Costs of affiliation
You want a brand to make your hotel more profitable, both by increasing your bottom line through marketing and by sharing to reduce the costs of large-scale services. Franchise companies provide and continually upgrade those marketing and sharing services because they are in business to make money.
As a franchisee, you pay royalties for the use of the brand, marketing and reservation fees, fees for the loyalty program, and a variety of other fees for everything from the initial brand application to training. Analysis of the fees to make sure you will get a return on your investment is one part of your due diligence. There are variations in the costs of franchises and in how fees are structured. They may be a percent of room revenue, fees per room occupied or per reservation, fees per room available, fixed fees and other measures.
There are legal differences in the structure of brands. For instance, some are structured legally as franchise companies while others, like Best Western or Preferred Hotels, are membership organizations or marketing associations. Depending on their legal structure, their services and your obligations may be very different. Some require a long-term commitment with withdrawal penalties, others can be renewed annually.
FDD (Franchise Disclosure Document)
Most of the costs associated with a franchise are disclosed in a Franchise Disclosure Document. An FDD is a comprehensive document that details the legal rights and obligations associated with a franchise. FDDs encompass 23 items with additional exhibits. Information within the FDD includes the history of the franchise, background on corporate leadership, franchise turnover rates, termination causes, fees, rules, restrictions and numerous other facts pertaining to that franchise. Franchisors are required by the Federal Trade Commission (FTC) to present potential franchisees with an FDD at least 14 days before a contract is signed.
The Item 7 FDD disclosure is intended to help you understand how much money will be needed to open the franchised business. Generally, franchisers require that you have a certain amount of fixed capital so you have a reasonable chance of opening successfully. Fixed capital might be for equipment, construction, inventory, supplies and other items needed to open the doors and start the franchised business model.
Most hotel companies have certain fixed fees attached to each franchise which are payable monthly except some one-time fees generally applicable at the inception. All fees related to the franchise are disclosed in the FDD. The FDD must be updated annually and new fees can be introduced, old fees can be discontinued and the company may change the fee structure.
The FDD also contains information about brand performance and average cost to build a hotel or convert a hotel. FDD’s are a valuable part of your due diligence.
| Fee | Description | Frequency | Average % of Room Revenues |
| Initial franchise fee | Typically, a minimum dollar amount based on the hotel’s room count and is paid on submission of the franchise application. The initial fee typically covers processing the application, reviewing the site/hotel, assessing market potential, evaluating plans and/or existing layout, inspections during construction, and pre-opening or conversion services. | One-time | |
| Royalty fee | Compensation for use of the brand’s trade name, service marks, associated logos, goodwill and other franchise benefits, the royalty is typically a percent of room revenues and sometimes a percent of other revenues including food and beverage. | Recurring, usually billed and paid monthly | 5.1% |
| Marketing fees | Payment for brand-wide advertising and marketing including national and regional advertising, brand directories and websites, marketing targeting various groups and segments. In many instances, the marketing fee goes into a fund administered by the brand for all the hotels in the system. Marketing fees may include a percent of room revenues, a fixed fee per room, fees for specific marketing programs and services or a combination. | Recurring, usually billed and paid monthly | 1.6% marketing 1.5% sales |
| Reservation fees | Fees to support the cost of operating the reservation service including on-line bookings and the brand website (brand.com), operating the Central Reservation System (CRS) for reservations made by telephone, and fees paid to third parties including travel agents, Global Distribution Systems (GDS), and Online Travel Agencies or booking channels (OTA). These fees may be bundled with marketing fees. They may be a combination of percentage of revenue booked, a fee per reservation, dollars per room, fees per transaction with third parties, commissions for travel agents. | Recurring, usually billed and paid monthly | |
| Loyalty program fees | Frequent traveler programs cover their costs of operation with fees. Frequent traveler program fees cover the costs of promoting and running the program. They also cover the costs of room night redemption when members use their points to stay in system hotels. As a part of the system, your hotel will accept guests who are traveling on points and will receive reimbursement from the program as well as paying into the program.. Charges may be a combination of percentage of revenue from program members, fees per booking or room night, fees per point, etc. Your hotel operator should aggressively manage redemptions to benefit your hotel. As an owner, this is an area you should regularly review with management. | Recurring usually billed and paid monthly | 1.5% |
| Other fees | Franchisor or third-party suppliers charge for a variety of services for franchise regional and national conventions, training, etc. Franchise companies also process the billing for travel agents, channels and other for-fee business generators. | Recurring usually billed and paid monthly | 1.2% |
| Note: Average fees reported by HVS for 2019 based on analysis and extrapolation of FDD information on 73 brands and average operating statistics. Franchise costs averaged (median) close to 12 percent of room revenues over the projected ten years of operation across all types of franchised full and limited-service hotels. The variation is wide and actual costs for any individual hotel or brand can be materially higher or lower. |
