12.04.09

Cancellation Policies and the Dreaded Chargeback (Part 1)

Posted in Ownership of a Hospitality Business at 2:18 pm by Frank Petrosino

Mr. and Mrs. Smith have stayed at your Vermont inn a number of times in recent years. You are glad to see that they have yet again made a room reservation for next Saturday night and have requested their usual room, which carries a weekend rate of $250 per night. Your cancellation policy clearly states that for room reservations not cancelled by 6:00 p.m. (your time) on the night of the reservation, the person making the reservation will incur a charge equal to the cost of the night’s stay plus tax. Saturday night rolls around, and you get a call from Mr. Smith at 8:00 p.m. Mr. Smith informs you that he wants to cancel his and his wife’s room reservation. You dutifully charge Mr. Smith’s credit card for the cost of the night’s stay (i.e., $250) plus tax (i.e., 9% of $250, which equals $22.50). A few weeks later, you receive a chargeback notification telling you that Mr. Smith disputes your $272.50 charge and asking you to provide documentation supporting the charge. What do you do?

Chargeback Notifications

Generally speaking, a chargeback is a charge made against your credit card merchant account because your customer disputes a charge you made to the customer’s credit card. The dispute usually triggers the sending of a notice to you of the chargeback. This notice is usually called a chargeback notification, a retrieval request, or something of similar ilk. Any such notification or request will ask you to provide certain information in order to dispute the chargeback. Please take careful note of the deadline to respond. You may only have as little as 7 days to respond, depending on what the notification or request mandates.

Responding to a Chargeback Notification

Your response to a chargeback notification regarding cancellation or no show charges actually starts well before you receive the notification. To have any chance of succeeding, you must first have had in place a clearly written cancellation and no show policy. Such policy must identify the circumstances in which a customer will be charged and what the charge will be. Here is a sample cancellation and no show policy:

“Please notify Hotel Opulence immediately of any changes or cancellations to your reservation. If you do not show up to claim your reserved room(s) or if your reservation is not canceled by 6 p.m. Eastern Standard Time on your scheduled arrival date, you will be charged for one night’s stay (per room reserved) at the average daily rate you would have paid (per room reserved) for all the days covered by the reservation, plus all applicable tax due. ”

Any cancellation or no show policy you use must be clearly communicated to your customers. You will, of course, want the policy posted conspicuously on your website and at your establishment. During the reservation process, you need to at least communicate to the customer (1) the applicable room rates, (2) the hotel’s street address and other contact information, (3) the reservation conformation code and the need to retain it, and (4) your cancellation and no show policy. This can be done through a confirming letter sent via email or regular mail (or both); keep a copy of the confirmation letter for your records.

If the customer cancels the reservation either before or after the cancellation deadline, keep a written record of the date and time the cancellation was processed and provide the customer with a cancellation number. It is good practice to send a notice to the customer confirming the date and time of the cancellation, reminding the customer of your cancellation policy, and showing the amount the customer was charged (if a charge is warranted).

In a no show situation, it is good practice to send a notice to the customer detailing the reservation, confirming the no show, reminding the customer of your no show policy, and showing the amount the customer was charged.

You will want to have a chargeback response procedure ready so there is no delay in responding to the chargeback notification. Such procedure should include a calendaring system to remind you of response deadlines. Ready access to all reservation, cancellation, and no show records is a must. Regularly obtain and read the chargeback policies (and policy updates) for each credit card provider whose card you honor. Your procedure should document each step taken during the chargeback response process and should also keep track of historical dispute results.

Once you respond to a chargeback notification, it is up to the applicable credit card company to analyze your response and determine whether the chargeback is justified. If the credit card company sides with you but the customer is still disputing the charge, you may be able to utilize the credit card company’s dispute resolution procedure (e.g., arbitration in which the credit card company acts as the arbitrator). The whole process can take a week or it can take many months depending upon the stage in which the chargeback dispute is settled.

