The hotel purchase agreement must allow enough time to complete the new franchise approval and execution as part of the transaction process.
Hotel franchisors have an application process, which requires detailed background and financial information from the prospective hotel buyer before they will accept the buyer as a new franchisee. The seller will want to find out how long the franchisor will take to review the buyer’s franchise application. The buyer needs to be prepared to file a franchise application and submit the necessary background and financial information to the franchisor as early as possible. A franchisor can take several weeks to review a franchise application from a new franchisor. Less time may be required for a buyer who already operates other hotels under the same franchise, but the buyer will generally still need to submit a new application and obtain franchisor approval.
The franchisor may also require the buyer to commit to upgrades of the hotel as a condition of approval. The buyer will want to review the franchise agreement presented by the franchisor, and perhaps negotiate a few modifications. The seller and buyer need to provide time in the transaction process for the buyer to go through the approval and negotiation process with the franchisor before the closing. Once the buyer and the franchisor have agreed to the terms of the new franchise agreement, it may take additional time for the buyer to receive the signed franchise agreement from the franchisor. It is prudent for both the seller and buyer to wait until after the buyer has a signed (new) franchise agreement before closing the sale of the hotel.
For the buyer: How to deal with “PIP (product improvement plan)” requirements of the franchisor.
Almost every hotel franchisor will require a new franchisee to undertake a property improvement program or “PIP” as a condition of receiving a new franchise agreement. If the hotel has not been upgraded for several years, which many hotels have not since the economic downturn began in 2008, the franchisor may require the buyer to make a substantial investment in property upgrades. If, on the other hand, the seller has recently made upgrades, the buyer may be able to reduce the required improvements, and/or to negotiate a longer time period after closing for the buyer to complete property improvements.
The buyer will want to start the discussion process with the franchisor early in the purchase transaction, so that the buyer can determine the costs of the improvements being requested by the franchisor, and be prepared to discuss a timeline with the franchisor to manage the costs and operating disruptions that will be required for the upgrade. Inexperienced buyers will want to engage knowledgeable consultants to help review and evaluate the franchisor’s requested improvements, and suggest “value engineering” modifications to the franchisor’s property improvement plan to reduce the buyer’s cost.
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For the buyer: How to negotiate with the franchisor for better terms in the franchise agreement.
Although many of the terms of a franchise agreement will not be negotiated by a franchisor, there are some provisions that are negotiable. Some of the most frequently negotiated provisions include:
· a lower initial franchise fee rate, with a ramp-up in franchise fees over time;
· the inclusion or expansion of a restricted area within which the franchisor will not issue new franchises for the hotel brand;
· flexibility in transfer provisions to reflect the terms of the buyer’s internal ownership or financial structure;
· the elimination of a right of first refusal of the franchisor;
· elimination or reduction in termination fees for the future sale of the hotel by the buyer;
· some required standard before the franchisor can require the buyer to make future renovations.
Another major issue for negotiation will be the guarantees that the franchisor requires from the buyer and its affiliates. Buyers should be aware that there are different forms of guaranty, and it is possible to negotiate a guaranty that will reduce the potential liability of the guarantor.
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