This is the second article in a three-part series on the evolving relationships and roles of hotel owners, management companies and their directors. In the first article in this series, we look at how involved hotel owners are in real estate decisions. Depending on the type of agreement between the parties, the operator and the brand may be a single entity or separate actors. Management contracts aren`t just about assigning a bunch of roles at once, and it doesn`t have to involve two companies. An example of another type of transfer of functions is that of the contracts of association managers. These management contracts often involve non-profit organizations and other similar organizations such as professional associations. Our results therefore suggest that owners and management companies need to agree on a set of common goals for their hotels, as such alignment is associated with superior operational performance. While each party clearly has its own goals, the ability to align them will ultimately serve each party better, as higher operational performance should ultimately result in higher fees for most operators and higher asset valuations, as well as returns for owners. Finally, you need to consider common issues related to conflicts of interest.
If you use a large management company, you should be aware of the possibility that the company also has to do with your competitors. You want to make sure that the management company resolves these potential conflicts of interest, taking into account the interests of your company. Management contracts should not hinder the success of your business. When drafting contracts, clearly identify the people responsible for your business and discuss how a potential conflict of interest should arise. For example, since the vast majority of an operator`s fees are calculated as a percentage of the hotel`s revenue, owners are concerned that operators will focus on increasing revenue rather than profits. Given the growth of hotel management contracts and their importance to owners and operators, we were surprised to find no research on the actual targeting of owners and operators after the agreement was signed. Since management contracts cover a variety of activities, there is no uniform form of management contracts. However, most contracts follow the same loose structure, as follows: the best advice here is to strictly check the management company before embarking it. What is their reputation and trust rating? Who else in the industry uses them? What do their customers say? Doing your own due diligence is crucial to ensuring you have a business partner you can trust. The following video is worth seeing to understand the basics of a contract, which are also directly applicable in the case of a management contract. But with a management company, you entrust the information to people you haven`t verified yourself and trust to pass on information outside of your company`s physical premises.
Although this risk can and should be managed through the management contract, it still exists. While this should be evident from the definition of a management contract, it is worth remembering how the agreement transfers operational control of your business to the management company. Therefore, according to the terms of your contract, you have no say in many things that the function will do. It`s important to be aware of this because, for example, you want to influence decisions when things aren`t going well. However, operational control is not in your hands and you just need to be confident that you have made the right decision. Depending on the market segment in which the hotel operates, franchise costs may vary when calculated as a percentage of total room revenue. According to HVS, the median cost of the hotel franchise for a cheap hotel is 8.6%, up from its market. The cost of high-end hotel franchises is 11.4%, while the upper mid-range and first-class categories are around 12.1% and 12.4%, respectively (HVS, 2020). The franchise`s business model is very popular in North America and is increasingly being adopted by hotel groups due to its focus on the lightness of assets. Have you ever thought about hiring an independent third party to run a department for you? Have you been approached by a management company that has the capacity to have certain tasks performed on your behalf? If so, then you already have one foot in the world of management outsourcing. Signing a management contract means that someone else is taking care of a particular business function for a fee. These are the pros and cons of this approach, and they run counter to your desire to relinquish control of an industry.
Key performance indicators usually apply after the hotel has reached its stabilized operating year. However, if a case of force majeure or a similar event beyond the operator`s control has occurred, the performance test may not be applicable to that year. Operator failure is possible if two consecutive performance tests have not been passed for two consecutive years. However, operators are trying to negotiate a «right to heal» clause that allows for the payment of the funds needed to reach the minimum GOP. Capital expenditure Imagine running a startup and trying to establish your business in the industry. If you need to keep your own accounting, it can take too long for things like marketing or product development. By hiring a management company to take care of the accounting part of the business, you can save time and resources. Here`s an example. Let`s say you run a real estate business and own a large number of commercial properties that you rent to tenants.
You find that you spend a lot of time talking to homeowners about the service and maintenance fees they charge. You could hire a management company to take responsibility for negotiating these payments and pay them a percentage of the cost savings they can achieve. In addition, privacy issues are not just about your information and your relationship with the management company. If your company uses third-party vendors, you need to make sure that the contract with them doesn`t prevent your company from entering into a management contract. Third parties may have specific objections to the processing of their information by another company or may have problems dealing with a third party rather than directly with your company. It is important to consider these issues before venturing into a management contract. In summary, there are several factors to determine which operating model is right for the hotel. For example, the owner`s experience and risk appetite, the size and level of the hotel property, the relevance and availability of potential brands, etc. Signing a management company means that you entrust your corporate reputation to people outside the company. There`s a lot less transparency about what these people do every day, and you don`t have the ability to step in and correct course if the company lags behind on performance goals or timelines. The definition indicates how, under the management contract, operational functions are transferred from a company to the management company. But what functions can an organization or company entrust to the management company? The range of functions is wide and diverse.
Typical features are as follows: While greater orientation may suggest a more unified view of the hotel, it doesn`t necessarily mean the property would work better. In fact, a lower concentration could potentially mean that the management company, which has professional management expertise, operates the hotel optimally, even if it does not meet the owner`s objectives. Do you run a business and have you been exposed to the term management contract? Perhaps you have been offered the opportunity for a management company to take care of your business or part of it. However, before you make the decision to transfer part of your business to another company, you should know more about management contracts. A company or organization hires a management company to perform certain tasks. The management company receives remuneration for the work. Your organization could hire a management company to take care of its marketing, and under the contract, the management company would do marketing on behalf of your company and receive a fee for it. In this guide, we explain what these agreements consist of and what their features are. .