When selecting a brand and manager for a hotel, owners are faced with a choice: either hire the “brand” to manage their asset or bring in a third-party operator and enter into a franchise agreement.
Investors are intrigued with the concept of having a brand manage their property as they can avoid franchise fees and most established brand companies are skilled at hiring, offer excellent training, and are often able to leverage brand resources and distribution channels more effectively than a third-party operator.
Brand managers typically look for long-term contracts of at least 10 to 15 years. Brand companies look for long-term contracts because they want to limit volatility in their brand distribution, avoid the disruption of relocating or finding new positions for key employees, and their shareholders are looking for lengthy fee annuities. However, these objectives are often at odds with an owner’s desire to control their investments.
Owners may want to terminate the relationship with their manager in at least two circumstances:
- The owner becomes dissatisfied with the manager of the property.
- They want to exit the investment and are looking to offer the asset unencumbered by management to maximize the pool of buyers and their investment return.
Performance termination clauses generally are not favorable to the owner and if a brand managed contract is terminated, the owner loses the rights to the brand and is forced into an expensive process to find an alternative affiliation.
A ‘Manchise’ Might Be the Solution
The term ‘manchise’ describes a brand management contract that can be converted to a franchise agreement. This structure can offer benefits to both the brand and the owner. As there are dozens of quality third-party managers competing for opportunities, brands are finding it increasingly difficult to obtain management contracts. However, by allowing an investor the right to convert to a franchise, owners may be inclined to hire a brand manager as it provides potentially lower fees and the optionality they are seeking.
Typically, a manchise agreement is consistent with the term of a franchise agreement. If the owner elects to convert to a franchise, a third-party manager is brought in to replace the brand manager. In this case, both the brand and owner win as the brand can maintain its distribution and royalty fee stream while the owner benefits from the uninterrupted brand affiliation and minimal costs to replace the manager.
Achieving a Win-Win Situation
In negotiating a manchise agreement, material business points for the franchise agreement should be addressed up front. These points include:
- Conditions (if any) to exercise the conversion right;
- Term of the franchise agreement;
- Franchise fees;
- Assessing whether there will be a property improvement plan at the time of the conversion;
- Approval of the third-party manager;
- Franchise application fees; and
- Impact on any financial contributions by the brand manager when the contract was signed, such as key money, guarantees, and joint ventures.
Franchisors will likely want the right to apply their current form of franchise agreement at the time of the conversion, which is generally acceptable. Brands want uniformity in franchise agreements to maintain the quality of the brand, which benefits the entire system.
Finding the right structure to meet investor objectives is important to the process, and having the ability to change management should be a priority. A manchise agreement can offer both parties advantages and should be part of the discussion when selecting a brand and manager for a hotel.