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Buyer Beware

Common Mistakes Hotel Owners Make When Negotiating Their Franchise Agreement.

Friday, June 10, 2016
Mr. Michael Belmonte
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I have had the good fortune of growing up in the hotel business next to my father, who is still considered an industry icon. I have seen it all from a management company to franchising and now as the owner and CEO of a company which specializes in assisting franchisees in negotiating liquidated damages/termination fees or selecting and negotiating a new franchise agreement. Over the years, I have really been exposed to the good, the bad and the ugly. Sometimes an owner may feel negotiating a new agreement can be a simple process or think that trying to negotiate their own termination settlement can’t be too hard, but the truth is it is best off done by somebody who has the experience and understands the culture that exists at each of the franchise organizations. While you may think the process is simple enough, there are a number of possible and common mistakes that are made every day. Such as:

1. Selecting a franchise that is not based on actual market demand.
This is one aspect that constantly replays over and over. I continue to be amazed by how many hotel projects are built based on someone’s dream and ego rather than the actual market demand. In new construction, before a hotel is built, proper market and feasibility studies need to be done to determine the exact market demands. Oftentimes feasibility studies are quickly done simply because they are demanded by the lender. In fact, these feasibility studies should be properly done and provide you a wealth of information so you understand what your demand is before you get started in the process of selecting what type of hotel to build.

2. I want a major brand.
Well, that is fine but one has to remember that hotel franchising has gone through radical changes in the last several years and we have seen the emergence of soft-brands, which offer the same high-powered reservation system; third-party connectivity to all the major distribution systems; consumer marketing programs; and in essence, the same results as some of the larger brands, but they do it under cost-advantageous terms. As an example, the average franchisee fee for hotels in America is approximately 12%. Some of these soft-brands are offering deals at 3%. Instead of 20-year agreements they are offering windows every 36 months and reduced liquidated damages. Many of them have also eliminated the unreasonable mandates and terms that do not provide any return on investment to the hotel owner and the list of advantages goes on and on...

Owners are fooled into believing that only a brand that the customer recognizes can work. They end up signing a long-term franchise agreement with an older mature brand that actually is a “mixed-bag” of product that may have a negative connotation to a good portion of the traveling public. I do not care if the hotel brand has 300 hotels, if many of their hotels are depressed and the product is inconsistent, that name, while recognized, is not going to prove to be a positive for your location in the long run. It is said that more than 80% of all business is affected now by the Internet. Even if people are not booking online they are shopping online. It is all based on
a. location
b. price
c. the pretty pictures they look at on a site.

Brand loyalty, especially in the economy and mid-tier, has diminished significantly over the years. Guests can now go online and look at the actual room they are going to occupy. They get to see the hotel; its lobby, its restaurant. That is how they are making decisions on where to stay. Not necessary by the name on the building.

It is also vital to know that not all franchise companies are the same. They each have their own unique culture. While some still have a “my way or the highway” attitude, others are indeed more franchise friendly with low fees, easy exits, no unreasonable mandates, etc.

Do your homework. Take the time to sit through a webcast or talk to the president of one of these new, emerging soft-brands. You may be surprised how much money you can add to your bottom-line without reducing your gross revenue.

3. I told the franchise company that they were my first choice.
Please know that once you make this statement, it is in essence the “kiss of death” as it relates to your ability for advantageous negotiations. The franchise company firmly believes that their franchise is really the one you want; you are not in a position to negotiate deals and concessions. Be careful what you say.

4. You really have to have a major name brand to be successful.
I talked about this a little bit already, but it is still amazing how many old-timers and lending institutions are under the impression that without a major or mature brand the property cannot be successful. Nothing is further from the truth. With the advent of the Internet, Internet marketing, electronic distribution channels, combined with the booking habits of the traveling public (which I’ve already opined about), the playing field for these new soft-brands are frankly, level. Take the time to learn more about these brands. You may be shocked what you learn and well pleased with an enhanced profitability.

5. Well the franchise salesman told me I could get out anytime I wanted but now I am being sued.
Well, take a number and wait in line. Again, it all has to do with doing your homework before signing an agreement. The bottom-line is, with a little more planning and some expert help from industry professionals, you can be well on your way to a long-term and successful relationship with many outstanding brands available today. These are only a few of the mistakes and pitfalls that face you on your journey.

About Hospitality Solutions LLC
Michael Belmonte and Hospitality Solutions have been in business for 14 years and offer experience and expertise in negotiation of license agreements, negotiation of termination agreements (liquidated-damage claims) expert witness services and mediation services.

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Michael Belmonte    Mr. Michael Belmonte
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Hospitality Solutions, LLC
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