Due Diligence and Acquisition of a Boutique Hotel Chain

The client had independently identified an opportunity that seemed attractive: a chain of four boutique hotels in Mallorca, all in prime locations, with a recognised brand in the lifestyle segment and an average occupancy of 78%. The seller was asking €18.5M and the client was prepared to pay that price without further analysis.

LFGD was engaged to conduct full due diligence before closing the transaction. What we found completely changed the picture. The seller's valuation was based on revenue projections that included two atypically strong post-pandemic seasons, without adjusting for market normalisation. Normalised EBITDA was 22% lower than presented.

Even more concerning was the discovery of three significant tax contingencies: an open tax inspection covering fiscal years 2019–2021, an employment dispute with former employees estimated at €180,000, and a debt to a strategic supplier that did not appear on the balance sheet but that the seller had verbally acknowledged in one of the negotiation meetings.

The due diligence was structured across three simultaneous areas. In the financial area, we reconstructed the profit and loss account for the last five years, eliminating extraordinary effects and normalising revenues. We analysed real RevPAR against comparable market benchmarks and projected three scenarios for the next five years.

In the legal area, we worked with a firm specialising in hotel law to review all lease agreements (two of the four hotels operated under lease), operating licences, employment contracts and social security status. It was in this phase that the three tax contingencies were identified.

In the operational area, we visited all four properties, interviewed the management team and analysed online reviews for the last three years to assess the chain's real reputation. We also identified operational improvement opportunities that the buyer could implement to increase EBITDA by 15% in the first 24 months.

With all this information, we negotiated a price reduction from €18.5M to €15M, including price adjustment clauses linked to the resolution of the tax contingencies and an 8% price escrow held for 18 months as a guarantee against additional hidden liabilities.

The transaction closed at €15M, 19% below the initial price requested by the seller. The three tax contingencies identified during due diligence were quantified at €480,000 in potential liability, covered by the adjustment clauses and escrow negotiated.

Twelve months after closing, the client had implemented the operational improvement plan identified during due diligence. Average occupancy had risen from 78% to 84% and first-year EBITDA exceeded the base scenario projections by 11%.

The tax inspection was resolved with a settlement of €95,000, well below the maximum estimate of €300,000 we had provisioned. The employment dispute was resolved out of court for €62,000. The client recovered the escrow with a net positive balance.