Top ten things to consider when negotiating a hotel management agreement

15th Mar 2015

NB: This is an article written By : Graeme Dickson

In 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.

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