The branding decision process from the owner’s perspective

By Roland Mouly
The thought process involved in the branding decision process will undoubtedly impact the long-term success of the asset. This is a critical decision process from the brand, buyer, seller and owner and should be purely rational, but that has rarely been the case. Here’s a breakdown of each player’s involvement, agenda and priorities in the branding process:

  • Brands seek to maximize long-term income streams with agreements that are filled with restrictions to ensure the franchise remains in effect for a long period of time. This also guarantees that in the event of a cancellation, it will result in a payday via liquidated damages.
  • The owner is typically focused on seeking a brand that matches their expectations or aspiration for quality and positioning. Sometimes, they will select a brand based on previous relationships and may even choose to add some flexibility to the agreement.
  • Buyers and sellers of branded assets have a slightly different perspective and are more focused on brand contribution and its value to the asset. If the contribution is good, they see it as a positive. If it is not, an unencumbered approach might be the solution, albeit they would lose out on the brand’s benefits.

The reality
What is happening in the world of hospitality when it comes to branding decisions can be surprising. Too many will skip a step or two, convinced they completed an exhaustive, careful analysis. They will then make a rational decision, thus justifying, not incurring, any upfront consulting fee that might have ensured a proper and complete underwriting. Cutting corners this way often negatively impactsthe future. But time may help mitigate this effect, if not the financial burden that might come with it.

Let us dive in on a few important components of the branding decision process:

Not all brands will be available for each situation, thus forcing owners to seek alternatives. This incentivizes brands to offer substitutes such as “soft brands.” The proliferation of brands offered by each major hotel company is a response to this situation and a solution to keep an owner within the company by expanding its options.

If a previous relationship is important, owners will find a solution to stay with a company by picking a slightly different option—they tend to stay with the same model of fees previously negotiated. When this happens, an owner might rightly focus on an approach, but will overlook what the agreement says about the brand’s ability to charge back regional and corporate expenses. This will lead them to ignore branding and distribution charges and they will forget to ensure ownership has access to detailed financial information. By not focusing on the length of the agreement andomitting the right of brands to add competing hotels nearby, owners will fail to negotiate expensive options for canceling the contract in the future, and forget to include approval rights for key executive staff.

One important aspect of these negotiations is the essential need for owners to ensure proper oversight of the operations. This is done very seldom and in time will coalesce negatively. Either theowner, their representative or a professional asset manager might then be impacted by their inability to access pertinent data or participate in the operational decision process that will define the EBITDA the owner will receive. This is an important right they need to include in the agreement.

Another focus might be the need and/or desire to get the brand to invest in a project. It is worthwhile to ask, “How much key money can I get from the brand to enter into this agreement?,”but additional insights are needed, as there are some real upsides to this component but also several pitfalls.

First, these funds will be limited, comparatively speaking with the total project investment, and will only be disbursed at the opening of the hotel. This begs the question, “Would this funding impact the feasibility of structuring the project in the first place?” Most likely not.

Second, who is paying for this? If it comes with key money, the brand has already calculated a required ROI to fund that amount, and it will be included in the fees, the term, the financial penalty to cancel the agreement, etc. In other words, you are paying for it—and then some. Remember, that this key money comes with many strings attached that are not always easy to assess at the time of negotiations. Loan agreements, subject to some strong guarantees, might be another way to gain access to funding from the outset instead of waiting for the opening of the asset. But beware oflanguage excluding delays and extraordinary events that might be buried in these documents, resulting in a one-sided position of strength during the critical negotiating time after some unforeseen event in the future. A global pandemic is one such event that comes to mind.

When deciding on a brand, one thing should be top of mind: What is the ability of this company to contribute to future revenues and profits? While some companies excel at this analysis, many others will use creative statistics to inflate their contributions by accounting for channels of distribution from third-party travel companies as if they were their own! Loyalty programs have now become such an important source of business and understanding their potential contribution will also be a necessity not only for loyalty and repeat business, but also for redemption. It is essential to have a complete understanding of what is being bought into, both income and expenses. The inability of a brand to significantly contribute to top-line revenues will become an even more concerning issue when faced with growing branding expenses not properly foreseen.

In essence, focusing on one aspect of the branding decision is not enough and might backfire. Getting the right brand is important but ensuring that many additional components have been properly evaluated is even more critical.

The solution
The critical aspects of the decision process are:

  1. Picking the right company, brand and positioning
  2. Maintaining flexibility and owner’s rights in the agreement with appropriate language
  3. Proper underwriting and legal oversight is a must if key money and loan agreement are necessities
  4. Setting clear expectations for the relationship in terms of contribution: top line revenues, operating/branding expenses and eventually ROI from the original investment.

Most owners will not thoroughly consider each of these elements. Unfortunately, the personality of the stakeholders will also play a critical role in this decision process, often giving ownership false confidence about some steps of this critical path: “They are a great person and I trust their judgment and advice. After all, it is a well-known company, so it will be fine.”

Yes, they might be great, but the deal goes beyond that one individual and is actually a 20-year agreement with a large company loaded with lawyers doing 100+ agreements per year.  This is an expensive decision that will require proper attention.

Spend the necessary time and hire the right advisors, consultants and lawyers if you do not have in-house expertise. Realize that you are most likely not an expert in investing, drafting legal documents, running hotel operations, understanding distribution, sales and marketing, and forecasting what the next pandemic might bring and how it could affect you and your upcoming contractual obligations. By recognizing and accounting for these shortcomings, and bringing on the necessary consultants, the deal and the future of the brand are set up for success.

Roland Mouly is SVP of strategic partnerships at Premier.

This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.