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If you have any more questions or would like more information regarding due diligence, you can contact our Hospitality and Leisure Solicitors below.
What is due diligence?
Due diligence is an essential component of any business purchase, particularly for hospitality and leisure businesses. It allows the buyer to obtain information relating to the business to manage the risk caused by the principal; buyer beware.
The due diligence process begins at the start of the transaction and is likely to be ongoing throughout the process. The scope of due diligence is important and allows the buyer to ask questions of the seller and target the key considerations relating to the legal, financial, and commercial aspects of the business.
Why is due diligence important?
Buying a business is a major investment, and as a purchaser, you will want to satisfy yourself not only that the target has been run appropriately historically but also be able to consider the future prospects of the business.
The seller is under no obligation to provide any of this information to the buyer due to the principle of caveat emptor, or buyer beware. It is up to you as the buyer to conduct investigations about the business to make an informed decision on the purchase.
How to protect yourself as a buyer in the leisure industry
The simple answer is to carry out due diligence.
It is vital to ensure that the target leisure business has all relevant licences to the business, has carried out appropriate risk assessments for the health and safety of its staff and customers and is financially stable. However, legal and financial issues are not the only considerations in due diligence. It is important to also consider the main areas of risk and liability inherent in the leisure industry (as outlined below).
Businesses in the leisure industry depend on their reputations which take so much time to build and are one bad experience away from being lost. The buyer needs to ensure that there are no circumstances that could lead to a loss of reputation or that transaction could cause a key individual in the business to leave.
Once the seller has provided responses, further enquiries can be made to ensure that all queries are resolved prior to completion and that the buyer has all information to make an informed decision.
How to protect yourself as a seller in the leisure industry
Due diligence is not only essential for the buyer. A prospective seller should also carry out its own due diligence of the business to help it identify risks, deficiencies, and liabilities, enabling it to mitigate them before conducting the transaction. If any issues cannot be rectified, the due diligence process allows the seller to put the buyer on notice of any such issue.
As part of the transaction, a seller will be required to give the buyer an extensive number of warranties. Warranties are contractual statements given by the seller as to the condition of the business. If a warranty is found to be incorrect following completion, a buyer may have a potential claim for damages for a breach of warranty. How a seller can limit their liability under the warranties is to make a disclosure against them which is routinely done through the due diligence process.
The buyer may require an indemnity to be given in relation to specific liabilities following the due diligence process. An indemnity is a promise to reimburse the buyer in respect of a particular type of liability, should it arise. The due diligence process or disclosures offered against particular warranties will alert the buyer to areas where a warranty will not be enough, and an indemnity may be requested instead. Should an issue arise that relates to an indemnity, the buyer will be able to recover all losses on a pound-for-pound basis without needing to mitigate their losses.
The main takeaway for any seller approaching due diligence is to be detailed when responding to enquiries and as open as possible throughout the process to protect themselves against potential claims.
Issues to consider for hospitality and leisure business
Health and Safety
All businesses need to consider health and safety; however, the addition of customers adds further regulations to comply with and risk assessments to be carried out with a variety of potential hazards to both staff and customers ranging from site layout to site facilities and amenity blocks.
Compliance
Many compliance issues must be considered to ensure that the business operates safely and depends on the facilities available within the business. For example, if the business has pool facilities or amenity blocks, you need to ensure that all water safety and hygiene requirements are met in relation to legionella and risk of other infections.
Licences and Permits
Should the business have premises, you need to ensure that all appropriate licences and permits are in place, such as alcohol licences, premises licences, food hygiene certificates, PRS for music licence, and sitting out licence for any tables and chairs outside the premises.
Reputation and Brand Management
As a buyer, you need to ensure that there are no circumstances that could lead to a loss of reputation or that the transaction could cause a key individual in the business to leave.
Staff
The leisure industry is well known for having a high employee turnover. Careful consideration should be given to the target business's current employees in contrast to the employment needs of the business to ensure that the business can continue to run successfully post-completion.
Commercial agreements
With the many different components that make up a business in the leisure industry, a prospective buyer needs to ensure that the business has in place all appropriate contracts with suppliers and that the proposed transaction will not affect any key contracts. Once the buyer is confident that the contracts in place are all that are required for the business, an analysis of each contract and a comparison with industry norms can highlight potential areas where the business can be improved. Given the average industry profit margins, a prudent buyer should analyse where improvements and savings can be made.