The late Tip O’Neill, a wise old politician and Speaker of the House, on his profession, opinioned that “all politics is local”. So it is with Hotel Management. The top ranked brand-name chain image, their franchise quality control programs, their franchise support department, even the vaunted high-tech central reservation system, while all necessary, are not as effective in insuring the commercial success of the hotel property as much as dedicated local management.
If you are considering an investment for a franchised hotel, you are aware that both the risks and rewards are significant. With that awareness, as many investors in your position have done, you may be tempted to turn over your hotel franchise management to your franchisor, especially if that company successfully operates their own properties, for example, companies like Marriott, Hilton, Sheraton, or Holiday Inns. Sounds prudent, because they have the know-how and experience to draw on, that you don’t, and being astute, you know management is most important. But that may be a major mistake. Here’s why:
- If you are an independent franchisee, chances are your hotel is not large by chain standards; while approximately 75% of all properties are franchised, most are under 200 rooms.
- The franchisor/operator will provide you with a management contract making them the Management Operator over a specified period of years, perhaps as little as 5, and as many as 20. In that contract, the Management Operator will receive a fixed rate, usually based on a percentage of the total sales, and a supplemental fee against a percentage of the operating profit, i.e. before fixed expenses called an “incentive fee”. The management fee, of course. will include the manager’s salary that they provide, but the actual fee will be many time his salary and will include various charges for reservations, marketing, and other services as a part of the regional and national network of operated hotels. But that’s not the major concern; this is: the manager selected for your 125 room property will be at the lower end of the experience scale so that his salary will be commensurate with the size of the property!
So now, you may have a problem. You’re going to have a real nice hotel in a superb location with excellent amenities and a great brand. However, you need good local management, but you are not sure if you are qualified to select and supervise one, nor even be able to tell if he is doing a good job. On the other hand, you’re not comfortable with turning over your operation to a young person whose supervision you are not sure of. Besides, you don’t have that control over your operation in a franchisor Management Contract, and while there are incentive fees provided the operator for a more profitable operation, there is no real downside for a franchisor operator if the hotel is less profitable than expected. After all, they will still get their fixed fee, even if you have trouble making your mortgage. There has got to be a third way. There is:
- Look into the great number of smaller hotel management companies that do only that. They don’t own and they don’t franchise and they don’t have that tremendous overhead that large chains need to spread among their operations and franchisees. What they do have is years of hotel operating experience, managing hotels in many instances of 500 to 1000 rooms as well as all the smaller ones along the way. They also may put in a younger less experienced local manager, but they will monitor him, teach, and guide him as much as required because that is their livelihood. They want to keep their clients and gain new ones from recommendations.
Finally, the independent management companies will be most receptive in terms of flexibility in negotiating the management contract with shorter terms, owner/management meetings and options, and even in difficult economic circumstances, set aside a portion of the fixed fee to the extent of the mortgage shortfall, and of course all of the services provided by the franchise are still available to the operator through the owner.
Focused, supervised local management, a motivated staff, and a management company committed to the owner’s success will result in satisfied guests and a high rate of return, both in guests and investment.
Edward Dean is an accomplished website developer and author. To learn more about franchise-hotel-management [http://hotel-franchising.com/franchise-hotel-management] visit Hotel Franchising [http://hotel-franchising.com] for current articles and discussions.
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