How do hotel owners shop for management companies?

Generally, the client-owner has a problem (or a want, or a dream, or a desire, in the case of a developer who wants to build a new hotel; but even that's a 'problem': at least that's a problem worth having); and goes to whoever he thinks can offer a solution. He's often not aware that there are even as many choices as there are to pick from.

Sometimes, it's a banker or an attorney or a franchise brand rep who refers him to a management company (usually a much larger, more established one). Sometimes, they actually do go online in search of one.

I know they don't all consult Forbes magazine, but I've gotten several calls as a result of articles I've written that were published on Forbes - every one of which was picked up by Forbes right here on Quora, and none of which contained my phone number. They just read the piece in Forbes, googled Beechmont, and found my badly SEO'd website that I only launched back in the spring (I need to find a way to fix that robots.txt), and a bunch of my answers on Quora (I love it that Google spiders Quora answers individually).

If one goes through my accumulated material on Quora, one can learn a lot about me and how I like to work . . . and then I get a call. As a way to get my foot in the door, I'll take that any day of the week over being one of those guys dressed up in a tailored suit and tie (which I avoid wearing to work: I'm too much of a hands-on guy) and phony smile, posing on a grand staircase in an upscale hotel lobby; like I've seen on a few management company websites. (No one's going to hire me for my looks, anyway. And frankly, that's just the way I like it.)

But that's just how people pick me.

How much do hotel operators pay hotel/property owners?

Under a hotel management agreement?  Your typical mark-one-mod-zero, off-the-shelf, fill-in-the-blanks HMA calls for a base management fee of 2% of the hotel's revenue, before deductions (payroll, utilities, and operating costs are paid from revenue as much as possible, although a property running in the red will require occasional subsidies or capital calls from its owners) - and every year, the base management fee goes up half a point until it levels off at 5%. 

There's also an incentive management fee at the end of the year of ten to fifteen percent of any increase in total revenue from last year's total revenue (there's an accounting term for that, and I'm going to feel stupid when someone mentions it, for being unable for now to remember what it is).  




An HMA also provides for a fee of five percent of the cost of all renovations and upgrades done. To be fair, this is in exchange for planning it, overseeing it, making sure it all goes together properly, and  keeping the hotel up and running through the duration of it. However, an unscrupulous management company can get away with lots of abuse (see What is a typical Opco/Propco revenue split in the hospitality industry? | Michael Forrest Jones' answer to When a hotel has an electronic "Do Not Disturb" system, what happens, and where, when a guest toggles the setting? )  I hate people like that: they give all hotel management companies a bad name, and cause knowledgeable owners to want to negotiate HMA's very aggressively. (I can deal with and even respect that, it's the tough guys who think they're knowledgeable that are impossible to deal with . . . )  But I try not to judge those management companies too harshly. What they consider to be acceptable behavior, and performance standards, and competency levels, for themselves, presents an opportunity for decent, respectable human beings who want to do things right - like me.

What is the difference between a hotel franchise and a management agreement?

Lots of people own hotels. Even more can, and should. (A good half of the people who do now, shouldn't. But if you're smart, that's where the opportunity in it lies for a person like you.)

Not everyone who owns a hotel manages it. That's where hotel management agreements come in.

Even fewer own a nationally recognized hotel brand. That's where franchises come in.

That's the difference.

Anyone can buy, build, or own a hotel. Doing so can be very rewarding: many doctors, lawyers, dentists, and people who've made a pile in tech ventures should consider doing it. (Like 'Rich Dad' Robert Kiyosaki says, you make money in business, you keep it in real estate.) It can be a profitable real estate investment - but it's not a passive investment. It's a business. (If you bought your hotel from a commercial broker at a price based upon 'cap rate' -- which is not an appropriate metric for hotel valuation -- then chances are, you're in for a painful lesson in just that. I'll try to be gentle with you when you call me to try and fix it, but there will be only so much I can do because you didn't call me first. That's the lesson: you should have called me first.) A hotel must be managed with some level of skill and intentionality.

If a hotel management company is compensated based on sales, wouldn't it be incentivized to increase sales instead of profitability?

It is, and it frequently happens.

Hotel management companies charge a base fee of two to five percent of revenue. And many charge an incentive fee of fifteen percent of any increase in revenue over that of the prior year. The base fee is assured. The incentive fee may or may not amount to much, if there's an improvement in revenue over last year at all. (There are also upgrade fees, and those offer their own opportunities for abuse, but we're not dealing with those as part of this question.) 

So, if I want to ramp up my fees, the fast-and-easy way to do it (if not the best way for the client-owner) is to get as much money coming in the door, as soon as possible, without a lot of thought to how much your costs are eating up almost all of it as fast as it comes in. Offering low rates to certain people just to fill the rooms? Do it. Renting to rowdy local people? Do it. Bringing business into the hotel that costs us as much as they pay us? Do it.

But if our agreement is tied to profitability, such an agreement would have hazards of its own. It would incentivize a lot of bickering between us and the client-owner about what should count as profit and what shouldn't, and how we could have made more profit if we'd done this, or hadn't done that. It would disincentivize reinvestment, or even good maintenance. It would incentivize shortcuts that would have consequences that would come up later. It would incentivize the taking of risks that might have bigger consequences that would sooner or later show up. It would incentivize doing things on the cheap. Your property would lose value over time and sooner or later have bigger problems.