Hotel owners enter into franchises for a variety of reasons. For most, brand identity, marketing and reservation delivery are drivers. The appeal of particular product designs is often also a motivator. Whatever your driver, as you explore markets and hotel opportunities, choices about franchising will be some of the most significant decisions you make.
Once you identify the brand you want, there is a process to being accepted into the franchise system. Then there is an onboarding process as you become a franchisee and learn how to operate within the system. Your hotel is also onboarded as you, management and the brand deliver a brand compliant hotel product and get the hotel properly set up to receive business and services from the system. Then you and hotel management have relationships to develop and maintain with the service providers in the brand and you have inspections and standards to navigate as a franchisee.
Becoming a franchisee
Once you identify a brand or a market for your hotel, you meet with the representative for that brand for that geographic territory. You can request a meeting on the brand development website, or you can reach out directly and introduce yourself by phone or email. In general, franchise representatives will connect with you within a week of receiving the lead through the website.
After your first contact with the franchisor, you will receive the Franchise Disclosure Document (FDD). An FDD is a comprehensive legislatively mandated legal document that details a franchise. You should acknowledge and return the acknowledgment as soon as possible as there is a 14-day waiting period required by the FTC before entering into contractual franchise agreements.
Make sure you prepare to meet the franchise representative. They are in sales and want to promote their franchise. But they don’t want to waste time with projects that are unlikely to happen. So, the franchise representative will qualify you and you want to make the right impression immediately. To be a good candidate:
- Do your homework about the brand. You should have questions, but they should build on the reasonable understanding you get from researching the brand on-line and visiting a few hotels in the system.
- Express what you like about the brand because good franchisees are cheerleaders for the product.
- Describe your project, its potential, and show confidence that you can bring it to fruition.
- Present yourself as a solid business prospect. In addition to questions like these, expect the franchise representative to ask financial questions to get an idea of how comfortable you are with the required investment.
- Why do you want to buy a franchise?
- What attracted you to this specific franchise?
- What are your goals and expectations?
- Why would you make a good franchise owner?
- What are your professional passions?
- What is your relevant experience?
Some brands are hungry for franchisees. Others are extremely selective and hard to get. After the first meeting, you can explore the franchise opportunity and terms in more detail with the representative.
Once you pass initial muster, after the initial meeting, or at the appropriate time, you will be asked to submit a formal application with the application fee.
After you submit an application, the franchise company will be in a position to negotiate terms of the deal. If you are bringing an existing hotel into the system, the company will issue a Property Improvement Plan (PIP).
Brand Due Diligence
Your brand is a stakeholder in the hotel and they will conduct their own due diligence. The brand’s interests are:
- Location: The brand wants to know that it will be positioned competitively in the market. Understand that their concern is less about whether the hotel is financially feasible and more about brand position. They want to be represented in locations that are appealing to their customers so, for instance, a luxury brand will require a premium location. They want to be in the best location they can get in your area so if the brand has a choice, they tend to choose the most desirable location, although there are other considerations.
- Licensee: The brand wants to know that you will work well with their organization and will pay your bills in full and on time. They will review your financial status, the structure of your organization, and your credit history. They often require a personal guarantee, particularly for first time owners. They also want to understand your plans for operation of the hotel (self-manage or management company). For first-time owners, franchise companies may recommend or require and approved management company.
A franchise agreement is a legally binding document. It is a license establishing your rights and obligations and protecting the franchisor’s intellectual property. It defines the franchisor’s terms and conditions for a franchisee (you). Every franchise is governed by a comparable set of terms. Franchises are governed by the Federal Trade Commission (FTC) under the FTC Franchise Rule. Under the Rule, the agreement must meet three general requirements:
- The franchisee’s business must be substantially associated with the franchisor’s brand; they share a common brand.
- The franchisor exercises control or provides substantial assistance to the franchisee in how it uses the brand to conduct business. Franchisees are independent contractors and not joint employers so the brand standards do not control employees at the hotel nor do they control how the franchisee does business, beyond meeting brand standards.
