BUYING AND SELLING A BUSINESS IN A BOX

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BUYING AND SELLING A BUSINESS IN A BOX

• III. Management Contracts
• IV. Other Licensing Issues
• Irvin W. Sandman
• Chair, Graham Dunn Hospitality, Beverage and
  Franchise Team
• Beds, Bottles and Brands
• Chair, Executive Board, ABA Hotels Resorts and
  Tourism Committee

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III.  MANAGEMENT CONTRACTS

• A. Branded Management vs. Franchise/Management.
  Two configurations
• Branded Manager
• Manager brings the brand
• Franchise/Management
• The Brand is Franchised
• The Manager is hired to run the hotel under the
  franchised brand

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III.  MANAGEMENT CONTRACTS

• Branded Management Contracts
• Unique to the Hospitality Industry
• Like a Franchise Agreement and Management
  Agreement combined
• A tension is created
• ManagerEnhance the brand.
• OwnerUse the brand.
• Its my guest.

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III-B. Branded Contracts

• Initial Question for Buyer
• Is the brand right for the hotel?

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III-B. Branded Contracts

• If you want to terminate the branded management
  contract, can you?
• Places to look
• Termination on sale clause
• Termination without cause clause
• Performance clauses
• (Force Majeure?)
• Breachesterritory violation?
• (Agency theory)

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III-B. Branded Contracts

• 2. If you want to retain the branded manager,
  can you improve the contract?
• For leverage, look for grounds to terminate.
• Then check
• Fees. Incentives? Reasonable?
• Budget Controls. Remember the tension
• Performance clause. Make em stretch
• Termination on sale.

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III-B. Branded Contracts

• (renegotiating contd)
• Corporate marketing and operational programs.
• Hot Topicrebates, hidden fees.
• Answerget informed.
• Territory protection.
• what activities?

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III-B. Branded Contracts

• Negotiating a NEW Branded Management Contract.
• It takes time. Remember the tension
• Same list as before (fees, budget, performance,
  etc.)
• Dispute resolution
• PIP

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III-B. Branded Contracts

• Indemnity Provisionsa Red Herring?
• You want me to indemnify the Manager for its
  own negligence?!

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III-B. Branded Contracts

• Transition Issues
• The new branded manager will know
• What Alex saidunique due diligence
• Liquor licensesin a minute

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III.  MANAGEMENT CONTRACTS

• NON-BRANDED Management Contracts.
• Not as unique a contract
• the tension is absent
• (Now the tension is in the franchise agreement)
• Simple agency
• Does the Buyer like the manager?
• The contract should be terminable on sale
• Does the Franchisor like the manager?

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III-C. Non-Branded Contracts

• Expect and obtain more owner control over
• Budgets
• Bank accounts
• Right to terminate on sale
• Right to assign the contract
• Right to terminate for inadequate results.
• Check to see whether fees are at market

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III.  MANAGEMENT CONTRACTS

• Financing and Subordination/Nondisturbance
  Issues.
• If you have a branded management contract and a
  loan
• It will take time, unless the lender and manager
  have been down the path with each other before.
• Lender Youre just an unsecured creditor.
• Manager Youre just another owner.

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IV.  OTHER LICENSING ISSUES

• System License (Franchise) Agreements.
• The tension applies again
• Enhancing the brand vs. using the brand

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IV-A. Other Licensing Franchise Agmts

• Same Initial Question for Buyer
• Is the brand right for the hotel?
• Extra information sources
• UFOC
• Other Franchisees
• Consultants

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IV-A. Other Licensing Franchise Agmts

• Terminating the Franchise Agreement.
• Can you? Look for grounds to terminate
• Termination on Sale provision?
• Performance clauses
• Compliance with franchise lawsrescission?
• Other breachesencroachment?
• Does the franchisor also want out?

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IV-A. Other Licensing Franchise Agmts

• Renegotiating the Franchise.
• Check for grounds for termination
• Expect less room for renegotiation than for
  management contractsvolume game

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IV-A. Other Licensing Franchise Agmts

• Negotiating a NEW Franchise Agreement.
• Will the franchisor negotiate? If so
• The termshorter is usually better
• Termination on sale
• Performance clause
• Termination without causeLDC
• Territory
• Venue
• PIP

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IV.  OTHER LICENSING ISSUES

• Liquor Licenses.
• Complex patchwork of laws
• Constitutional underpinnings
• State specific laws
• Sometimes county specific
• Highly regulated

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IV-B. Other Licensing Liquor Licenses

• 1. They are frequently neglectedWhy?
• Often neglect doesnt hurt.
• Some regulators will work with you.
• You can often bumble your way through
• Why you shouldnt neglect liquor licensing
  issues
• The zealous regulator
• Careful, complete compliance is like insurance
  against the zealous regulator

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IV-B. Other Licensing Liquor Licenses

• Managing Liquor Licenses in the sale.
• Act early
• Get the right people for the job
• If a chain is involved, hire a firm that can
  handle liquor licensing regionally or nationally.
• If only one location is involved, you can use a
  local firm.
• They will conduct an audit and solve the
  problems, sometimes saving the deal.

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BUYING AND SELLING A BUSINESS IN A BOX

• Thank you!
• Irvin W. Sandman
• Chair, Graham Dunn Hospitality, Beverage and
  Franchise Team
• Beds, Bottles and Brands
• Chair, Executive Board, ABA Hotels Resorts and
  Tourism Committee