Tips for negotiating hotel management agreements
When it comes to negotiating new HMAs, one of the first questions usually raised is how the process of negotiating a management agreement works with all the different parties involved, usually in different parts of the country (or the world).
So my partner Bob Braun and I decided to share the process we usually use with clients. Most of these suggestions are focused on expediting the negotiating process, because time is not your friend if you are an owner or developer. You need to complete the entire process, and you can’t afford to cave on critical points too quickly just to rush things along. But generally speaking, the faster you can complete a well-orchestrated negotiation, the less the process will cost, and the better your terms will be. Deadlines and delays can put too much leverage in the hands of the operators, and all operators know that.
So how do you expedite a HMA negotiation while maintaining stamina to win important economic and business points? Here are our 10 tips:
1. Select your team and get access to a virtual database of “market” terms.
You should identify the members of your group who will have the authority to make decisions and will be dedicated to the process. Just as importantly, you need to seek outside advisors — lawyers and consultants — who can bring you the expertise and sense of “market” terms that you don’t have in your organization.
2. Identify and prioritize the issues.
There are at least 20 or 30 business issues that are “tier 1” or “tier 2” issues that need to be raised and negotiated in a term sheet or LOI. While such term sheets and LOIs are usually “nonbinding,” the failure to raise these major issues at this stage will subject you to angry claims that you are retrading if you want to raise them later. It will certainly be harder to accomplish them later — if you can at all — and will delay your process.
3. Control your own draft of the HMA.
Get the operator to provide you with a Microsoft Word copy of the form of HMA they propose to use. The operator may want to “control” the document revisions, but that’s not realistic in an age of universal word processing, and we can often conform their HMA to the agreed-upon terms faster and better than they can. In any event, we need it for the process described below.
4. Shaping the form HMA to meet your needs.
We don’t mind starting with the operator’s form HMA. That is generally the accepted custom of the industry. However, after working with you to identify the most important business and legal points, we revise the operator’s form agreement to meet your needs.
5. Making sure we are all on the same page.
Based on our earlier discussions about your priorities and goal, we then circulate a marked-up draft of the operator’s form HMA showing all of our proposed changes. This draft only goes to you for your review, followed by a conference call to discuss the agreement and any necessary revisions.
6. Revise and confirm.
After our joint review of the document, we make any necessary revisions to reflect your decisions. If changes are minor, we may not recirculate to our team prior to sending to the operator. If there are major changes or there is a desire to see the revised language, we may recirculate to gain final approval before sending the document to the operator.
7. Send the revised draft to the operator.
The next step is to send the proposed changes to the operator in the form of the marked-up draft we have already cleared with our client. We jointly want to press the operator for a fast turnaround with its own indication of what changes the operator can accept or proposed changes to our changes. If at all possible, it is very much to your advantage to keep control of the drafts.
8. Set the all-hands meeting.
The goal is to get the operator’s markup or written response to our proposals, and then to arrange a “meet until the deal is done” meeting. This usually takes at least one, and perhaps two, working days. The biggest problem for you will be convincing the operator to make someone available for the entire time necessary. Otherwise, there can be a delay of days or weeks until the follow-up meeting is scheduled and the negotiations can be completed.
9. Location of the all-hands meeting.
It is not important where we meet. There is a benefit to meeting in our offices in terms of our ability to generate documents quickly, but we can meet at the operator’s corporate offices, their attorney’s offices, the hotel or your offices. The availability of representatives with decision-making ability will probably drive this location, and you should be prepared to travel to meet the operator on their “turf,” if it means they will have the necessary people available.
10. Exchange and finalize.
After the all-hands meeting, we will circulate revised drafts of the HMA reflecting the decisions. There may be a very small handful of final issues to be resolved that we hold to the very end before we give them up or trade them off. But there will be an exchange of documents reflecting the final decisions that should lead to an expedited signing of the HMA. If something goes awry, we will do another meet-until-we-sign meeting.