Buying Hotel - Do I Take Over the Accounts Receivable?
Seems you're paying for work already done at the hotel in the purchase price, so if you buy a hotel are you responsible for collecting account receivable that are 30-120 days past due on varying amounts. How does it work if you're buying an asset for $8mm (asking price) and the account receivable is $100k overall past due.
When acquiring a hotel, the treatment of accounts receivable (AR) can vary based on the terms negotiated between the buyer and seller. Here's a breakdown of considerations and common practices regarding AR in hotel acquisitions:
Negotiation is Key: The handling of accounts receivable is typically a point of negotiation in the sale agreement. Buyers and sellers can agree on various terms regarding the AR, such as whether the buyer will take over the responsibility of collecting it or if the seller retains that responsibility.
Purchase Price Adjustments: In some cases, the accounts receivable may be factored into the purchase price. For example, if you're buying the hotel for $8 million and there's $100k in AR, the purchase price could be adjusted to reflect this. The specifics depend on the agreement reached.
Due Diligence: Buyers should conduct thorough due diligence on the accounts receivable. This includes assessing the age of the receivables, the likelihood of collection, and any potential issues that could affect their value. Understanding the quality of the AR is crucial for making informed decisions.
Types of Sales: The nature of the sale (asset sale vs. share sale) can impact how accounts receivable are handled. In an asset sale, it's more common for the AR to be excluded from the sale unless specifically included in the agreement. In a share sale, the AR typically remains with the hotel as it's part of the company being acquired.
Legal and Accounting Implications: There are legal and accounting implications to consider when taking over accounts receivable. It's advisable to consult with legal and financial professionals to understand the implications, including any liabilities or tax considerations.
Operational Considerations: If taking over the AR, consider the operational aspects of collecting it. This includes the processes, resources, and potential costs involved in collection efforts.
In summary, whether you take over the accounts receivable when buying a hotel depends on the terms negotiated in the sale agreement. It's important to carefully evaluate the AR, negotiate terms that align with your interests, and consult with professionals to navigate the complexities involved.
Sources: DCF Modeling Course ~ Pre-training text.pdf, Hotel Crisis, Is anyone else really forgetful? Or do I have terrible memory, Lunch & Learn - Hotel Industry & Hotel Development, https://www.wallstreetoasis.com/forum/investment-banking/didnt-make-it-to-a-target-now-what?customgpt=1
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