Tribes are beginning to regularly look for off-reservation investment opportunities as they seek ways to diversify their economies and related investments while tribal gaming continues to mature as an industry and opportunities for gaming expansion become less attractive.
The decision to invest in off-reservation businesses is especially vital to tribes with limited diversification choices because of their reservation’s size or location. Choosing the right investment helps tribes grow, generate more revenue, and bring more value to their balance sheet and overall community. The right investment also provides tribal members and nonmembers with more employment and career advancement opportunities.
Step One: Choose the Right Investment and Team
The Right Investment
Tribes commonly diversify their business ventures beyond gaming to include businesses like gas stations, hotels, golf courses, and strip malls and more uncommon investments, such as banks and commercial lending, construction companies, bowling and amusement centers, and gaming consulting and management companies.
A best practice of the due diligence process for acquiring these types of businesses is to determine which one is the right investment for the tribe. Items to consider include:
- Does the investment fit strategically and culturally with the tribe and overall community?
- Does the business provide a strategic fit and leverage existing tribal assets, or does the business provide products and services the tribe doesn’t currently have?
- Does the tribe have or can it get access to investment capital and at what cost?
- Does the tribe have the expertise to run the business or will it need to hire, train, or retain expertise?
- What is the upside potential of owning the business?What are the downsides? This should include ways the tribe can lose money with this investment.
The Right Team
Another key attribute of a successful business acquisition is a strong and well-rounded due diligence team that includes:
- Legal, accounting, and finance representatives from the tribe
- Tribal business executives
- Tribal council members or others charged with governance
- Like-minded third party transactional resources, such as outside legal and financial advisors
The right outside advisors bring specific transactions experience and provide an independent and objective perspective during the analysis and negotiation process. Transactional professionals can own and manage certain risks during the due diligence process, giving tribal leaders more time to focus on other community endeavors.
Step Two: Conduct Preacquisition Planning and Analysis
Once step one is complete, it’s time to plan for and analyze the business acquisition. Due diligence professionals employed to assist with this process will manage risks and questions during the planning phase and add valuable insight into specific items that should be discussed, such as:
- Why the seller wants to sell the business
- The quality of the existing management team and employees
- The target’s market position and reputation in the community
- Licensing, permitting, and any special certifications to operate the business
- Potential deal breakers and any other key issues
Step Three: Perform Due Diligence and Evaluate Results
A formal due diligence process should be conducted once step two is complete, including:
- Assessing the sustainability of future cash flow and evaluate the consistency and quality of historical financial information
- Analyzing the target’s balance sheet and assess the future utility of the assets acquired and liabilities to be assumed
- Considering existing and potential internal control weaknesses in operational and accounting processes
- Depending on the analysis, renegotiating the deal with the seller
Acquiring and operating a new business is complicated, and the impact of a transaction can last for many years. It can also be an emotional process for the due diligence team and tribal decision makers who approve and sign off on the contemplated deal, given the potential risk, both financial and reputational.
The key to a successful acquisition is to manage and minimize risk by planning due diligence early, assembling a dedicated transactional team of internal and external advisors, and executing the due diligence plan.
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For questions about how you can perform better due diligence before expanding your off-reservation business investments, contact your Moss Adams professional.