Navigating the end of the Hotel Management Agreement: A guide for hotel owners nearing the end of management agreements

The end of a management agreement is a critical point that presents both challenges and opportunities. Whether hotel owners are contemplating renewing their contract, transitioning to a new management company, or taking on management responsibilities themselves, careful planning and strategic decision-making are essential. 

At Axsia HTL we understand the complexities of this process and can offer guidance to help hotel owners make informed decisions.

David Simpson, Managing Director of Axsia HTL, advises to start reviewing earlier than you think: “Pay close attention to the termination clauses, notice period for termination, renewal or non-renewal terms, and any financial obligations or penalties associated with ending the hotel management contract,” says Simpson.

“Hotel owners often leave it too late to review their options and while taking a different approach could bring major financial reward, they have no option but to renew the contract, often for another 10 years, as they didn’t prepare early enough.”

Here are Axsia HTL’s top four tips for hotel owners to consider in 2024.

1. Evaluate performance and future goals 

Assess the performance of the current management company. Consider both quantitative metrics (e.g., occupancy rates, room rates, revenue per available room, market share, profitability) and qualitative factors (e.g., management expertise, guest satisfaction, staff morale, hotel and brand reputation). 

Align this evaluation with the future goals for the property. Are the goals to reposition the hotel in the market, enhance guest experiences, or improve operational efficiency? What is your plan in terms of sell versus hold? These goals will influence the decision to choose to renew, switch management companies, or self-manage.

2. Explore alternative options

When making the choice of whether to renew your current agreement, there are multiple options:

Renew with the current management company

• Negotiate better terms or conditions.
• Address any performance issues or areas of improvement.

Switch to a new Brand

• Alternative brands may be a better fit to deliver desired outcomes

Capital expenditure requirements and business impact

Switch to a new management company

• Conduct a thorough search and thorough due diligence on potential companies. This is essential for a successful partnership.
• Things to consider are the company’s track record, expertise, contract terms, operational processes, cultural fit and alignment with the property’s vision.
  

Switch to a franchise agreement

• Franchise agreements can be a powerful alternative for hotel owners looking for more control over their properties while benefiting from the support and brand recognition of established hotel brands. 
• Review the potential for increased control with operational autonomy and customisation flexibility. Access to systems and support, with brand power, training resources and marketing campaigns. 
• Review the potential for improved profitability with revenue management strategies and cost efficiencies established by the existing franchiser. 
• Make use of support during the initial transition period and ongoing support addressing any challenges, with assistance from franchisers
  

Self-management

• Assess the capability of managing the property in-house.
• Plan for the necessary resources, systems, and personnel to ensure smooth operations.
• Taking on the management responsibilities in-house can be an attractive option, but it requires a thorough assessment of capabilities and resources. There are lots of things to consider. Including operational expertise, are the team familiar with industry standards and best practices? Can they plan for managing risks and ensuring safety? Does the team have skills to motivate and manage staff effectively?

3. Engage in strategic negotiations

Whether renewing or transitioning, effective negotiation is key. Aim to secure terms that align with the property’s needs and long-term strategy. Focus on areas such as management fees, performance incentives, contract duration, and exit clauses.

Negotiation tips

• Leverage performance data and market benchmarks.
• Have an alternative strategy if negotiations are not going well.
• Be clear about expectations and goals.
• Seek advice from industry experts (consultants and lawyers) to ensure a fair and balanced agreement.

4. Plan for a smooth transition and long-term success

A seamless transition is crucial to maintaining operational stability and guest satisfaction. Develop a comprehensive transition plan that covers all aspects of the handover process including technology systems, accounting and financial records, supplier contracts, employee training, guest relations and regulatory compliance.

Be sure to keep focus on the long-term success of the property hotel. Regularly review and adjust management strategies to adapt to changing market conditions and guest expectations. Continuously invest in staff training, property improvements, and guest experience enhancements.

The end of a hotel management agreement is a pivotal moment that requires careful consideration and strategic planning. By thoroughly reviewing options, engaging in informed negotiations, and planning a smooth transition, the stage can be set for continued success and growth.