The opportunity to use the existing strength of a national or international hotel brand can be attractive to hotel owners, who can benefit from the power of a well known name and large marketing budget to attract guests.
The market for hotel franchising remains relatively buoyant, with hotel brands keen to promote their own franchise opportunities. Should you feel that this is a beneficial route to market for your hotel, whilst hotel franchise agreements are not typically heavily negotiated and very much favour the brand, there are certain key provisions that you can make some headway on if you are well prepared.
What is hotel franchising?
Under a hotel franchise agreement the hotel owner acquires the right to use the brand of a national or international hotel group, which grants a licence to the hotel owner on very specific terms.
Why does hotel franchising occur?
One of the main drivers for a hotel owner to want to enter into a hotel franchise agreement is the need for profile, identity and a level of marketing support which will enable the hotel to establish a presence for itself in a crowded marketplace. From the brand owner’s perspective the use of hotel franchises is a way of increasing brand profile without the cost of investment in real estate.
What are the main provisions of a franchise agreement?
Brand owners usually have a standard form of franchise agreement. They are usually reluctant to negotiate on the terms, as a franchisor generally wants to maintain consistency in its master franchise agreement. However in practice some provisions will be negotiable because there is no ‘one size fits all’ even for the leading brands.
Some of the key provisions of a franchise agreement are discussed below.
Fees
You will have to pay a royalty or licence fee (likely to be in the 7-10% range), for use of the brand, based on total revenues generated by the hotel. The range varies between brand owners and is to some extent shaped by the type of hotel. In the case of a new build there may be scope to phase in the royalty during the initial years of the term to reflect a need to build up custom and goodwill in a new property. There will also be additional fees to cover a variety of services provided by the brand.
Term and termination
The term of the agreement will vary but a period of 10-20 years is the usual range. It is unusual for a break clause to be volunteered by the brand owner. It is important to consider the circumstances in which the hotel owner may want to exit whether by reason of sale or otherwise.
The brand owner will impose a requirement to pay liquidated damages on the hotel owner if the franchise agreement is terminated early so this is an area which must be given serious consideration. There are various ways this obligation can be qualified to reduce the potential exposure, though the best one, if not easily secured, is a right to terminate the agreement without paying such penalties after a minimum period or at regular intervals.
Capital investment
The hotel owner will be expected to make significant capital investment to bring the look and feel of the hotel up to the brand’s standards and to maintain those standards. There will be more scope to negotiate the level and timing of such investment where the property is new or recently renovated.
Management of the hotel
Before a brand allows its flag to be applied to a hotel it will want approval rights in respect of the operator actually managing the hotel, if the hotel owner is not managing it. If the hotel owner is managing, the brand will need to be convinced it has the experience to do so and has a suitable track record.
So if there is a change of manager during the term of the franchise agreement, the hotel owner needs to try and retain control over that change. The brand owner will want approval rights on the appointment – clearly whoever is in charge of the day-to-day running of the hotel needs to be a good hotel manager.
Transfer of ownership
There will usually be restrictions on the ability of a hotel owner to transfer ownership of the hotel during the term of the franchise agreement. The brand owner may, for example, want approval rights on any transfer, or to impose new franchise fees or a property improvement plan. The hotel owner will want some flexibility to be able to transfer ownership, and should resist any attempt to veto sale to a buyer who is not otherwise subject to some sort of legal sanction.
Protected area
The hotel owner will want some comfort that in taking on a new franchise the brand will not offer a franchise to a competing hotel in the same vicinity. The radius of the area in which this sort of protection is granted and the length of time it will be offered for, if at all, are a matter for negotiation on a case by case basis.
Personal guarantee
Where they can, a brand owner will try to secure a personal guarantee from the hotel owner before entering into the franchise agreement. Where the hotel owner is owned by institutional investors, if not a personal guarantee, then other forms of security will be sought.
Key money
Brand owners are sometimes willing to provide what is known as “key money” to support the hotel owner in the building of a new hotel. This form of incentivisation can be a way of securing a coveted property where there is competition among brand owners, but it does not come without strings. The key money is not usually released until after completion of the hotel and it will be repayable in certain circumstances.
How we can help
As a result of our experience in hotel franchise agreements we can help you achieve positive results in your consideration of franchise opportunities, based on having dealt with many different brands and owners in the hotels sector.
