Nationwide Franchise Assistance for Hotel Owners
The Top Five Mistakes to Avoid in Negotiating Franchise Agreements
Published in AAHOA Business Lodging
By Steven J. Belmonte
I have had the good fortune of viewing the hospitality industry as a CEO of a major management company, as a franchisor, a franchisee, and CEO of Hospitality Solutions; a company which specializes in assisting franchisees with franchise issues such as negotiating fair franchise agreements or the termination of those agreements (liquidated damages). With that kind of experience I have seen the good, the bad, and the ugly. Communicating these few pertinent points can save you from potential and costly mistakes.
With the information provided, you would be able to choose a brand and negotiate a long-term agreement that will be advantageous to you. The process may seem simple enough, but there are a number of possible and common mistakes that could be made.
Mistake Number One: Selecting a franchise based on your personal desires versus the market demand. This will often result in negative consequences. Before a hotel is built, proper market and feasibility studies need to be done to determine specific market demands. To this day and age, I continue to be amazed by the projects that are based on someone’s dream and ego rather than the actual market demand.
Mistake Number Two: Any major brand will do. One has to remember that once the type of product the market demands has been selected, there are a variety of franchise and membership affiliations to choose from. It’s important to realize that each franchise company is different and that each is unique with their own culture. Some are more franchise friendly with flexible terms, while others can maintain a staunch “my way or the highway” attitude. Equally as important, these companies provide different types of agreements relative to the length, fees, liquidated damages, transfers, issues of impact, etc. They vary depending upon the franchise company you are doing business with. However, regardless of your selected franchise company, a boilerplate franchise agreement is always one-sided and in favor of the franchisor. It is incumbent upon you to hire a professional who can negotiate that agreement. Terms that need to be considered are the length of the agreement, fee structures, windows, liquidated damages, transfers, encroachment or impact issues, dispute resolution, the default process, and many others.
Mistake Number Three: Telling a franchise company that they are the franchise of your choice. I have often seen this be “the kiss of death”. Once a franchise company is aware that they are the flag you are seeking, you have essentially given up your ability for advantageous negotiation. Rather, you should be telling the franchise company that you are entertaining proposals and are in conversations with several franchise companies relative to the project.
Mistake Number Four: You can’t succeed without a major name brand. Often, many of the old-timers and lending institutions are under the impression that without a major and mature brand name the property has little chance of success. In today’s day and age, nothing is further from the truth. With the advent of the Internet, Internet marketing, electronic distribution channels combined with the selection and booking habits of the traveling public means the playing field has been leveled. Many emerging brands that have sufficient infrastructure can do a remarkable job putting heads in beds for a fraction of what some of the mature brands are charging. For example, a major franchise typically charges 14% of the gross room revenue “all in”. By “all in”, I am referring to royalty, marketing, reservation, and loyalty club fees. There are plenty of brands such as America’s Best Value Inn in the economy market and Lexington in the upper mid-tier to luxury end, who provide all the same resources and services as the major brands with an approximate fee structure of 4% of gross room revenue “all in”. Additionally, there are other emerging companies that can offer a la carte services and provide viable alternatives. Remember that at the end of the day, it’s all about ROI (Return On Investment).
Mistake Number Five: Your agreement didn’t work out with the franchise company and you are now being sued for liquidated damages. You may believe that you have to pay them or hire an attorney to contest them, but it’s untrue. Most major franchise companies don’t want the added expense of outside counsel and the frustration of long-term litigation. It is expensive, painful, and unnecessary. While mediation is an option that is typically provided in most franchise agreements, we at Hospitality Solutions have successfully negotiated hundreds of cases with reduction in liquidated damages for a fraction of what attorneys charge. It is only a matter of understanding the culture of the franchise company and being able to effectively articulate the rationale for requesting reduction in liquidated damages. This is a process that can go back and forth many times before an amount is mutually agreed upon. Unless you have a lot of time, a professional negotiating company or an expert franchise attorney will be more effective.
With just a little planning and some expert help from industry professionals, you can be well on your way to a successful long-term relationship with one of the many outstanding brands available today. Avoiding these mistakes is your first step to franchise agreement success.
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