As will be evident from what follows, mixing on the ground management with the halo effect of a franchisor's offering is enticing and potentially profit enhancing but at the same time tricky – particularly in Australia where franchising is regulated by the Franchising Code of Conduct.

So, to use McDonald's parlance, are we looking at just a "combo" of service offerings or an "upsize" or enhancement which is superior to the sum of its component parts. You be the judge.

In depth

The offering of a white label manager is very similar to a legacy manager except arguably for branding. The hotel can either be eponymously branded or the brand can be accessed through the white label manager's master licence agreement with a particular brand or a franchisor. To date, in Australia, the franchise option seems more popular than the eponymous option.

Typically the management agreement is entered into concurrently with the franchise. However there are no hard and fast rules.

Further, there is an opportunity for owners, managers and franchisors to consider a more novel offering which builds upon the manchise arrangement by converting a management agreement with a legacy operator to a franchise and appoint a white label manager in place of the legacy manager.

At the end of this newsletter, we provide a diagrammatic form of a potential arrangement involving a white label manager and a franchisor. Put simply:-

• The owner enters into a management agreement with the white label manager which should include provisions which obligate the manager as agent for or as independent contractor to the owner to in essence act in a manner which maximises hotel profitability and not cause the owner to be in breach of the franchise agreement
• The owner enters into a franchise agreement with the franchisor with the same ideals and safeguards as a management agreement
• The owner enters into a tri-partite agreement (or appropriate complimentary provisions to each of the management and franchise agreements) whereby the owner's obligations under the management agreement are harmonised with the owner's obligations under the franchise agreement and the owner is indemnified if the actions of one service provider causes the owner to be exposed to legal proceedings from the other service provider.

To ensure harmony between the management agreement with the franchise agreement, the following issues should be considered:-

1. The services to be provided under the management agreement vs franchise agreement (e.g., who is providing reservation, marketing, system, branding services), the fees associated with those services and most importantly whether there is any overlap – particularly in relation to fees
2. If the manager is subject to a performance test, how to determine a failure to achieve the required gross operating profit and or RevPAR target is a result of the manager's failure to perform or is due to or contributed to by the franchisor
3. Covenants from the manager and franchisor not to do anything which would put owner in breach of franchise agreement and management agreement (respectively)
4. The term of the management agreement vs franchise agreement
5. The consequences of termination of each agreement, e.g., if the management agreement terminates first vs the franchise agreement terminates first
6. Structuring of fees, owner's may wish to focus on incentive fees rather than base fee for the management agreement
7. Whether a franchisor should have pre-approval rights over the white label manager (or vice versa).

One highly regarded industry observer with significant operational knowledge of how these arrangements work on a day to day basis has offered the following comments:-

• In certain markets, there is also a concept of brand licensing. To differentiate, franchisors offer their brands with a system supporting it. They usually claim to offer design/technical services, their network, regional/global reach, economies of scale, etc. which in the mind of this observer still boils down to brands and systems. White label managers typically set out to introduce operational systems to a hotel asset under certain brands under certain hospitality chains, their considerations usually being whether they have the expertise to bring the brand to life and operate the systems.
• The "ideal" path for a franchise - white label manager arrangement is for the owner to identify the franchise first then the white label operator in consultation of the franchisor.
• The cost-benefit analysis of a legacy operator vs the combination must also consider the incremental responsibility and risks to the owner. At the very least, the owner must be very clear and be comfortable with any information and responsibility gaps between the franchisor and the white label manager combination as well as dealing with any conflict between them. Certain risks for the Owner will also be compounded, e.g., reputational risks of the brand and/or the manager. As such, in the observer's opinion, any potential "combo" effect is NOT sufficient to warrant combining a white label manager with a franchisor.

We should also comment on comparative fees. A legacy manager usually charges management fees comprising 1–2% of gross revenue and 6–8% of gross profit and other centralised service fees around a further 2-5% of gross revenue. White label managers typically charge about the same as the legacy managers or a bit less. The addition of a franchise increases fees paid by an amount approximating 2-4% of gross rooms revenue plus other costs which need to be closely considered to ensure that the same services are not being provided by and charged for by both the manager and the franchisor.

A word on the Franchising Code of Conduct ("Code"). In our next newsletter we focus solely on franchising and the Code will figure prominently.

The Code in Australia is a mandatory industry code that regulates the conduct of franchising participants towards each other. It aims to ensure transparency and fairness in franchise agreements.

When considering the conversion from a pure management agreement to combination white label management and franchise agreement, the parties should take note of the mandatory '14-day disclosure/waiting period' and '14-day cooling off period' set out in the Code.

An owner wishing to enter into a franchise agreement should take further advice on the rights and restrictions set out in the Franchising Code of Conduct, including the Code's impact on transfers and the rights of an incoming owner to 'accept' the franchise.

Conclusion

There was a time when hotel management was a "one size fits all" offering. Not any more. There is now a smorgasbord of offerings to choose from with the combination of white label management and franchising just but one.

As oft stated in these newsletters the hotel industry needs to constantly move with the times and make sure the variety of contractual arrangements on offer is as broad and diverse as possible. Otherwise there is a risk that capital providers, who are always in scarce supply, will be attracted to other opportunities which provide a more attractive risk/reward proposition than investment in the hotel industry. If that eventuates, it would certainly not be a McHappy Day.

Diagrammatic representation of how a typical management arrangement involving a white label manager and a franchisor would be documented.

[Note: There will usually be two (2) separate non disturbance agreements – one joining the owner, financier and operator and the other joining the owner, financier and the franchisor.]