You’re coming out of the pandemic with a full-service brand-managed hotel, struggling to make debt service and some of your corporate resources aren’t the same due to downsizing during COVID-19. So, you’re entertaining the idea of converting to a franchise with third-party management.

You believe it will reduce costs, result in a better, more flexible management agreement, and allow for more input on running your hotel. This seems to be the answer to your problems! Or is it?

There are opportunities and risks to converting from a brand-managed to franchise model that must be weighed, even those that seem like a slam dunk. Let’s identify some.

• Typically, lower management fees and overhead — don’t forget, you will have a franchise fee plus a management fee.

• Lower employee benefit costs.

• Better, more flexible terms.

• Less red tape in implementing operational initiatives.

• Meaningful owner input and control.

• Ability to opt out of costly brand programs, centralized services and shared services.

• Potential to sell the asset unencumbered by brand management.

• Required product improvement plans and stringent enforcement of brand standards.

• Loss of executive team if they transfer within the brand.

• Less bench strength and ability to attract top talent — especially with smaller companies.

• Drop in employee morale — less rich benefits, limited career path options, fewer employee and corporate resources.

• Compromised area of protection.

• Loss of purchasing power.

• Lack of shared services and task-force assistance.

• Loss of national sales office.

• Loss of coverage under brand insurance.

• Transition expenses, including paying out sick, vacation and severance, replacement of IT systems, new marketing programs, etc.

It is important to note, not all opportunities and risks will apply for a given situation. In other words, there are excellent, large third-party operators with the bench strength needed to backfill brand management; conversely, there are brand-managed hotels that allow for significant owner input and collaboration.

Now let’s look at some considerations and ramifications of conversion and how they can affect you.

• If you plan to sell, shorter-term third-party management agreements may be advantageous by eliminating the encumbrance of a long-term agreement and increasing asset value upon sale.

• A primary concern of a long-term investment is the preservation of value; in this case brand management brings consistent brand standards, certainty, and mitigates risk — at least pre-COVID-19.

• A big-box or group-oriented hotel requires effective group sales to maintain occupancy and fuel food and beverage and other ancillary revenue streams — branded management may deliver stronger results due to their robust national sales programs. All operators are not created equal when it comes to delivering group versus leisure demand.

• Assets in urban, suburban, primary, tertiary, resort and pioneering markets all have different needs — the third-party manager must have expertise and resources in your asset’s market and type.

• Unionized operations may not be able to capitalize on the potential labor upside due to the many contractual obligations.

• Reducing expenses through a management change may help improve margins in the short run, but if your asset is also struggling to generate revenue, a third-party manager may not be the answer to delivering better top-line results.

• Your asset needs the “right” type of business, so make sure the third-party manager can deliver.

• Creative concepting and programming are required to drive revenue — the manager must have the corporate resources to identify, develop and execute.

• The brand landscape is different post-pandemic; brands may not want to rebuild their corporate infrastructure reduced during the pandemic.

• If your asset is not highly visible, historically significant, or in a strategically important location, you may not get the attention needed, as corporate resources are spread thin.

• Franchising is a profitable model for the brands — franchisees don’t have to deal with the complexities of personnel — and many of the advantages of being brand-managed may have been compromised due to cuts.

With so many considerations, hidden expenses and moving parts, consulting with experts who can assist you with evaluating all aspects of a potential management change and navigating the transition is imperative. Within our own practice, we have conducted this analysis on numerous occasions and have found keeping brand management is best for certain situations, yet in others, franchise conversion with third-party management had an immediate positive impact depending on the owner’s asset and investment strategy and goals.

Sometimes change isn’t all it’s cracked up to be; other times it’s exactly what you need. Make sure to do your due diligence before making such a monumental decision that will affect your investment, your asset and your employees for years to come.

Tommy Pho is a vice president and Stephanie Trenter is a manager with CHMWarnick, the leading provider of hotel asset management and owner advisory services.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.