23 January 2012

How To Manage Hotel Ownership Transitions

Goodwin Procter LLP


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With continuing market volatility and the certainty of closing being a less-than-ideal reality, sellers of hotels should take steps to enable a seamless management transition.
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With continuing market volatility and the certainty of closing being a less-than-ideal reality, sellers of hotels should take steps to enable a seamless management transition. At the same time, buyers of hotels must be proactive to ensure they are prepared to assume control of a hotel at closing without any interruption or disruption to guest service and experience. In order to achieve these goals, the parties must concentrate their efforts on transitioning the hotel operations well in advance of closing.

Shadow management

A buyer will want to start thinking about operational transition as soon as possible during the purchase and sale agreement negotiation and the due diligence period. If the management of the hotel is not changing, then the new ownership team needs to integrate with the existing management team. 

However, if the management of the hotel is changing, then the new management company will need to connect with the existing management early on in the process. Open communication between the two groups is very important to a successful transition, and the parties involved in the sale transaction should consider negotiating a transitional management period— sometimes called shadow management—in the purchase and sale agreement. This is where the buyer's team begins to work with the hotel manager on operational matters before closing to ensure the change in management is as smooth as possible once the closing occurs.

Each hotel is its own business with hundreds—or thousands—of transactions conducted each day—from guests checking in and out to guests dining in the hotel's restaurant or purchasing goods in the hotel shops—and it is essential the hotel continues to operate without disruption in the ordinary course of business during the sale process so hotel guests are not affected by the change in ownership and management; communication and cooperation are critical.

Employee transition and the WARN Act

The parties involved should focus on transitioning employees early on in the process. The seller and the buyer will need to take into account potential employment liability under the federal Worker Adjustment and Retraining Notification Act, or WARN Act, and similar state laws, which require employers (in this case, the seller or hotel manager) to give prior notice to affected employees. The WARN Act requires at least 60 days notice in advance of a plant closing or mass layoffs. A hotel sale that results in job losses might trigger the requirements of the WARN Act, even when the hotel continues operating in the ordinary course. Failure to provide the required notice once the WARN Act is triggered results in substantial liability of the employer to the affected employees.

Some states have laws that impose greater burdens than the federal WARN Act. For example, while the federal WARN Act applies to employers with 100 or more full-time employees (though it doesn't count employees who have worked less than six months in the last 12 months or employees that work less than 20 hours per week), the California WARN Act's provisions are triggered if there are 75 or more employees within a "covered establishment" without any distinction between full-time and part-time employees. In addition, a prudent buyer must adhere to any state law requirements that arise from a change in employer. Under California law, employers are required to pay terminated employees the final rate of pay for accrued or unused vacation time even when those employees immediately are rehired by the new employer on identical terms. This is done unless the employee consents in writing to having the vacation time rolled over to the new employer.

Open communication

Communication with the hotel employees about the transition of ownership also is critical to a successful and uneventful closing. Unconfirmed rumors and speculation about a potential sale and management change will present a distraction to employees and even might prompt employees to seek other employment without knowing all the facts. Buyers should consider negotiating the right to talk to employees, or at least the key employees such as the general manager or director of finance, either during the diligence period or between the expiration of the due diligence period and closing. Employees should be advised that their benefits might change under a new manager or that the hotel might have a new general manager, director of finance or other key employees.

To achieve a smooth transition, the buyer also will want to communicate the change in ownership and/or management to the clients of the hotel. Sometimes contracts for future hotel events such as weddings or conferences will have cancellation clauses allowing the clients to terminate the contract if the hotel management changes. It  is important for the buyer and seller to work together to establish an organized outreach plan in order to strike an appropriate balance that will give clients enough notice of the change but not too far in advance in case the sale of the hotel does not occur. If the management of the hotel is changing, the buyer should mobilize the sales team to reach out to group guests right after the closing to introduce the new management team and assure the guests that their events will occur as planned.

Transitional services

Other items the seller and buyer might be concerned with are transitional services such as IT or computer systems that cannot be transferred at closing as well as facilities that are shared with other hotels owned by the seller. For example, the seller might have accounting offices or laundry facilities serving several of its hotels in the area; the buyer might want to consider entering into an agreement with the seller to use those facilities for a period of time following closing to ensure that there is no disruption in the quality of the services provided to the hotel. The buyer also will want to have copies of guest information available to permit the new manager to fulfill future reservations appropriately.

The most important factor in a smooth purchase and sale transaction is a strong relationship between the seller and buyer. Both parties should be committed to efficiently and effectively working through the issues that arise in order to get the deal done. If the seller makes all of its pertinent information available to the buyer upfront, many issues will be flushed out during the purchase and sale agreement negotiations and the diligence period. This will allow both parties to work seamlessly together until closing, ultimately achieving a smooth ownership transition.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2012 Goodwin Procter LLP. All rights reserved.

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