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Frequently Asked Questions: Hotel Franchise Agreements

The trend towards alternative hotel management and operation structures, particularly franchise models, continue to be on the rise – particularly hotel franchise agreements (Franchise Agreements). 

We have considered some frequently asked questions about Franchise Agreements below:

What is a Franchise Agreement?

A Franchise Agreement is an agreement between an owner of a hotel brand (Franchisor) and an owner of a hotel asset (Franchisee) which grants a Franchisee a licence to operate a hotel under the Franchisor’s brand in exchange for fees.

Under a Franchise Agreement the Franchisee takes the benefit of the Franchisor’s brand and sales platform but crucially retains control over the management of the hotel (subject to compliance with the Franchisee’s brand standards and requirements).

What are the main differences between a Franchise Agreement and a Hotel Management Agreement (HMA)? 

Some of the main differences between an HMA include the following:

Criteria

Franchise Agreement

HMA

Management and Operation

A Franchisee will manage and operate the hotel.

Alternatively, a Franchisee can appoint a third-party operator (TPO) under a separate management agreement (TPO Agreement).

A hotel brand owner (referred to as an Operator) will fully manage and operate the hotel.

A hotel owner (Owner) will have limited control over day-to-day decision making.

Contractual Term

On average, the term is between 5-15 years

(Although we have seen Franchise Agreements which include a 20+ year terms)

On average, the initial term is between 15 – 30 years with renewal term(s) between 5-10 years.

Fee Structures

A typical fee structure for a Franchise Agreement will include: 

Initial Fee (Fixed amount per key)

Royalty Fees (3% - 5% room revenue)

Continuing Fees / Central Services Fees (These include sales and Marketing Fees, Room Reservation Fees, Loyalty Programme Fees)

 

A typical fee structure for an HMA will include:

Base Fee (2% - 4% of gross revenues)

Incentive Fees: (7% - 15% of adjusted gross profits)

Central Services Fees (These include Sales and Marketing Fees, Room Reservation Fees and Loyalty Programme Fees)

Technical Services Fees (USD 1,000 – USD 1,500 per key)

Personnel

A Franchisee will employ all personnel associated with the hotel.

An Operator will usually employee key management (the General Manager and occasionally heads of departments) and as an expense to the hotel. All remaining personnel will be employed by the hotel owner.

 

Will the fees payable pursuant to a Franchise Agreement be less than an HMA?

This will depend on the overall structure put in place by an Owner / Franchisee.

The total fees payable pursuant to a Franchise Agreement is likely to be less than the aggregate of the fees payable under an HMA. This is one of the key advantages to the franchise model. However, if a Franchisee opts to engage a TPO to manage and operate the franchised hotel, then the total fees payable may be similar or even higher than a traditional HMA.

Are Franchise Agreements better for owners?

There are advantages and disadvantages to each hotel operating model. The main advantages are that:

Franchise Agreements provide more control over operations compared to other hotel operating models. However, Franchisees will still need to comply with the Franchisor’s brand standards and requirements.

A Franchisor will typically provide expertise support and training to the Franchisee and the hotel.

The hotel benefits from being part of the Franchisor’s wider network and brand strength.

Potentially, the reduced fees, control over budgets and operations and ability to benefit from economies of scale where a Franchisee owns multiple franchised hotels could lead to higher profits.

However, a Franchisee will be fully exposed to the financial risks associated with operating a hotel. In addition, a Franchisee may still be required to incur significant overheads and costs for complying with Franchisor requirements.

An aspiring Franchisee should consider these advantages and disadvantages in the context of its own operating structure including its management experience, its existing or projected hotel portfolio, the proposed market, brand strength. Our view is that it is that a franchise model will generally be more favourable to a Franchisee / Owner that owns or intends to own multiple franchised hotels.

For more information on Hotel Franchise agreements, please contact Reem Al Mahroos or your usual Charles Russell Speechlys contact. 

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