Selecting A Brand Or Third Party Manager
Stuart Metcalfe turns his mind to his top 10 considerations for an Owner or Investor when contemplating selecting a Brand and/or engaging a third party management company.
Get someone on your side, early on.
There’s no substitute for having someone with experience, who knows what is what, in your corner early on in your investment plans. They are 100% focussed on your goals and recognise that when the Brand salesmen come to call, all that glisters is not gold.
A good representative will help you ask the right questions and ultimately make the right decisions. They will deliver a multiple of their cost in value to your business throughout the process.
2. Legal Representation
Good, relevant experience can advise on what is “market” and save time and money from selecting a Brand or third party manager through to signing a contract and beyond.
It maybe that your usual legal firm might not necessarily be the best equipped to help you secure either a Brand for your hotel(s) or the best fit third party management company to maximise your opportunity.
Be prepared to consider options, looking at firms with teams or individuals who have specific experience (relevant and recent) and meet to see if you have chemistry before deciding.
As my father brought me up to understand, “that which cost the least is seldom the cheapest.”
3. What have you got to offer?
Single site, existing asset, and portfolio, fixed or with development potential – see the opportunity through the eyes of your potential partners.
Getting good advice engaged early on will work with you to identify and evaluate exactly what opportunity you have for which Brands, and/or the appetite a third party management company may have for your deal. Remember it’s best to see your opportunity through the eyes of the Brand or manager and not through your own. If you have a close to unique opportunity in a geographic or city market that a particular Brand has designs upon, but has yet to unlock then you are likely in a better position to both select a Brand and negotiate a contract.
As an example, I remember discussing with the then Queens Moat Houses Board the question of an upcoming contract expiry for a Brand we operated in three European countries. Directors were concerned about our ability to secure any Brand going forward. By seeing things through the eyes of the Brands, positioning the opportunity and creating competitive tension amongst Brand providers we turned that view 180 degrees on its head and ran a process resulting in securing a better deal going forward than we had had for the previous 10 years.
4. What do you want to achieve?
It may seem obvious but have you thought it through?
Do you want or need a global name? Is it important to you to operate in the 5 star market (and can your asset(s) carry that?) Do you want your brand to be number 1 unprompted awareness in your market? Is your priority a secure long term cash flow or short term capital appreciation?
These aren’t all mutually exclusive questions, but understanding what you want to try and achieve with your investment opportunity across what time horizon will helpfully inform the selection of both Brand and third party manger and enable you to make the right, informed, choices.
Don’t automatically dismiss the question of Brand or individual named asset if you do not have a Lender Requirement (see below). If the investment opportunity is a commercially focussed one, then that focus may well narrow to the bottom right hand corner of the Profit & Loss account. Yes Brands will claim to be able to drive higher sales volume across some or all of the week and year and that may, on investigation, be true, but not without costs. Understanding the true impact to the P&L is critical, I’ve seen many a protracted argument about additional costs levied by Brands which may not have been properly understood by Owner or manger and may be at best ambiguous in the contract – and by that time it’s really too late to do anything about them.
For the right asset in the right location with the right management – a Brand may actually be a negative impact to value.
In today’s rapidly changing digital world there are emerging partnership and consortia routes to market to consider which provide a paradigm shift in traditional Hotel Brand thinking. Opportunities such as Trip Advisor and Booking.com now provide the beginnings of a possible alternative for independent Hotels.
As a subset here too, it may well be that there is an element of Lender Requirement to consider. Many sophisticated Lenders today will be knowledgeable about the perceived benefits of Brands, to the point of being able to intelligently discuss the variances between offerings. Some Lenders may actually insist on Brand as part of the security net for any loan – you may therefore have no option but to choose from a list the Lender provides. Best know that early.
5. Identify the options and run the process.
Having completed the steps 1 through 4, run a process of identifying all of the options open to you.
Once identified you can weight and analyse, to narrow things down.
That should provide you a short list of options to progress, either more simply by a series of meetings and requests for proposals, through to a full blown beauty parade of pitches.
6. Level of owner’s engagement, from passive through to active.
Think through what involvement the owner would like to have in the investment. Everything from completely passive through to a daily active engagement are possible but, in my experience, need to be identified and discussed and agreed up front. Not doing so can lead to misunderstanding and confusion, or worse.
Remember, the owner is 100% focussed on the investment, as then is a properly sourced owner’s representative/advisor – after that it reduces and softens. The Brand management team will have priorities set by people you may have not met, and they are unlikely to ever be priorities which are completely aligned to yours. Sometimes they will even be at odds.
What levels of reporting, both detail and frequency would you like to see? Some owners like to review the daily arrivals list to satisfy themselves of customer profile and average rate management contribution to yield management. Other owners might give the annual budget proposal a cursory review and then not be involved for a further 12 months.
What’s important here is that the Owner decides what level of engagement and influence they want to have, and ensure that is openly discussed with potential partners and finds its way through to contracting.
7. Key Personnel
People make the difference, but they can change.
