Hotel Franchise Disadvantages
Many aspiring entrepreneurs may look to acquiring a hotel franchise as a means to start their own business. Hotel franchises offer the advantages of a built-in brand presence and an established business model, both of which can help startup business owners launch their ventures. However, the franchise model of hotel ownership also carries numerous disadvantages. Business owners who go into hotel franchise ownership expecting maximum profits and minimum effort are sure to be frustrated and disappointed.
Initial and Ongoing Costs
The costs of purchasing a hotel franchise can be significant, especially for new business owners without a large amount of capital. Hospitality consultant Stephen Rushmore wrote that some of the fees can include "an initial fee for joining the chain, an annual cost of the reservation system, various marketing and frequent guest programs, and a liquidated damage fee should you want to terminate the affiliation before the term ends." Franchise buyers also must contribute a portion of their profits to the corporate office as part of the franchise agreement.
Operational Restrictions
Hotel franchise owners must abide by the franchise agreement's restrictions on operations. These restrictions may be too severe for creative entrepreneurs, especially those who seek out the most cost-effective solutions or those hoping to improve the customer experience. Hospitality law expert Nelson Migdal wrote that, "The very premise of a franchise agreement negates extensive revisions or changes" by the franchisee. For instance, a hotel franchisee must use the franchisor's marketing materials to promote his location. The franchisee must pay to use the franchisor's branding, logos and specifications on any advertising material, regardless of if that material has been shown to be ineffective at attracting guests.
Brand Reputation
When a franchisee signs on with a hotel franchise, the franchisee hopes to reap the benefits of an established brand. When the reputation of that brand suffers, the reputations of all the associated franchise hotels suffer as well. If one franchise hotel gains a poor reputation for cleanliness, guest services or amenities, other franchisees can suffer from that poor reputation. According to the Cornell University School of Hotel Administration, many hotel franchise contracts can run as long as 20 years, so the franchisee can suffer an extended dry spell if the brand takes a significant hit.
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Territorial Restrictions
Hotel franchisees are not free to set up their establishments wherever they choose. Franchise agreements also contain territorial restrictions. These restrictions prevent two hotels within the same franchise from being too close to each other. Rushmore also noted the consolidation in the hotel market that can lead to having two hotels with different brands coexisting in the same corporate "family." This condition adds even more restrictions to where hotels under the same corporate umbrella can be located in relation to each other.
Brand franchise issues in hotel purchase and sale transactions by Robert E. Braun | Hotel Lawyer
The first thing you need to know: The franchise does not follow the property. It terminates when the hotel is sold.
Some hotel buyers and sellers believe that the hotel brand can be sold along with the hotel. That is not true. Virtually all franchise agreements currently used by the major brands provide that the seller’s existing franchise agreement terminates when the hotel is sold. The buyer will need to enter into a new franchise agreement if the buyer wants to retain the brand. This leads to two key concerns.
First, unless a franchisee (the seller) has negotiated otherwise with the franchisor, the sale of the hotel will cause the termination of the franchise agreement, obligating the seller to pay a significant termination fee. While most franchisors will waive the termination fee when an approved buyer enters into a new franchise agreement, the transaction documents, conditions and timeline must deal with this reality.
Second, the new franchisee (the buyer) must make independent arrangements with the franchisor to continue to operate the hotel under the same brand (if it chooses to do so), starting on the day the transfer takes place.
The hotel purchase and sale agreement should address these concerns. For example, the seller might include provisions in the hotel purchase and sale agreement to require that the buyer receive approval from the franchisor and a new franchise agreement from the franchisor before the closing of the transfer. If the buyer intends to change the franchise, then the seller needs to take into account the termination fees that the franchisor will charge for termination of the franchise, and the seller may want to increase the purchase price or negotiate terms with the buyer that reflect the seller’s payment of any franchise termination fees. The parties’ respective obligations to effectuate the transition should also be spelled out.
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