There is no doubt that the first eight months of 2020 have been nothing like what we all expected when writing our New Year’s resolutions back in January. Despite the challenges and obstacles of the last few months, it has been fantastic to see the beers flowing and venues bustling again as the Queensland hospitality industry welcomes a (partial) return to normality. As a result of the staged relaxation of COVID-19 restrictions in Queensland, we have seen a gradual increase in interest in the hospitality transactional space. Hopefully we will see this continue to rise in the months ahead, and with this in mind, I thought it timely to run through some tips for new entrants to the pub and hotel market, or those well-versed veterans looking to revisit the basics.
What assets do you want to buy?
While it may seem a simple question, it’s one that requires careful consideration. For example, combined freehold and business transactions will bring higher purchase prices, but provide additional exit and restructuring opportunities in the future (such as a sale of the freehold title, but retention of the leasehold, or vice versa).Alternatively, leasehold purchases will be cheaper, but require careful consideration in relation to leasing matters and options to renew.
Both prospective buyers and sellers should consider what assets will form part of the transaction, as it is often the case that some aspects of the business (such as branding, vehicles or specific products or licences) are excluded from the sale.
Who owns what?
This is a common issue when dealing with long-established businesses as it is often the case that certain assets have been purchased over time, or are used in the business but are owned by or registered in the name of someone else. These inconsistencies ought to be investigated prior to listing your asset for sale, or at the very least (for purchasers) addressed in the sale agreement so that the buyer can be assured that they are able to take ownership of all necessary assets to run the venue after settlement. Importantly, these matters will often have a bearing on the tax treatment of the transaction, particularly in relation to GST.
Financial information and equipment leases
As a starting point for both buyers and sellers, financiers should be given as much notice as possible of any potential transaction. As with any transaction, prospective buyers should be fully aware of their financial capacity and the terms required by their financier in any potential transaction (such as director’s guarantees). For sellers, company directors should confirm whether any personal guarantees have been provided as part of the financial arrangements and ensure that they are released upon the sale of the venue.
Information regarding the financial position of the business is a key preliminary detail in the transaction process. As outlined in my column in the August edition of the QHA Review, we have seen some contracts negotiated in the midst of COVID-19 include conditions precedent, to the effect that settlement of the transaction will not be triggered until the venue sees a return to ‘normalised’ turnover figures (ordinarily two consecutive months reflective of the numbers achieved 12 months prior).
Careful structuring consideration needs to be given by both parties as to the ‘triggers’ for the settlement of the transaction.
It is important to ensure that the name of the venue has been registered with ASIC and is current. The name of the hotel and any bottle shops can make up a large component of the goodwill associated with the business so for sellers and buyers alike, it is vital to ensure that these matters are in order.
Quite often the terms of a hotel lease (for leasehold premises) are neglected, particularly when the landlord and tenant are related parties. Prospective sellers should look to rectify any internal leasing matters prior to going to market. Consideration should also be given to the terms and status of any detached bottle shop lease.
The incoming purchaser will take assignment of these leases as part of the transaction, so it is important to ensure that the terms of the lease are complied with to the extent assignment is concerned (for example, rent arrears or other potential breaches).
Due to the pandemic, most tenants have sought to secure rent relief or other rental incentives. The extent (including quantum) of these relief measures should be quantified in any disclosure material and will need to form part of the purchase consideration (for example, any pre-settlement rent that has been deferred to post settlement as part of a rent concession).
Development and building approvals
Buyers and sellers alike need to consider the current regulatory status of the venue. If any redevelopment or renovation works have been undertaken, the seller should also make sure that all local government development approval conditions have been complied with and any final approvals obtained (such as certificates of classification).
It is timely to note that OLGR approval is required for any COVID-19 related operational changes, such as changes to the licenced area or alterations to gaming rooms and gaming machine locations. This is yet another important item to investigate before progressing with a transaction.
Is the business operating lawfully?
Of course, every hotel will require a liquor licence! Those premises with gaming facilities will require a gaming machine licence. Most local governments will also require a premises to hold several other accreditations, including food hygiene, trade waste and signage. Both buyers and sellers should ensure that all relevant licences are in place and current.
Mullins has advised the hospitality industry for more than 30 years. In this time, we have developed a team of specialist property and hospitality lawyers, renowned for their experience in hotel, pub and club transactions. If you would like to discuss the prospect of entering the transactional market, please call me on 07 3224 0230.