- The franchisor receives a fee from the franchisee for the right to enter into the relationship and use the franchisor’s trademarks.
Some states also have laws governing franchising.
Franchise agreements are flexible enough to allow the franchisor to adapt to franchisee specific needs, within the policy constraints for that brand. However the franchisee must always manage their independently owned businesses in accordance with brand standards. Basic elements of the agreement are:
- Overview of the independent contractor relationship
- Duration or term of the franchise agreement; rights to enter into new agreements
- Requirements to upgrade and renewal
- Initial and continuing fees and required purchases
- Territory – not all franchises have a territory, but this must be defined (an area of protection is territory around your hotel where the franchise company will not add another property of the same brand)
- Opening date and time schedule by which the franchisee must advance the project and open
- Site selection and development, generally franchisees find the location and develop to franchise standards, subject to approval
- Services offered by the franchisor
- Training and support
- Use and protection of intellectual property including trademarks, patents and manuals
- Advertising including the franchisors commitment to provide services and the associated fees
- Insurance requirements (minimums)
- Record-keeping and the right to audit franchisee records
- Defaults, damages and complaint limitations
- Termination, expiration and transfer rights and obligations including liquidated damages
- Personal guarantees
- Quality control
- Non-competition covenant
- Other items including successor rights, dispute resolution, indemnification, first right of refusal, default, governing law, releases, etc.
Example franchise agreement:
Negotiating Franchise terms
Hotel franchise agreements are not highly negotiable. There are several reasons for this. In most cases, particularly for new hoteliers, the brand has the more powerful negotiating position and does not need to make significant compromises. For the brand, managing hundreds or thousands of franchise legal relationships that are alike is much more practical than managing small differences between deals. Critically, the value of the franchise company – the franchise asset on its balance sheet – is determined in part by the present value of the projected future contracted earnings from its franchises. The company is motivated to maximize that number, which limits franchise agreement modifications.
Although it is not easy to read a franchise agreement, it is a binding legal document and you should not sign until you have read it and talked about its provisions with an attorney who is experienced with hotel franchise agreements. However, you might want to limit your legal expense and do not expect the attorney to be able to negotiate extensively on your behalf.
Items that franchisees ask to negotiate commonly include royalties, area of protection and termination windows. Like any negotiation, you will be most effective if you understand what the franchise company wants and needs from the deal. If you win a concession in one area, it may be offset in other areas. These are long term relationships and the negotiation should be professional and forward-looking on both sides. Franchisors are more likely to consider requests that do not affect their consistency. However, some franchise companies will negotiate some items to bring desirable assets into their system. Sometimes, the brand may offer a development advance note or other incentive.
Items negotiated might include:
- Extra help opening the business or money for opening marketing
- Territorial protection, which is not a part of all agreements but is not uncommon and may include a negotiated geographic area for a specified period of time
- Modified transfer fee or initial fee
- Adjustment to the time to cure a default, get the hotel opened or implement at PIP
- First right of refusal or first notice about opportunities to own a property in an adjoining territory (but not a first right of refusal for the franchisor to acquire your hotel)
- Limited or no restrictive covenants, these are limitations on what you can do outside of the hotel franchise including hotels with other brands and in other markets
- Renewal rights, a term with one or two renewal opportunities is not uncommon but may be adjusted under some circumstances
- Calculation of liquidated damages – payments to the franchiser to compensate for missed fees if your hotel is taken out of the brand before the end of the term
- Key money which is upfront capital the brand provides the franchisee as a loan that typically burns off as long as the hotel performs under the franchise agreement; key money may make the brand less flexible on other terms and may restrict you as an owner and your ability to sell the hotel in the future
- A personal guarantee waiver for guaranties of financial obligations specific to their business (royalties, advertising, restricted covenants including confidential information) is difficult to negotiate, particularly with first deals; other broader guarantees may be negotiable if they appear in the agreement
- Cross fault provisions
You and your franchise company want your hotel to be successful financially and as a member of the brand family. In other ways, your interests are not aligned. Fair franchising is a movement that has improved that situation significantly in the hotel industry. Although you should go into a franchise with positive expectations, it is reasonable to understand fair franchising. https://www.aahoa.com/membership/franchise-relations/points-of-fair-franchising
Onboarding with your franchise
Once you have contracted to bring your hotel into the brand, you will want to develop a strong and mutually beneficial relationship with your team at the brand. You may have met some team members during the sale and negotiation process. But typically there will be a welcome call introducing you to the pre-opening team.
