Pinnacle Advisory Group


The Nation's Leading Full Service Hospitality Consulting Firm.

Four Tips to Selecting a Hotel Management Company

Written By: Matthew R. Arrants, ISHC

As published on

Selecting the right management company is one of the most important decisions a hotel owner can make. The financial implications are significant and wide]ranging. The selection process is a complex equation as there are numerous factors that should be considered to ensure the right fit. Before beginning the selection process there are several steps that every hotel owner should take:

1. Create a Competitive Environment . Owners often make the mistake of gfalling in loveh with the first management company they meet. They get invited to visit the companyfs nicest property, stay in a beautiful suite, enjoy a nice dinner with the principals of the company, and, the next thing they know, they feel committed. Unfortunately, management companies are not equal and management contract terms can vary dramatically. Creating a competitive environment from the start will force the manager to negotiate the best deal possible and result in a more favorable outcome for the owner. The most common method to create a competitive environment is through a Request for Proposal (RFP) process. Before developing the RFP, however, there are several critical steps that owners should take.

2. Get Help . Hotels are not like other classes of real estate. They are operating businesses and the relationship between owner and operator is a complex one. Most management companies have extensive experience negotiating management agreements and utilize both in]house and outside counsel. Ownership should be similarly represented by experts. All owners should be represented by legal experts that specialize in hotel management agreements. Owners with limited experience in hotel management selection should also hire an experienced hotel asset manager to assist them through the process and to work with management on an ongoing basis to maximize the value of the hotel. In the management selection process, the advisor will help ownership clarify their objectives and as result, provide recommendations regarding the best management company for their hotel. Ultimately, an experienced team brought on board early will provide better outcome for the owner.

3. Clarify Your Objectives . Maximizing the value of their investment is typically ownershipfs primary objective and is the basis for most of their decisions. However, maximizing value is not as simple as it seems, and profit is not always ownershipfs primary motivation. A developer building a fullservice hotel in a high barrier]to]entry urban market might be best served by keeping the hotel independent, negotiating the ability to terminate management upon sale, then selling it soon after opening to a strategic buyer that would pay a premium for the ability to bring in management and brand. That, however, could also be a fairly risky strategy. Other owners are not motivated by the profitability of their hotels, but are more concerned with the impact of the hotel on other nearby uses. For example, colleges and universities are often more concerned with protecting their relationship with the community and their brand image than with bottom line profitability. Whatever the goal, understanding the objectives is an important factor to consider when selecting a management company.

4. Know the Hotel . Every hotel is unique. Many share similarities, but none are the same. Hotels are not simply a function of their room count and physical product; they are also defined by their location, the demand in the market, and their competition. Savvy owners will have a thorough understanding of their hotel regardless of whether itfs an existing property or new construction. Criteria to consider in identifying management candidates include room count, food and beverage offerings, meeting space, location, brand, and market. In addition, ownership should have a good understanding of the hotelfs capital needs and projected financial performance. Lastly, understanding the hotelfs desirability to managers is critical. For example, a 1,000]room headquarters hotel in a gateway city is going to be a very high]profile property that will be very desirable to certain types of management companies and thus impact what companies might be interested in it and what terms they might offer.

Owners and developers preparing to select a management company would do well to begin the process as early as possible in order to allow ample time for thorough consideration of each of these issues. A variety of stakeholders should be brought to the table and outside experts may be called upon. Moreover, the actual selection and negotiation processes often take much longer than most anticipate. Depending on the type of property and its particular needs, the time horizon varies, so considering each of these points in turn will help ownership clarify a timeline and maximize efficiency at each stage of the process. After owners have taken these preliminary steps they can begin the formal selection process: Identifying and researching likely candidates; developing and issuing the RFP; evaluating responses; and ultimately negotiating an agreement.