Will Thomas - Hotel Negotiator

The last couple of years has seen the proliferation of management contracts and management companies, both branded and unbranded. One of the results of the downturn in the market, both in terms of trading levels and property values, is that hotel owners considering a sale or letting have been faced with either selling or leasing their property at a perceived loss in value, continuing operating the business for a number of further years until performance and values return or, now the popular alternative, securing the services of a management company.

The reason behind a decision to follow the management route vary from case to case, reflecting each parties individual aims and objectives. Lenders may choose the management route in distressed situations to avoid crystallising substantial capital losses in the hope that values return at some future date. Developers intending to let new hotels may consider management as a more attractive option given that rental levels and investment yields are currently under pressure. An owner/operator may wish to work with a management company if it has no intention to sell but either wishes to stand back from the business or, alternatively, is lacking the skills, resources or expertise required to drive it forward.

As the owner of a hotel that is subject to a management contract, unlike a lease, you are perhaps only one step detached from the business.

Recruiting a management company is similar, in basic principles, to employing a full time general manager however, a management company is empowered to a much higher degree in terms of operating, promoting and maintaining the business and the property. They are essentially able to make virtually all decisions regarding the business and the property as if it were their own, without requiring approval from an owner, except in the case of pre-agreed checks and balances usually relating to levels of capital expenditure and major business decisions. Furthermore, a management company not only provides the general manager service but brings with it the skills, resources and systems of its head office, such as sales and marketing, PR, supply chains, accounts and reservation teams, website links along with web reservation systems. As an owner working with a management company, you are essentially bolting your business onto a larger organisation, gaining the synergy and inherent benefits which that brings without losing the asset or income opportunity. Clearly, such services and benefits come at a cost.

The level of management fee will reflect the style and nature of each proposition. Typically, management fees are broken down as a percentage of revenue and as a percentage of operating profits, reflecting an incentive to grow the business. There may be ‘one off’ set up costs or additional service fees that may be chargeable. Management fees are, as with a manager’s salary, in addition to the usual operating costs of the business. In our experience, management companies tend to be flexible with regard to their fee arrangements and often are prepared to consider alternative fee structures and proposals that will align with the aims and objectives of an owner, for example if the ultimate goal is to maximise trading levels with a view to a future sale.

The viability of a management contract can only be considered on a case by case basis.

Will the business support a management company financially, taking into account any anticipated upside in the trade/profit performance that the recruitment of a management company would bring?

Is the remaining profit, after all management charges have been paid, or perhaps reduced level of projected profit, acceptable to the owner, taking into account the diminished day to day responsibility?

Can the terms of the management contract be aligned with the owner’s short/medium/long term aims and objectives?

Fleurets are frequently in contact with the full spectrum of experienced management companies ranging from the small/niche multiple unit operating companies through to the major international brands. Combined with our years of experience of new lettings, leasehold assignments and hotel sales, we are able to advise on both the benefits and implications of the various disposal and management options that are available.

...working with a management company, you are essentially bolting your business onto a larger organisation