The cost of a deductible includes two types of fees: upfront fees and ongoing fees. The hotel brand/operator is responsible for the management of the hotel by providing supervision, management and expertise through conventional methods and measurements. In principle, he will take over the operation of the hotel for and on behalf of the hotel owner for a fee. Although very few legal terms of the franchise agreement are open for negotiation if they are addressed during the negotiation of the term sheet before the trademark is approved by the committee, there are several terms and conditions that owners can negotiate. Owners have more influence on economic conditions when they develop the hotel rather than buying a stabilized asset. The terms that apply as terms and conditions and can be negotiated are: Depending on the type of agreement that binds the parties, the operator and the brand can be a single entity or separate actors. The branding of a hotel property is often a long and expensive offer for the hotel owner, the trade-off being access to an established clientele and an extensive booking and marketing system. Hotel owners often face the difficult decision of balancing the potential benefits of a hotel brand with the costs associated with meeting and maintaining prescribed brand standards. In our current economic climate, this decision can be crucial, as the ability to secure financing and/or stabilize profits and reach return thresholds can affect economic conditions with the owner of the hotel brand. The reputation, name and standard level of a brand owner, as well as the cost constraints of the hotel owner, are key elements in determining and negotiating a franchise or management agreement. Many hotel brands offer both options, depending on the location of the property, size, amenities, engagement duration, brand level, and other related factors. So why choose a franchise agreement instead of a management agreement? Often this is simply because the hotel owner enjoys the benefits of brand strength and presence with the potential to reduce costs.
The premise of a franchise agreement cancels significant revisions or changes to the form of the original franchise agreement provided by the trademark owner. As a result, the negotiation process is limited in nature, less time-consuming and much more focused. Each operating model has its own advantages and disadvantages, which makes it more or less attractive to owners and branded businesses. Although both parties have an interest in the hotel`s success, their different risk profiles, sources of income and investment strategies can lead to trade-offs if they are not carefully considered when determining the business terms of the agreement. A hotel management contract is an agreement between the same parties as for a franchise, but does not indicate the same responsibilities. Since 1963, when the first hotel was opened under a management contract, this business model has continued to improve and attract more attention. In a hotel management contract, the operator/brand is the manager (e.B. IHG) and the owner of the hotel is the manager (e.B. a financing group).
The operator will operate a particular branded hotel on behalf of the owner-manager for a fee, which is usually negotiated heavily based on the responsibilities of each party. The owner is responsible for all risks such as employment contracts, maintenance of the property or FF&E. On the other hand, the operator is responsible for all management matters. So how can an owner choose between a franchise or a management agreement? The decision can be made based on many factors, but in general, a franchise agreement is preferable for an owner who wants to be involved „practically” in the day-to-day operation of their hotel. This person may already be an experienced hotelier. These optional services are sold to the franchisee or managed owner for an additional fee. The role of the franchisor/manager is to recommend these optional services when they are best needed in response to a problem faced by the hotel. It is always the decision of the franchisee/managed owner to agree on optional services. Rather, a managed owner may be someone who does not have the desire or experience to manage the hotel itself. Their expertise or business interest is more closely related to the real estate investment aspect of the hotel property. Christine Ravanat of AccorHotels explains how large hotel groups are expanding their presence on the network through franchise or management agreements, a win-win agreement for hotel groups and owners.
While franchise agreements are designed in favor of brands, most owners are more than happy to sign them because the right flag (and their reservation system) is extremely beneficial to the owner`s business. The right flag can significantly increase hotel occupancy and room rates, increasing a hotel`s value by more than 20% to 40% compared to „unmarked” or weaker branding options. In the hospitality industry, a number of key players and stakeholders have been involved in managing a successful hotel. Hotel brands, hotel owners, and asset management companies often work together to create transformations and combinations of operating models to maximize profitability and increase guest satisfaction. The question asked to the hotel owner is: „How to choose between a franchise agreement or a hotel management agreement?” and „Which model is best for your hotel?” This article is intended to give a brief overview and comparison between the two hotel operating models. The fee structure of the hotel management contract is established in order to reconcile the interests of both parties. The business owner pays the operator different fees for running their business: The general principle of a franchise agreement is that the franchisee operates their own hotel in accordance with brand standards. While the process of negotiating a franchise agreement may be less vigorous, certain conditions are open to discussion and change. Common changes to the franchise agreement may include, for example, furniture and furnishing reserve amounts and periods, requirements and costs for property improvement, assignment and financing provisions, and termination provisions. Other more exclusive changes to the franchise agreement may include territorial restrictions, management company approval, guarantees, and provisions relating to duration and renewal. Provisions for liquidated losses, the budget approval process, centralized services and related costs are areas that tend to be normalized rather than heavily negotiated. The influence of the hotel owner on negotiations is often based on the strength and extent of the brand`s power, as opposed to the need for the brand`s presence in a particular area, the structure and character of the building, as well as the age and marketing strategy of the brand itself.
Knowing the advantages and disadvantages of a franchise and management agreement allows you to better understand the strategic position of the hotel group. There is no single model, as international operations allow hotel groups to diversify their business model according to their geographical and market positioning. However, the difference in market trade rules between countries may limit their diversification. Although the franchise model is less common in Europe than in the United States, it seems to be gaining popularity with owners looking to keep their business under control and hotel groups looking to expand their portfolio with minimal investment. The franchise accounts for three-quarters of the total European pipeline and management contracts for the rest (HVS, 2015). According to STR and JLL Research, Marriott International, Hilton Worldwide, Intercontinental Hotels Group and Choice Hotels International together account for 82% of total franchised branded rooms (JLL, 2020). On the other hand, hotel chains are still very reluctant to give up control of their luxury brands and prefer management contracts for the operation of their luxury properties. Considering the market leader in Europe, Latin America, the Middle East and Africa, and Asia-Pacific, Accor operates 51% of its hotels under management contracts and 49% franchised (Accor, 2021), a good example of how hotel groups manage their brands around the world. In cases of franchising and management, the parties may agree on additional provision of services. Most hotel groups have a range of optional services that meet specific needs throughout the hotel`s life cycle.
The two models described above offer a range of options with examples of advantages and limitations that make them more or less attractive depending on the requirements, priorities and profile of the hotel owner. In addition, the following table illustrates the comparisons between the franchise and the management agreement in terms of revenue, services provided by the hotel brand, contract duration, employees, financial obligations and other costs. These optional services cover many areas, such as renovation. B hotel, revenue management, exposure to distribution channels, hotel staff learning and development, procurement and much more. Whether you`re considering developing a hotel or acquiring a hotel to maximize your revenue per available room (and get capital investors and financing), you`ll likely turn to one of the leading hotel brands to „label” your hotel with a suitable hotel brand. The document that formalizes your rights and obligations is called the „License Agreement” or the „Franchise Agreement”. For many owners, their understanding of this important agreement does not go beyond the basic economic terms of royalties, „scopes of protection,” the term, and perhaps „key money.” Hotel franchise agreements To maximize RevPAR (and secure equity investors and financing), owners typically turn to a large hotel brand to „label” their hotel with an appropriate hotel brand. The right flag can significantly increase hotel occupancy and room rates, and increase a hotel`s value by more than 20% to 40% compared to „unmarked” or weaker branded options.