Hotel Operator Selection & Contracting

Hotel management companies do not invest in hotel operator management/franchise agreement schemes. The risk is that of the developer or investor. So it is necessary for him to seek qualified advice to understand these documents. We can help

Assisting developers or investors by short listing and contacting potential hotel operators, we will try to secure the optimum management contract or franchise agreement, keeping in mind the interest of our client.

We give the developer or investor a list of operators and brands that we consider to be suitable for the hotel. We then invite these operators to the hotel or project site, where they will be able to meet the developer or investor and our representatives. The operators will be offered a guided tour of the hotel site and the surrounding region, enabling them to gain a better insight.

The operators will be given a project summary report to motivate them to submit their initial contract terms and fees. We will then analyse the responses and assist our client to identify a shortlist of companies with whom to hold more detailed presentations and negotiations, as appropriate. Our task is also to set parameters for these companies and invite them to respond with revised tenders, taking into account requirements of the developer or investor.

On receipt of the revised proposals from operators, we will review and analyse these submissions after which we will begin detailed contract negotiations with the preferred hotel operator.

Contracting

Operating a hotel’s development under an established brand stimulates the overall perception of the hotel among the clientele. The brand affiliation may be a condition of bank funding. We assist developers or investors by shortlisting and contacting potential hotel operators keeping in mind the interests of our client.

Before recommending the operator with whom negotiations should be started we keep in mind the requirements of our client as well as the financial offers. We will conduct the actual negotiations on our client’s behalf, acting as their advisers. Some of the important issues which we need to negotiate are:

  • Contract term – duration of the contract. Owner should seek maximum flexibility and as short a period as possible. Operator will seek as long a period as possible.
  • Management fees – comprising a base fee calculated on revenues, and an incentive fee calculated on gross operating profit. Operator will seek as high a percentage as possible. Other charges need to be identified and agreed upon, such as marketing, reservations and recharging of central services.
  • Requirement for a profit guarantee – often sought by the owner from the operator in the early years of the contract, when the hotel is building trade and debt service capacity may be at its most vulnerable.
  • Reporting requirements – frequency and content of the manager’s reporting to the owner, including annual trading budgets, capital expenditure, monthly management accounts and establishing ownership of the hotel’s trading data.
  • Termination – understanding what events may cause termination of the contract and at whose instigation, along with each party’s rights and obligations on termination.
  • Hotel personnel – hotel staff are employed by the hotel and therefore by the owner, not the operator who engages the staff on behalf of the owner. Exceptions to this may be key personnel such as the General Manager and the Financial Controller. Aspects such as employer’s liability and the owner’s right to interview key positions need to be negotiated
  • Exclusivity – Period and geographic area over which the owner may require exclusive use of the brand. This means the manager may not enter into an agreement to operate or brand another hotel within a defined area and for a defined period.
  • Transfer of ownership – Owner’s obligations and manager’s rights should the owner wish to sell the hotel or should the operating company be sold or taken over. It is also important to specify what constitutes transfer of ownership.
  • Replacement of fixtures, fittings and equipment – a reserve fund needs to be established. The amount needs to be negotiated and how the money may be spent must be agreed.
  • Indemnity – the owner and the operator will each seek for the other to indemnify them against certain acts or events, all of which requires negotiations.
  • Technical assistance – the cost, duration and services provided as part of the technical services agreement. As part of our service, we will seek clarity on items such as pre-opening budgets, expenses, staffing and timing, as well as pre-opening sales and marketing activities.
  • The purpose of our analysis and negotiations is to reach an agreement we consider fitting for our client. Our objective is to obtain the services of a hotel management company equipped to maximise the profit opportunities of the hotel and optimise investment returns.
  • Re-branding and re-imaging of existing operations is another aspect of our expertise. We provide market data to understand the future potential of the hotel to be re-developed; assess the hotel’s current and potential future market position; and project the hotel’s future performance.