7 Areas to Negotiate in Your Next Franchise Agreement - By Jim Butler, Author of Www.HotelLawBlog.com

2012-10-15
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  • www.HotelLawBlog.com Last week, my partner, Catherine Holmes, participated on the Franchisee/Franchisee Relations panel at the Lodging Conference in Phoenix. Lodging Hospitality's Ed Watkins moderated the panel and reported on the 7 areas where franchisees can negotiate better terms that Catherine identified as critical to owners . His article is reprinted, with permission, below. A few edits and formatting changes have been made to accomodate the blog format.

    What's Negotiable in Hotel Franchise Agreements - By Ed Watkins | Lodging Hospitality 

    There's Lots of Wiggle Room in Licensing Contracts

    This article first appeared in Lodging Hospitality and is reprinted with permission. Copyright 2012 Penton Business Media, Inc.

    The franchise agreement is one of the most common documents in the lodging industry, and one of the most important. The agreement, often a source of tension between franchisors and franchisees, is ripe for negotiation in a number of areas. A panel at The Lodging Conference last week in Phoenix discussed what's open for discussion--and what's not--before a licensee signs on the dotted line.

    The panel, titled Franchisee/Franchisee Relations, included brand company executives, an owner-operator and a lawyer. The lawyer, Jeffer Mangels Butler & Mitchell partner Catherine Holmes, offered a list of seven areas of negotiation hotel owners can explore to reach agreement on a licensing contract. Her list:

    1. Franchise fees. "You won't get a reduction in the amount, but you might be able to get a ramp-up in franchise fees over a period of time," said Holmes. Michael George, president & CEO of Crescent Hotels & Resorts, added the only bit of negotiating leverage is in the royalty fees. "When it comes to other fixed fees, there is little negotiation possible," he said.
    2. Area restriction. If it's not offered, a franchisee should ask for a geographic area of protection during the negotiations. She says it's possible in some circumstances. 
    3. Ownership transfer. While a sale of a hotel often precipitates a property improvement plan, it's smart to seek some flexibility in the contract when it comes to an internal change in control of the property, say to another family member. 
    4. Change in management. Similarly, it's important to prevent a franchisor from having veto power over change in management of the hotel.
    5. Liquidated damages. Negotiations can include elimination or reduction in termination fees upon sale of the hotel. "The key is it must be a sale, not just any kind of termination," said Holmes. 
    6. Capital investments. Holmes said owners should protect themselves from a mandate for major capital investments if they just built a new property or bought one that's in good shape. 
    7. Personal guarantees. "You may be asked to personally guarantee the franchise contract, but do you darnedest to get rid of that provision," said Holmes. George concurred: "I would never, never accept a personal guarantee." 
    George, whose firm operates 67 mostly upper upscale full-service hotels, says he's troubled by agreements that allow franchisors to invoke new Universal Franchise Offering Circulars during the middle of a contract term.

    "In effect, the brand is issuing a new licensing agreement, said George. "None of us have the time to dig through those UFOCs on a line-by-line basis to see where the changes are."

    David Wilner, senior vice president of development for La Quinta, also warned franchisees about potential pitfalls when brands offer to cut or ramp-up royalty fees or to provide key money for development projects. "The brands in demand aren't going to be the ones who offer key money," he noted.

    And as George says, accepting key money makes it more difficult for a franchisee to negotiate. "You lose your leverage and often the terms of the agreements are tougher," he said.

    As Chris Drazba, vice president, owner and franchise relations for IHG, pointed out, each franchise negotiation is different and needs to be hammered out individually. "Each deal has its own parameters," he said.

    "One might be what I call a retail deal, in which you're looking at a basic franchise structure. However, it might be a different situation for a property that's in a hard-to-get-into urban market."

     

    Catherine Holmes is a transaction and finance partner with JMBM's Global Hospitality Group® and Chinese Investment Group™ and specializes in hotel management and franchise agreements, resort and hotel purchase and sale transactions, resort and urban mixed-use financing and development and hospitality asset workouts. With her background in securities transactions, she also assists hotel developers with public and private offerings of securities. For more information, please contact Catherine Holmes at +1 310.201.3553 or cholmes@jmbm.com.

     

    This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer? 


    Logos, product and company names mentioned are the property of their respective owners.

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