How do you achieve this balance?
To reach an agreement that is successful for both the brand and the owner, there must be parity in the process. Owners need the same level of legal representation that the franchisor will have. The franchisor’s lawyers will have negotiated hundreds of these agreements. Your lawyer should have this level of practical experience, as well. The franchisor’s lawyers will understand the implications and ramifications of each sentence and phrase in the agreement. So should your lawyer. The franchisor’s lawyers will make sure the franchisor takes as little risk as possible — that’s the lawyers’ job. Your lawyer should do the same job for you.
U.S. Hotel Franchise Fee Guide
The purpose of this U.S. Hotel Franchise Fee Guide, prepared by HVS, is to provide a comparative review of various hotel franchise brands based on the applicable franchise fees. The selection of an appropriate franchise affiliation affects a property’s ability to compete in the local market, generate profits, achieve a certain image or market orientation, and benefit from referral business. Because the success of a hotel is based primarily on the cash flows it generates, owners and lenders must weigh the benefits of a brand affiliation against the total cost of such a commitment. We note that the fees outlined herein apply only to hotels operating in the United States.
Types of Hotel Franchise Fees.
Brand attributes play a crucial role in an investor’s decision to acquire or change a franchise affiliation.
When evaluating a potential hotel franchise, one of the important economic considerations is the structure and amount of the franchise fees. Second only to payroll, franchise fees represent one of the largest operating expenses for most hotels.
Hotel franchise fees are compensation paid by the franchisee to the franchisor for the use of the brand’s name, logo, goodwill, marketing, and referral and reservation systems. Franchise fees normally include an initial fee with the franchise application, plus continuing fees paid periodically throughout the term of the agreement. The initial fee typically takes the form of a minimum dollar amount based on a hotel’s room count. For example, the initial fee may be a minimum of $45,000 plus $300 per room for each room over 150. Thus, a hotel with 125 rooms would pay $45,000 and a hotel with 200 rooms would pay $60,000.
The initial fee is paid upon submission of the franchise application. This amount covers the franchisor’s cost of processing the application, reviewing the site, assessing market potential, evaluating the plans or existing layout, inspecting the property during construction, and providing services during the pre-opening or conversion phases. In the case of reflagging an existing hotel, the initial fee structure is occasionally reduced. Some franchisors will return the initial fee if the franchise is not approved, while others will keep a portion, approximately 5% to 20%, to cover the cost of reviewing the application.
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Converting the affiliation of an existing hotel may require the purchase of towels, brochures, operating supplies, and paper items imprinted with the national franchisor’s logos. The potential affiliate may have to undertake property refurbishment or renovation (e.g., laying a higher-grade carpet or enclosing a property’s exterior corridors). Both new franchises and conversions also pay for the cost of signage. Some franchisors require the operator to pay a property improvement plan fee. Although these potential costs are not quantified in our study, they must be considered when measuring the costs and benefits of an affiliation. Requirements of this kind vary from brand to brand.
Continuing Fees
Payment of continuing franchise fees commences when the hotel assumes the franchise affiliation, and fees are usually paid monthly over the term of the agreement. Continuing costs generally include a royalty fee, an advertising or marketing contribution fee, and a reservation fee. In addition, continuing fees may include a frequent traveler program and other miscellaneous fees. The continuing fees we analyzed are categorized as follows.
Royalty Fee: Almost all franchisors collect a royalty fee, which represents compensation for the use of the brand’s trade name, service marks and associated logos, goodwill, and other franchise services. Royalty fees represent a major source of revenue for a franchisor.
Advertising or Marketing Contribution Fee: Brandwide advertising and marketing consist of national or regional advertising in various types of media, the development and distribution of a brand directory, and marketing geared toward specific groups and segments. In many instances, the advertising or marketing contribution fee goes into a fund that is administered by the franchisor on behalf of all members of the brand.
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Reservation Fee: If the franchise brand has a reservation system, the reservation fee supports the cost of operating the central office, telephones, computers, and reservation personnel. The reservation fee contains all distribution-related fees, including fees payable to third parties, such as travel agents and distributors. Our study takes into account only those distribution fees that have been quantified in the Uniform Franchise Offering Circulars (UFOC) or Franchise Disclosure Document (FDD) prepared by each franchisor.
Frequent Traveler Program Fee: Some franchisors offer incentive programs that reward guests for frequent stays; these programs are designed to encourage loyalty toward a brand. The cost of managing such programs is financed by frequent traveler assessments.
Other Miscellaneous Fees: This category includes fees payable to the franchisor or third-party supplier(s) for additional system and technical support. It also includes fees related to training programs and national and regional annual conferences.
Sometimes franchisors offer additional services. These services generally include consulting, purchasing assistance, computer equipment, equipment rental, on-site pre-opening assistance, centralized revenue management, sales commissions, and marketing campaigns. The fees for these services are typically not quantified in the disclosure document. Our study considers only those costs that are mandatory and quantified by the franchisor.
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