When negotiating compensation for a management company, an owner should ensure that the management company is encouraged to improve the profitability of the hotel. If the management company is paid too much a fixed fee or a royalty on the basis of gross revenue, the ultimate profitability of the hotel is ignored as a barometer for measuring the performance of the management company. If a management company`s royalty is linked to profitability, the company has an incentive to increase its turnover while controlling expenses. Remember that hotel fees are paid by the owner; The only incentive for the management company to keep these expenses low, in addition to professional liability to the owner, is a compensation formula that rewards the management company for improving the owner`s profits and cash flow. Hotel management agreements between major brand management companies follow what has become the standard formula for royalties, at least before negotiations begin. Basic and incentive fees are now known in the area and are expected as starting points in most management-owner negotiations. A management contract, such as a franchise agreement, is at the heart of the countless agreements negotiated by an owner in connection with the ownership and operation of a hotel. These documents should be negotiated carefully and with the advice of a lawyer who could highlight the problems and contribute to the achievement of the owner`s objectives. Management agreements can generally be negotiated more easily than franchise agreements.
Owners should take this opportunity to make the best possible business to protect their investment. Negotiating fees is a “give and take” process – an owner who intends to maintain a first-class long-term hotel heritage and accepts that any new owner is bound by the hotel administration agreement may be able to insist that the fees be lower. In addition, an owner wishing to maintain the hotel in the short term (for example. B a hedge fund) and who needs flexibility in pursuing the hotel management contract when selling may agree to pay higher fees in exchange for such flexibility. Operators should not have a problem with transparency in making their pricing proposal available, but we have seen that royalties have been hidden in the long grass of the enterprise agreement, but have not been identified at the roadmap level. This can lead to delays or interruptions in the negotiation of the hotel management contract. Management companies, particularly brand managers, have demanded full compensation from owners, with the exception of some cases of gross negligence or wilful misconduct on the part of the officer.