I once heard John Moulton speak (British Venture Capitalist), where he said that in any investment opportunity he was considering he attributed around 30% of value to the management team. In my experience it’s a point often overlooked or worse, ignored.
At an individual asset level, the General Manager can make an error of judgement in running your business, in just moments costing a multiple of their annual salary – and you might never see it.
If things aren’t right, there may be no engendering of a holistic environment to encourage calculated commercial risk taking. Opportunity can be missed or lost, costing more – and you likely won’t see that either.
I’ve often said that in a portfolio business, the most important decisions I took each day where which men and women to have running each of the businesses, the Hotels. The role of the General Manager in running a successful business must never be taken for granted, that remains true for both Branded and unbranded Hotels. So, as an absolute minimum I’d recommend that the owner take an interest in the position of General Manager.
At a Brand or third party management level it will be right to expect that the owner is likely to have little or no influence in respect of personnel. That influence might increase depending on the size of the opportunity you have to offer, or the strategic or tactical value to the Brand or third party manager irrespective of opportunity size.
But suffice to say I agree completely with John Moulton, I have seen people make the real difference, make a material positive contribution through to the other end of that scale and being detrimental to the owners business.
So my conclusion on key personnel would be, whilst recognising you are selecting to partner with either or both of a Brand and third party manager – three things:
A – Satisfy yourself as far as possible about the type of people you are contemplating working with. Meet the Chief Executive, as he or she sets the agenda. Meet some of the people who’d actually be involved in managing your asset(s). Simply put – complete your own due diligence.
B – To the extent you wish or are able, seek to have your contract deal with any issues you identify around personnel requirements.
C – The less fulsome A and B appear to you, the more critically important having influence over the General Manager becomes, consider moving from simple approval rights through incentivisation for performance for the Owner to being fully engaged in the recruitment and selection process.
8. What’s the impact of another Brand Hotel opening across the road?
Yours might be the bright new shiny Hotel in town today, but think later down the road of your contract. Consider what the impact might be to your business of another same Brand, same family of Brand Hotel opening right across the road.
In over 30 years I’ve yet to see any substantiated analysis that proves additional distribution in your market (with the possible exception of key gateway cities) is net positive to your value especially if that additional distribution is now the bright new shiny Hotel you once represented too.
Be careful what you wish for.
Forgetting the legals for a moment. The contract is critically important; as it will prescribe the way the relationship is going to work for some years to come whilst it is in effect. I’d recommend a contract be agreed that both parties feel positive and engaged about signing. The list of issues for the contract to deal with is too long for this article, and of course legal advice is needed. However, simply put, I’d recommend focussing on the key elements driven by this list of Top Ten.
Ensure that the things that are critical to your decision making to enter into the contract are clearly articulated there. If you’ve made agreements about how things will work, e.g. reporting, key personnel, controls and authorisations, new hotels across the street then make sure that all those are in the contract clearly laid out.
Worked examples work well in contracts to ensure common understanding of how complex clauses are intended to work. Have a fee example laid out showing all fees.
These are the three performance metrics that count in my view:
A – against the prior year (a known stake in the ground).
B – against the approved budget (as this should have all the predicted and forecasted amends to prior year).
C – against the agreed market/competitive set (irrespective of what the overall market does, your performance relative to it is a crucial performance indicator of Brand and management competency).
If you can, consider what you pay being driven linked to performance. The better you as Owner do, the better the Brand or third party manager does too. You’ll never achieve total alignment but finding some common ground such as enhanced performance impacting both parties in a materially positive way is a worthwhile target.
10. Punch above your weight; create and seize the opportunities to engage.
So, you’ve completed your evaluation and analysis and you’ve signed on the line. So, you’re “in”.
This recommendation then is as much about mind set. If you’ve decided to sign, then the mind-set should set about ensuring that as an owner you and your team punch above the weight of your investment to engage and influence. Ensure your Hotels receive their fair share and more of management time, follow that the financial results outperform both the market but just as importantly the peer group of like Brand hotels too.
If there are any opportunities to get more closely and influentially involved – seize them. Some Brands operate Owners Clubs and Associations where the Owner, their representative and/or the third party manager can engage. Use these to maximum positive effect for the bottom right hand corner of your P&L.
Brands can be extremely powerful things to have over the door and for you to be connected to their access to customers. There has been a rapid growth in professional organisations creating platforms, infrastructure and the personnel teams to manage Hotels on behalf of Owners as the Brand Owners have largely followed a path to disengage from management and prefer the franchise model.
Successful business relationships of these types are built on understanding informed by experience, transparency of process and clarity of goals.
Former President and Chief Operating Officer at Realstar
Stuart Metcalfe has worked on both sides of the Brand and Ownership equation in the hospitality industry for over 30 years.
Initially with Brands such as Forte, Hilton and Bilderberg amongst others in senior Operations and Sales, Marketing and Revenue management roles globally. In 2005 he moved to Owners representation and asset management, building the Realstar Hotels specialist team to look after the LRG investment in over 70 Holiday Inn and Crowne Plaza Hotels in the U.K with that portfolio successfully marketed and sold through 2013-2015.