While every brand is different, a pre-opening team usually has a manager assigned to your property who will work with you and be your point of contact. You may also connect with these or other people in the franchise organization as you bring your hotel on-line:
- Design & Construction team: review your plans, advise you about PIPs and brand requirements, perform inspections and make sure that your hotel meets standards before it is opened and online in the brand System
- Sourcing (purchasing) team: review your PIP and product needs, introduce you to the process of ordering supplies through the brand, and are a resource as you complete purchases through the brand and from other sources
- Training manager: works with your management team to complete all necessary training prior to opening and to schedule on-going training whether on-site at your hotel or in training classes
- Marketing team/global sales team: works with you and your on-site manager and salespeople so that your hotel is optimally presented in the brand’s online systems, technologically ready to receive reservations, knowledgeable about system reports and ready to use them to market locally, implementing pre-opening marketing, etc. Once your opening date is set, they launch your property in all OTAs, brand websites and work behind the scenes to train your staff on the property management systems.
- Franchise advisory councils: some brands have independent counsels of franchisees that work with franchisee and the brand to optimize performance and opportunity; some of these are large networks which can offer you a variety of benefits; others are small groups invited to discuss issues with the brand from the franchisee perspective.
Brand relations, inspections and reviews
As owner, you are the licensee for your brand and therefore the apex point of contact. You are responsible for relations with the brand, although management handles most day-to-day operating interactions.
Brand standards enable brands to deliver consistency in operations, design and experience. They create uniformity across brand identifiers. It must be possible to implement them at scale in rural, urban, hot, cold, corporate, tourist and other settings. Standards shift with changes in consumer preferences, although not usually quickly. Standards have to be appealing to hotel owners, like you, as well as the brand and hotel guests.
To maintain standards, brands inspect and review participating hotels. Accordingly, in the process of opening your hotel, you will clear a series of quality assurance inspections.
Once you are operating, you will have periodic quality assurance inspections (QA reports). Performing well on the QA can carry benefits with how your brand presents your hotel for booking and in other ways. Failing QA inspections can cause you to lose your franchise.
In addition to physical QA, participating properly in brand programs can significantly boost your business. You will oversee management’s participation in these programs.
As an owner, you have an emotional investment in your hotel and will (hopefully) think of highly of your property. So will your manager, who invests time and effort into the operation. It hurts when someone tells you that your baby is ugly, even if its mild criticism. So, QA inspections are stressful. They can be expensive if major corrections are required. And it’s always better to get an outstanding inspection.
To prepare, make sure that your manager understands the brand’s standards and rules of operation (as owner, you should have the gist of it so you are not surprised):
- Get the latest version of the standards from the brand online
- Use the self-evaluation form and do a mock QA inspection (or ask your manager to do it)
- Ask your brand representative to do a QA run-through with you before your first inspection for a perspective on the condition and cleanliness of your hotel; they typically know what will pass
- Ask another GM or reach out to the brand to get insight into things you are uncertain about
- Get your waivers ready to show; many hotels have waivers for a few items that don’t meet standards but don’t need to be changed
Brand standards cover everything from paperwork to cleanliness to physical condition of the hotel to service. Most standards make intuitive sense and those that seem extreme are usually understandable with a little background information. If adhering to brand standards is part and parcel of your operation every day, you will be in good shape for the inspector. But, even then, you will only do well on the inspection if you do a detailed check as the time for inspection approaches.
It helps to inform team members and encourage them to uphold the standards. If they are committed to the brand’s quality, it will show to the inspector. When your hotel passes the inspection, particularly if the score is outstanding, share the recognition with your team. They will have worked hard to earn it.