Permalink Comments

01.26.09

Buying or Selling Your Hospitality Business (Part 2)

Posted in Ownership of a Hospitality Business at 9:58 pm by Frank Petrosino

Representations and Warranties
No matter how much due diligence is done, most buyers still want sellers to give the buyers contractually binding representations and warranties about the past and current condition of the business.  The idea here is that if after a sale a buyer encounters an unpleasant surprise that relates to the seller’s action or inaction, the buyer wants to be able to go after the seller.  For example, if a seller of a resort hotel makes a representation that has remitted all collected trustee taxes to the appropriate taxing authorities and such representation turns out to be false, the seller will be liable to the buyer for any damages the buyer suffers as a result of the misrepresentation (even if the representation was innocent).

Conclusion
As on any road to achievement, the key to a successful and mutually rewarding sale of a business takes a combination of realistic self-confidence, bulldog determination, good timing, and a touch of audacity.  Planning and due diligence are essential to figuring out what is being purchased and reducing the risk of post-closing surprises.  If the process concludes well, the seller can move on to new adventures, and the buyer can make its new business shine.

Permalink Comments

01.20.09

Buying or Selling Your Hospitality Business (Part 1)

Posted in Ownership of a Hospitality Business at 4:13 pm by Frank Petrosino

During the lifecycle of a business, its owners may get the opportunity to sell the business as a going concern.  Depending upon the type of business, the buyer may be a couple looking to get into the bed and breakfast market or a multinational resort owner looking to expand its market share.  Regardless of the size of the transaction and the types of players involved, however, there are common elements to every sale of a business. 

Finding Buyers and Sellers
The business of selling a business is no mystery.  Owners looking to sell a business can actively seek potential buyers by going through a business broker or marketing the business themselves.  In certain industries, such as the hospitality industry, a broker can really help bring buyers and sellers together and act as a liaison between the parties.  In industries with fewer players, sellers can market their businesses to potential buyers who may be direct competitors or who may be looking to vertically integrate.    

Circumstances will obviously dictate the tone of the search.  A financially distressed seller will have an air of desperation that a financially vibrant seller will not.  Be cognizant of relative bargaining positions, realistic about determining business value, and prepared for the likelihood that bargaining positions will affect the ultimate purchase price.   

Structuring the Deal – Asset Sale, Ownership Interest Sale, and Merger
There are three basic structures that can be used to effect the sale of a business: a sale of all the assets of the business; a sale of all the stock (or other ownership interest) of the entity (e.g., corporation, limited liability company) that owns the business; and a merger. 

Buyers who are not looking to assume all of the liabilities of a business will want to structure the purchase as an asset purchase.  In an asset deal, the buyer can generally pick which liabilities it wants to assume and which it does not.  For example, a hotel/restaurant business will carry current liabilities to its vendors, may owe long term debt to a bank, and may be a defendant in litigation.  A buyer is generally not going to want to take on the litigation liability or the long term debt (even if the bank would let the buyer take over the long term debt), and may or may not want to take on the current liabilities.  Of course, the buyer can also reject some of the assets (e.g., obsolete inventory).      

In an ownership purchase deal (called a “stock deal” in the corporate context), the buyer purchases the underling ownership interest of the entity that owns and operates the business.  Such an entity is usually a corporation or limited liability company.  In such a deal, the assets and liabilities of the business remain in the entity whose ownership is being purchased.  Contracts that the entity had with vendors and others will generally be unaffected.  The extent to which assets of the business remain unaffected, however, will need to be verified during the due diligence process (described below). 

In a merger, two entities will join together – one will survive and one will not survive.  The survivor becomes the owner of all of the assets and liabilities of the non-survivor.  Additionally, a merger of corporations may offer some tax advantages. 

The Due Diligence Process
The due diligence process allows buyers to determine what they are buying.  Of course, the financial condition of the seller’s business is of paramount concern.  Buyers also will want to investigate tax compliance, employee safety and benefit compliance, insurance coverage status, environmental and code compliance, intellectual property status, and litigation status.  For instance, when buying a restaurant, a buyer will want to know that the building where the restaurant is located is properly permitted and up to code, all servers serving alcohol are trained and certified, and all taxes have been paid. 

One key area in the due diligence process is determining whether the sale will violate any contracts the business has entered into.  If the buyer is looking to take over vehicle leases or key software licenses, the buyer must make sure that such contracts are transferable (even in a stock deal or a merger).  Transfer restrictions can be quite time consuming to deal with; give yourself plenty of time to work out such issues with third parties.

Permalink Comments