Hotel Management Agreements

Hotel Management Agreement Negotiations - So What's All the Fuss About Running an Operator Selection Process?

- Thoughts for owners and operators to achieve a winning strategy

During the course of a negotiation in relation to a hotel management agreement ("HMA") there are many issues to be identified, negotiated and resolved. Some issues seem to come up more regularly than others and seem to take a disproportionate amount of time to deal with to the satisfaction of both owners and operators. In this series we will focus on a number of issues which fall into this category.

In this edition we take a somewhat different tact. Increasingly we are observing owners going down the path of an operator selection as opposed to conducting negotiations with only a single operator.

Like most other aspects of hotel management agreement negotiations, thought needs to be given by both operators and owners to each stage in the selection process. From an owner's perspective an operator selection can be significantly more time consuming and costly than a single operator negotiation. There is also the risk that the owner and its advisers can "lose sight of the forest for the trees" and make significant decisions based on relatively insignificant matters with the result that the best operator for the particular opportunity may not be selected.

Operators need to be mindful of the impact of competitive tension and the realisation that the true adversary in such negotiations in all likelihood is the group of other potential operators - as opposed to the owner. Furthermore, an operator selection should give an operator who may not be "front of mind" for a particular opportunity the chance to participate in the process and ultimately demonstrate through sheer determination and enthusiasm that it is in fact the best operator for such opportunity.

Since we are based in Australia, we will approach the questions below from a broadly Australian perspective. However, the good news is that we have 17 offices in Asia Pacific and many more around the world to answer any jurisdictional specific questions that may arise from the discussion below.

Question     Discussion
  • When does the process start for an operator?
If an operator is not approached to participate in an operator selection in circumstances where it considered it should have been, the question should be asked as to why not and detailed enquiries should be undertaken of the owner and its advisers to fully understand how this occurred.

Operators, and particularly their development executives, should be constantly engaging with consultants who are regularly engaged to undertake operator selections to lay the groundwork to achieve the degree of familiarity which can on occasion be the precursor to an invitation to participate in an operator selection. The cost of not being "front of mind" with such consultants could be the loss of a prestigious and potentially very lucrative opportunity.

 

  • Are there circumstances where an operator selection may not be appropriate?
The primary benefit of an operator selection is the opportunity for an owner to methodically compare the offerings of a number of potential operators and benefit from the competitive tension that such a process engenders.

However, before embarking on the process, serious thought should be given to whether there is one operator which has "stand out" attributes for a particular offering such that the benefits of operator selection are not present. Embarking on an operator selection process in this circumstance results in needless time being devoted to the process and potentially significant incremental costs. Worse still, the process may dissuade the obvious operator from participating or dropping out before the process is finalised.

 

  • What are the negotiation strategies from an owner's perspective?
  • Be strategic - what are you ultimately seeking to achieve from the negotiation
  • Be commercial - pursue the commercially significant issues and accept the peripheral issues
  • Be bold - propose approaches which depart from accepted methodology ( e.g operator employs hotel staff/operator participation in proceeds on sale of the Hotel)
  • When should  an owner be and not be prescriptive about key commercial terms?
This is always a difficult decision and it is unclear whether ultimately there is a right or wrong way to proceed. For example should an owner specify the quantum of base and incentive fees it is seeking to pay or ask proposed operators to specify what they would be prepared to accept.

In our experience, being prescriptive is significantly more popular.

 

  • What are the negotiation strategies from an operator's perspective?
  • Be flexible and reasonable
  • Be aware of local market nuances
  • Don't make unreasonable promises (e.g projections)
  • What negotiation strategies are at play when seeking to broadly compare international operators against local operators?
  • International operators bring multi-jurisdictional brands and reservation systems
  • Domestic operators generally have lower overhead costs and potentially more sophisticated local market knowledge
  • Is the process of comparing operators science or art?
The vast majority of operator selections proceed on the basis that each of the relevant commercial terms (e.g term, fees, termination provisions etc) are scheduled in a form which makes for easy comparison between competing proposals. A savvy operator should consider unique or differing aspects of its proposal to minimise the risk that its offering is commoditised.

However in the process of comparing such commercial terms, it should not be overlooked that each operator will bring a distinctive operating style to the Hotel and a favourable operating style needs to be given appropriate weight when considering the range of commercial terms on offer. In this vein, operators should not assume that an owner and its advisors will know every aspect of what is distinctive about each operator's offering.

 

  • Whose hotel management agreement template to use?
We are aware of one instance where an owner of a "trophy" hotel proposed that an owner drafted a hotel specific management agreement be used.

Owners who proceed in the conventional manner and agree to use operator template agreements, which we consider will be the overwhelming majority, should review such agreements carefully as part of the selection process and identify any potential "commercial" issues in the template (e.g. some template agreements include a first right of refusal to acquire the hotel in favour of the operator).

 

  • When in the process should the field of potential operators be reduced?
An owner should always maximise the competitive tension between potential operators and defer reducing the field of potential operators until all significant commercial terms have been extensively negotiated.

An owner should only go exclusive with one potential operator when it  considers that the benefits of competitive tension has been totally exhausted. Once exclusivity is granted, negotiations should be finalised as quickly as possible. Whilst such exclusive negotiations progress, the owner should maintain contact with other shortlisted operators just in case negotiations with the front runner falter.

 

  • A final comment
Human interaction between personnel representing the owner and the operator lie at the heart of successful hotel operations. Both owners and operators should always remember that they are going to be in business with each other for a long time.

From the earliest point in time (which can be some time before the selection process even begins), a potential operator should seek to build a positive human relationship with its owner counter-parts.

The hard work which lies at the core of owner comments such as:

  • "we can work with these people"
  • "they have taken the time to get to know us"
  • "we are not being treated like just another item on the conveyor belt - they make us feel special"
can make the difference between success and failure.

About Baker & McKenzie

Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 11,000 people in 77 offices in 47 countries. The Firm is known for its global perspective, deep understanding of the local language and culture of business, uncompromising commitment to excellence, and world-class fluency in its client service. Global revenues for the fiscal year ended 30 June 2014, were US$2.54 billion. Eduardo Leite is Chairman of the Executive Committee. (www.bakermckenzie.com)

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