4 tips to selecting a hotel management company
16 OCTOBER 2014 6:38 AM
Owners should follow these four steps before selecting a hotel management company.
Selecting the right hotel management company is one of the most important decisions a hotel owner can make. The financial implications are significant and wide-ranging. The selection process is a complex equation as there are numerous factors that should be considered to ensure the right fit.
Before beginning the selection process, there are several steps that every hotel owner should take:
1. Create a competitive environment
Owners often make the mistake of “falling in love” with the first management company they meet. They get invited to visit the company’s nicest property, stay in a beautiful suite, enjoy a nice dinner with the principals of the company and, the next thing they know, they feel committed.
Unfortunately, management companies are not equal, and management contract terms can vary dramatically. Creating a competitive environment from the start will force the manager to negotiate the best deal possible and result in a more favorable outcome for the owner. The most common method to create a competitive environment is through a request-for-proposal process. Before developing the RFP, however, owners should take the following critical steps.
2. Get help
Hotels are not like other classes of real estate. They are operating businesses, and the relationship between owner and operator is a complex one.
Most management companies have extensive experience negotiating management agreements and utilize both in-house and outside counsel. Ownership should be similarly represented by experts. All owners should be represented by legal experts that specialize in hotel management agreements.
Owners with limited experience in hotel management selection also should hire an experienced hotel asset manager to assist them through the process and to work with management on an ongoing basis to maximize the value of the hotel. In the management selection process, the advisor will help ownership clarify its objectives and, as a result, provide recommendations regarding the best management company for the hotel. Ultimately, an experienced team brought on board early will provide better outcome for the owner.
3. Clarify your objectives
Maximizing value of the investment is typically ownership’s primary objective and is the basis for most decisions. However, maximizing value is not as simple as it seems, and profit is not always ownership’s primary motivation.
A developer building a full-service hotel in a high barrier-to-entry urban market might be best served by keeping the hotel independent, negotiating the ability to terminate management upon sale, then selling it soon after opening to a strategic buyer that would pay a premium for the ability to bring in management and brand.
That, however, also could be a fairly risky strategy. Other owners are not motivated by the profitability of their hotels but are more concerned with the impact of the hotel on other nearby uses. For example, colleges and universities often are more concerned with protecting their relationship with the community and their brand image than with bottom-line profitability.
Whatever the goal, understanding the objectives is an important factor to consider when selecting a management company.
4. Know the hotel
Every hotel is unique. Many share similarities, but none are the same. Hotels are not simply a function of their room count and physical product; they also are defined by their location, the demand in the market and their competition.
Savvy owners will have a thorough understanding of their hotel regardless of whether it’s an existing property or new construction. Criteria to consider in identifying management candidates include room count, food-and-beverage offerings, meeting space, location, brand and market. In addition, ownership should have a good understanding of the hotel’s capital needs and projected financial performance.
Lastly, understanding the hotel’s desirability to managers is critical. For example, a 1,000-room headquarters hotel in a gateway city is going to be a high-profile property that will be desirable to certain types of management companies and thus impact what companies might be interested in it and what terms they might offer.
Owners and developers preparing to select a management company would do well to begin the process as early as possible in order to allow ample time for thorough consideration of each of these issues. A variety of stakeholders should be brought to the table, and outside experts should be called upon.
Moreover, the actual selection and negotiation processes often take much longer than most anticipate. Depending on the type of property and its particular needs, the time horizon varies, so considering each of these points in turn will help ownership clarify a timeline and maximize efficiency at each stage of the process.
After owners have taken these preliminary steps, they can begin the formal selection process: identifying and researching likely candidates; developing and issuing the RFP; evaluating responses; and ultimately negotiating an agreement.
Matthew Arrants, ISHC is the Executive Vice President of Pinnacle Advisory Group. Pinnacle Advisory Group is a boutique full-service hospitality consulting firm with several offices throughout the US. For the past 18 years, Matt has specialized in asset management, new development and operational reviews. Matt also recently organized the first annual College and University Hotel Owners Symposium (CUHOS) at Notre Dame, open only to college and university employees responsible for hotel assets.
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