Acquisitions · 5 min read
Hotel P&L Red Flags Every Buyer Should Check Before LOI
Thirty years of running and asset-managing hotels around the world taught me one thing: the P&L tells the truth, but only if you know where to look.
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Read it like an operator, not a spreadsheet
Most buyers read a hotel P&L from the top: revenue, RevPAR, growth. I read it from the bottom up, the way I did when I was the one responsible for delivering that bottom line. Start with what the owner actually kept, then work upward and ask what had to be true for that number to happen.
Before you sign a letter of intent, you are still negotiating with leverage. Every red flag I find for a client now is either a price adjustment or a reason to walk. Every one found after LOI is a cost.
“A seller's P&L is a story. My job before LOI is to find the chapters they skipped.”
Revenue that won't repeat
I look for one-off business inflating the trailing twelve months: a construction crew, an airline contract, a film production, a sports event, a group that won't return. I've seen a single crew contract carry a hotel's occupancy for a year — and vanish the month after closing. Ask for revenue by segment and by top accounts. If a handful of accounts drive a large share of room nights, find out whether those contracts survive a sale.
Then compare ADR and occupancy against the STR competitive set. A hotel outperforming its comp set by a wide margin either has a real advantage you can name, or a temporary one you are about to pay for.
Expenses that were managed for the sale
Sellers preparing for an exit often trim what they can: maintenance deferred, positions left vacant, marketing cut, FF&E reserve contributions reduced or skipped. Margins look better; the building and the team quietly pay for it. I know exactly what this looks like, because I've sat in the meetings where these cuts were decided.
Check payroll against staffing guides for the brand and size. Check repairs and maintenance against prior years. Ask when rooms, corridors, mechanical systems and the roof were last renovated, and when the brand's next property improvement plan is due. A PIP can turn a good price into a bad deal.
The fees below the line
Management and franchise fees, reservation and loyalty charges, and distribution costs belong in your analysis even when they sit in odd places in the statement. Read the management agreement and franchise agreement before LOI if you can: termination rights, key money, incentive fee hurdles and transfer conditions shape what you are really buying.
And if the owner's statement shows management fees but no clear incentive fee calculation, ask for it. You want to know whether the operator is paid for performance or just for presence.
Taxes, insurance and the lines that reset
Property taxes can be reassessed after a sale. Insurance renews at today's market, not the seller's legacy rate. Ground leases, parking agreements and service contracts may reprice on transfer. Rebuild these lines as they will look under your ownership, not as they looked under theirs.
The question I always ask
After three decades of running hotels and asset-managing them across markets, the most useful question is still the simplest: why is this hotel for sale now? The answer is usually somewhere in the P&L. Find it before LOI, and you negotiate from knowledge instead of hope.