How to choose a hotel management company in 2023
The Chief Investment Officer of a major hotel brand recently told me hotel management companies have had a bit of a “hall pass” over the past few years but that moving forward, they will be held accountable for performance.
To help you understand how to find the right management company for your hotels, I spoke with a few industry experts to get their take on what to keep in mind for 2023:
- David Chu, Senior Vice President at GAM Hospitality
- Mark Keiser, Chief Development Officer at EOS Hospitality
- Scott Curran, Chief Operating Officer at Reneson Hotels
- Susan Barry, Principal at HIVE
First, let’s start with the basics for those who may be newer to the industry.
What do hotel management companies do?
Hotel management companies are responsible for overseeing the operations of a hotel on behalf of owners, in compliance with brand standards. These services typically include:
- Hiring and training staff
- Leading and managing these associates day-to-day
- Driving demand through marketing, distribution, sales, and revenue management
- Converting demand into profits through efficient operations and appropriate cost controls
- Ensuring guest satisfaction
- Managing the hotel’s finances
Ultimately, all of this is done to ensure the hotel business is as profitable as possible for the hotel owners.
Third-party hotel management companies create convenience for hotel owners
, David Chu, SVP of GAM Hospitality said. Investors don’t want to get bogged down by the operational nature of hotels. They will tell their managers, ‘We bought this hotel and want you to run it for us.’ They may not know anything about labor, operations, or hotel accounting. They just want the manager to come to them on a monthly basis and tell them what’s going on and where they need to improve and invest.
While the responsibilities of management companies outlined above are true for many firms, Chu pointed out there are many different types of hotel managers. Some management companies specialize in a specific area such as labor, and others are specialists in operations. And then there are companies who have robust executive teams who have seen it all and help with turnarounds.
In Chu’s experience, many hotel owners turned to their management companies for advice on asset management, and sometimes these relationships became advisory only and don’t involve operational management.
Hotel management companies have a challenging job, observed Brian Proctor, Principal at Leeds Hospitality Group, who formerly ran operations in executive roles at Starwood Hotels, Evolution Hospitality, and BridgeStreet. Third-party hotel management companies are there to protect the owner's asset value. It’s a very tough job because you're always managing someone else's assets on behalf of them while trying to maintain brand standards. At some point, there will be a pull from one of those sides. Brands may want to get you to adopt a new initiative, but owners may not want to spend money on it. You need to be a good intermediary.
How do hotel management companies make money?
Hotel management companies typically make money by charging a percentage of the hotel's revenue as a management fee. 3% of topline revenue is a good rule of thumb to keep in mind,
Barry advised.
Sometimes, it’s based on gross operating income, and Chu has seen management agreements range from 3-5% of gross operating income, with incentives for performance.
You often get what you pay for with hotel management companies,
added Mark Keiser, Chief Development Officer at EOS Hospitality. It is often more important how the contracts are structured to incentivize profitability as well as top-line performance. A management contract that is structured as 3% of revenue but little incentive on driving profitability might result in lower actual profits to an owner than paying a total fee of 4% or more that is balanced between a percentage of profits and a percentage of operating profit.
How are hotel management contracts structured?
According to Chu, most industry participants sign a hotel management contract for a minimum of 3-5 years and then have a renewal clause for another 3-5 years that’s subject to review and renegotiations.
How do I choose a hotel management company?
Hotel owners looking to find the right hotel management company for their properties should consider the following:
- Experience with the hotel type, brand, and location you have
- Track record of performance
- Range of services offered (people/HR, marketing, revenue management, technology, etc)
- Fees and contract structure
- Reputation and references
Get to know the team
As with any key business partnership, it’s important to meet with the management companies you’re considering to discuss your goals and expectations. Great management companies will be able to provide you with similar references from other owners and investors whom you can speak with to understand their experience.
According to Chu, skipping this step of due diligence is a warning sign to good hotel management companies. We would never work on a project where an owner didn’t really know who we are and just expect us to get started after signing a contract. We want you to know all about us because we’re going to need to work closely with you to deliver the best results.
Brand experience is key
If I own the Hilton hotel, I expect my management company to know everything about Hilton’s systems, its rules and regulations to quality assurance, its training, its critical path to opening and closing, its management of personnel, hiring, diversity, HR - all of these things,
Chu added.
Alignment is vital
There are a lot of questions an owner should ask to uncover whether the management company will be successful in managing the day-to-day,
Keiser said. We believe it is most important to ensure that there is alignment between you and your manager on your vision for the property, your investment objectives, and how you will ultimately measure success. You can then determine who your best partner will be — for a specific hotel or even your entire portfolio - and ensure that the financial incentives are in place so that the manager is appropriately focused in good times and bad.
Proctor agrees. Hotel management companies have to consider the guest’s interests and the brand’s interests, but ultimately align with the owner’s interest. I learned early on at a management company the importance of aligning yourself with the right owners that understood and had similar goals that you as an operator have. You really have to pick your partners correctly and carefully.
Choose a partner with the right mindset
When I was a hotel operator, I always tried to manage my hotels as if I owned them,
Proctor recalled. Every decision that I made as a GM, and then eventually as COO, was made by considering 1) Does this protect and enhance the brand 2) Does this take care of my associates 3) Does it take care of my guests, and 4) Does this enhance the value of the hotel as an operating real estate business?
That’s certainly something to keep in mind as you think about who should manage your hotels this year.
I put together a just-updated list of the top 50+ hotel management companies for 2023 here if you’d like to check them out.
