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Top ten things to consider when negotiating a hotel management agreement

Mar 15, 2015  By 

 

Negotiations signpostIn my experience, when both owners and operators reach the end of a hotel management agreement negotiation there are always things that potentially could have been done differently. In this article, I’ll identify a number of the more common issues and to keep it balanced, I have identified an equal number for both owners and operators.

Owner considerations

1. Testing the market

- Consider operator selection programme rather than exclusive negotiation

- Seek to compare operational and commercial differences between operators

- Facilitate competitive bids to get world’s best practice

- Seek to accumulate market information for future projects

2. The consequences of when to go exclusive

- How should the operator selection programme proceed?

- When should exclusivity take place – when commercial terms agreed or later stage?

- Consider the operator’s legal agreements for ancillary / non-core commercial issues (e.g. rights of first refusal, financing limitations and purchasing)

- How to proceed should negotiations with the preferred operator falter

3. Determine which matters have significant commercial value

- Be strategic – what are you seeking to achieve from the negotiation

- Pick your battles – pursue the commercially significant issues and accept the peripheral issues

- Be prepared to be bold (e.g. consider other commercial alternatives other than just relying on Performance Test and/or AOP)

4. Are significant commercial issues being conceded without a value-driven negotiation?

- Don’t settle for second best (e.g. press for a Performance Test that actually works)

- The most significant issues are best resolved with properly structured competitive process for operator selection programme

- Be determined and prepared for an investing time and efforts for a thorough negotiation – the best deals are generally not done quickly

5. Which consultants should be engaged and when

- Identify the skill sets you lack and engage appropriate consultants to provide the relevant skills

- Consider engaging the consultants at the outset – it may cost more but it may just be worth it

- Ensure that all your consultants are marching to the same tune as you are

- If you are paying for advice, consider it carefully – even if you initially disagree with it

Operator considerations

1. Don’t assume that the owner and its consultants know what is distinctive about you

- Does the market understand your unique/distinctive service offering

- To what extent do you provide an information kit to prospective owners to highlight what is “special” about your offering and how you are different from your competitors?

- Repeat your major selling points over and over again

- Take every opportunity to inform owner consultants – it’s better that they sing your praises rather than you

2. Be flexible and reasonable

- Amplify your niche and value proposition in today’s competitive world – be prepared to be sufficiently flexible or reasonable to get the right the deal

- Separate the wood from the trees – shame to lose a deal over a word in an indemnity clause

- Approach to negotiation may indicate how parties will deal with disputes during contractual term

- Thinking and approach of commercial and legal teams should be constantly aligned

3. Don’t allow negotiations to blow out

- Ensure that the negotiation team is focused and pro-active

- At the outset determine a timetable and seek to follow it religiously

- Ensure that all relevant tasks are identified and responsibility attributed to each

- Particularly important in complex hotel/branded residence and condo hotel developments

4. Be aware of the local market nuances

- Before pitching, study the local market for specific practices and approaches to commercial terms

- For international operators, consider the value proposition of local operators

- If unsuccessful, seek appropriate feed back as to competitive qualifiers (e.g. fees, term and/or premature termination)

4. Don’t make promises that are unrealistic

- Don’t oversell (it’s a long term relationship and it will come back to haunt you)

- Don’t place too much importance on information which you are not prepared to stand behind (e.g. forecasts)

- Be honest about your strengths and weaknesses with respect to your competitive set

I appreciate that that this is by no means an exhaustive list that can be improved in the next negotiation. I trust, however that at least some of the considerations set out above resonate with you – and if at least one of the considerations helps you with your approach in a beneficial way then all the better.

 

About Graeme Dickson

Graeme Dickson

Graeme Dickson is a partner in the Structured Real Estate group in Sydney at Baker & McKenzie and is global coordinator of the Firm’s

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