Acquiring a hospitality business: Key legal considerations

Deciding to acquire a business involves the consideration of a wide range of factors, some of which will be driven by the sector in which the business operates. This article explores the general and primary decision of how to structure an acquisition before highlighting some key areas to be aware of when acquiring a business within the hospitality sector.

After deciding to purchase a business, one of the first steps will be determining how to structure the transaction. There are two possible options:

1. Share Purchase: the buyer purchases the shares in the company operating the hospitality business from its shareholders; or
2. Asset Purchase: the buyer purchases the necessary assets to run the hospitality business (such as the buildings, contracts, intellectual property etc.) from the company.

Share purchase

• More straightforward in terms of the transfer as the buyer acquires the company and everything in its name (such as contracts, IP, IT, employees etc.) instead of ending up in negotiations around what is/isn’t included.
• Less paperwork as acquiring the entire company does not require separate transfers of each asset (i.e. transfer of real estate, novation of contracts, IP assignments and TUPE transfers of employees) as would be required under an asset purchase.
• Appeals to sellers as they avoid the double taxation they incur on an asset sale (as the selling company incurs CGT and then the shareholders incur tax when they extract the completion monies from the company)​​​​

Asset purchase

• The buyer can limit the acquisition to only those assets of the business they would like/need without obtaining the historic liabilities of the entire company which narrows their exposure, the scope of the deal and the level of due diligence (in turn, potentially reducing costs).
• Assets which carry risk of liability can be excluded from the sale which helps the buyer protect their position.

One of the key considerations which will drive the structure of the transaction is risk and which party bears the risk. Below we have set out three areas of risk which apply to the hospitality sector, in particular. Being alive to such risks and identifying them early will be key to ensuring these can be resolved via appropriate mechanisms in the purchase agreement, a price adjustment or, ultimately, calling the deal off altogether.  

Healthy and safety compliance

When acquiring a hospitality business, it will be necessary to ensure that the business has complied with its regulatory requirements and is operating safely for the benefit of its customers and employees. Enquiries will be made during the due diligence stage of the transaction to identify any non-compliance and flag the implications of the same. For example, requests are usually made for evidence of the following reports having been carried out (where applicable) within the last 12 months:

• Electrical Installation Condition Report (EICR certificate)
• Gas safety reports
• Boiler service
• Fire alarm tests
• Fire extinguisher tests
• Fire risk assessments
• PAT testing
• Leak checks for equipment using F Gas (such as large refrigerators and air conditioning units)
• Extraction system servicing and cleaning (TR19 Certificate)
• LOLER (Lifting Operations and Lifting Equipment Regulations) testing

Where the buyer identifies any failure to carry out inspection, they can ask the seller to remedy this before completion of the transaction and review the results of the requested inspection to identify any risk areas.

Licensing requirements

Venues will require licences in order to operate their business (such as the premises licence for the sale of alcohol and offering of entertainment and a PPL PRS music licence for playing recorded music or staging live music events). Care must therefore be taken during the due diligence stage to ensure that the appropriate licenses are in place and the associated fees have been paid. Failure to have in place the necessary licences can lead to fines and, potentially, criminal conviction.

The practical implications must also be considered. For example, the premises licence requires a designated premises supervisor who holds a personal licence to sell alcohol. This will need to be updated, and a suitable replacement lined up, if the individual who is the current designated premises supervisor is not remaining in the business post-acquisition.

Employment issues

Within the hospitality sector, the following employment issues are of particular importance:

National Minimum Wage (NMW)

The hospitality sector predominantly relies on the engagement of young, part-time and zero-hour workers. Care must be taken to ensure that employers meet their NMW obligations, tipping requirements are adhered to and adequate pay records are kept. Failure to pay NMW can result in fines, potential grievances and claims from employees and reputational damage. This can be potentially costly for a buyer.

Right to work checks

Employers must carry out right to work checks on all staff before commencement of employment (and where an employee’s right to work is time-limited, again when this is due to expire). Employers need to keep a record of such checks having been carried out to demonstrate compliance. On an asset purchase where TUPE applies, the buyer has a 60 day grace period post-purchase to ensure everything is in place but there is no equivalent grace period when TUPE does not apply (typically when only acquiring the business through the purchase of shares in the employer company). The sanctions for employing someone who is working illegally are severe, so it is essential for compliance to be checked during the due diligence phase of an acquisition. 

Holiday entitlement

In calculating entitlement to holiday pay, employers must include an employee’s basic salary and any payments which are ‘intrinsically linked to the performance of tasks’. In certain circumstances, this can include regular overtime payments and performance related bonuses, which can be common in the hospitality sector. Care should therefore be taken to ensure holiday pay has been calculated correctly, as a new employer may be liable to account to the employee for unpaid holiday pay for up to two years prior. 

Working time regulations

The Working Time Regulations set out rules in relation to working hours, rest breaks, and annual leave. Special protection applies to young workers, who are subject to stricter limits on their working hours. Employers must keep adequate records in relation to their WTR obligations to demonstrate compliance with the regulations and which can be inspected during the due diligence phase of an acquisition.

Next steps 

Overall, the hospitality sector, with its specific regulatory framework and demographic of employees, gives rise to a number of sector-specific considerations a buyer must be alive to. It is also important for a buyer to instruct advisors who have experience in the sector to ensure that they can identify and adequately deal with any issues to protect the buyer from unwanted liabilities (such as fines, employee claims and reputational damage).  

If you or your business has any corporate matters you would like advice on, including further details on acquiring a business, please contact our corporate lawyers  by email on [email protected].