Franchising and Management Contracts in the hotel industry

1
Franchising and Management Contracts in the hotel
industry

• Friedrich W. NiemannGeneral Manager, Hilton
  Sofia
• Sofia, October 21st, 2004

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Franchising

• A hotel franchise is an agreement between a hotel
  chain (franchisor) and the hotel owner
  (franchisee), whereby the hotel chain allows the
  owner to make use of the chains name and
  services. In return the owner pays the franchisor
  a fee for the franchise, which usually consists
  of various elements. The hotel chain has no
  ownership or financial interest in the hotel and
  is not directly responsible for the hotels
  results.
• Per definition Franchising can be explained as a
  business strategy for getting and keeping
  customers. It is a marketing system for creating
  an image in the minds of current and future
  customers. It is also a method for distributing
  products and services that satisfy customer needs.

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Franchise Terminology

• Franchisor The parent company that grants, for a
  fee and other considerations, the right to use
  its name and system of business operations.
• Franchisee
• The business partner, who invests his assets in a
  brand, operating system and ongoing
  support.Franchise Agreement A written contract
  detailing the mutual responsibilities of
  franchisors and franchisees. It is usually for a
  several-year term, and when the term is up, the
  contract expires and must be renewed. Usually a
  franchise agreement may not be sold, transferred,
  or otherwise assigned without the franchisors
  permission.

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Franchise Terminology

• Franchise FeeAn up-front entry fee, usually
  payable upon the signing of the franchise
  agreement for the right to use the franchisors
  name, logo, and business system. RoyaltyA
  continuing payment to the franchisor that is
  payable on a periodic basis throughout the term
  of the franchise agreement.
• Advertising FeeAnother continuing periodic
  payment to the franchisor that, like the royalty
  payment, can be a fixed amount or a percentage of
  gross sales.

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Franchise Services

• -         Marketing and Advertising
• -         Brand recognition
• -         Reservation systems
• -         Cross selling within the network
• -         Proven mode of operations
• -         Technology, soft- and hardware
• -         Training
• -         Design plans and specifications
• -         Financing
• -         Site selection and market analysis
• -         PR and promotion support
• -         Quality assurance programs
• -         Purchasing benefits

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Fees

• The franchise fee is usually based on a fixed
  amount per room and has to be paid upon
  submission of the franchise application. This fee
  covers the franchisors cost of processing the
  application, reviewing the site and market
  potential etc.
• The royalty commences when the hotel assumes the
  franchise affiliation resp. starts its operation.
  This fee is usually paid monthly over the term of
  the franchise agreement.
• In addition fees may be due for loyalty programs,
  consulting, purchasing assistance, equipment
  rental etc.

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Franchising in a Nutshell

• Franchising is a business strategy centered
  around a strategic alliance of groups of people
  who share a specific relationship and
  responsibilities in addition to being licensed to
  use a franchisors brand name and proprietary way
  of doing business. Other franchisees of the
  same brand are not necessarily competitors they
  work in tandem to establish and reinforce
  brand-name dominance in the respective area.
  The franchisee still owns the assets of his
  company but is licensed to operate someone elses
  business. Franchising is successful because
  people are more and more brand-driven.

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• Hotel Management

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Hotel Management

• Supervision
• Hotel management companies usually provide
  permanent supervision and control in their own
  interests, since they are responsible for the
  results.
•  
• Expertise
• Most hotel management companies offer a depth of
  expertise. This includes finance and accounting,
  food and beverage, engineering, sales and
  marketing etc.
•  
• Established procedures
• Due to the size of their network and their
  yearlong experience, hotel management companies
  have a proven track record of immediately
  available procedures plug and play!

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Hotel Management

• Key Indicators
• 20 years of agreement period
• Optional provisions of twice five years
• Base fee averages around 1.8
• Incentive fee averages around 10
• Potential additional fees of approx. 2
• FFE reserve averages around 3 - 5

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You get what you pay for!

• Go with the best!