood of sale
Undertaking Due Diligence
Within the M&A process, the area where there is most potential for Hospitality industry specialisation is Due Diligence. Once potential targets have been selected and approached, Due Diligence must be undertaken to better understand the opportunities and issues that the presented by the target.
There are a number of common Due Diligence considerations which must be addressed, such as:
- Company Financials, including P&L, balance sheet & tax
- Legal issues, e.g. contracts and litigation
- Intellectual Property, including ownership of trademarks, logos, etc.
- HR and People, numbers, structures, training, compensation approach.
However, for the hospitality industry certain specifics must be given a higher priority and deeper level of analysis than in other industries. For example:
Real Estate - ensuring that there are no underlying issues with property or leases:
- Physical condition of properties
- Previous property issues
- Future lease liabilities
- Engineering or development reports
Operations - Industry specific considerations and policy / regulatory requirements such as:
- Kitchen equipment consideration and issues
- HACCP & Food Safety Risk Assessment
- Cleaning - Schedule, Plan, COSHH Flowchart & Risk Assessment
- Complaints - Procedures, Registers & Disclaimers
- Training - Requirements, Essentials & Register
- Pest Control - Policy & Register
- First Aid & Accident - Policy, Register, Medical Questionnaire & Return to Work Document
- Health & Safety - Policies, Risk Assessment
- Other Policies - Drugs, Smoking, Alcohol, Safeguarding, Allergies, Glass, Glove, Personal Hygiene
- Fire & other Risk Assessments
Performing this Due Diligence in a structured and comprehensive manner will allow the show-stopping risks and issues to be identified and negotiated if necessary. It also provides input into the value drivers for the deal.
How will you get value from the deal?
You are not going to do the deal unless it makes financial sense, so it is critical to understand how it is going to make you money. These Value Drivers for the deal must be quantified and planned carefully. While you may have an initial view of these from the target assessment process, Due Diligence will enable the full definition of these opportunities.
Example Value Drivers for the hospitality industry will include:
- Cost Synergies, such as:
- Centralisation of capabilities such as Finance, IT, Reservations and Supply Chain.
- Supplier consolidation and rationalisation to optimise volume pricing.
- Harmonisation of staff terms and conditions.
- Growth Synergies, such as:
- Cross-marketing of different products or brands, e.g. hotels to restaurant diners.
- New product offers
- Optimisation, e.g. application of pricing or staffing best practice
These Value Drivers are a key input to the price that you will be willing to pay, over and above the base assets and/or multiples of profit or revenue. By considering these alongside the base performance of the business, you will know whether you can come to an agreement, or whether you will walk away from the deal.
Assuming that the deal does go ahead, it is also critical to understand how the value drivers will be realised. A summary of all the value drivers should be prepared which shows the financials, metrics, plans and risks underlying each. This is a key input to the integration or execution plan.
This planning will also ensure that the costs are clearly understood and trackable as an integration budget. This may include considerations such as rebranding, refurbishment, process change, and staff costs such as redundancies and retention.
In the hospitality industry, people are king. Where an acquisition will be an add-on to an existing brand, it is strongly recommended that there is a good cultural match. For stand-alone acquisitions, this may be less of a consideration other than at the senior management level - assuming they will be retained.
Culture reflects ‘the way we do things here’, so where there will be a significant rebranding, there may be barriers to change in behaviour. Where there is a high degree of staff turnover, this can be overcome in a relatively short period, but it can cause problems in the interim. These can be hard to overcome, so generally the best approach is to avoid the issue by including this as part of the assessment criteria.
Other people factors must also be considered, such as communication of deal progress, retention of key staff and implementation activities such as training.
Overall, people issues can be one of the key sources of failure in acquisitions. The nature of the hospitality industry means that this is especially true here. This is show clearly in the importance placed on people related success factors highlighted in the chart below:
“M&A Integration: A mergermarket report on issues surrounding post-deal integration for European companies” MergerMarket, 2007
In summary, the Hospitality industry has specific factors which must be considered as part of strategic M&A plans. However, as with all deals, structured planning and appropriate preparation will ensure that the planned value is delivered with the minimum of risk.