Chapter 12

Franchise Relationship and

Management Contracts
 The Franchise Relationship
What is franchising relationship?
A relationship between franchisee and franchisor allowing
one party to use the logo, trademarks and operating
systems of another business entity in exchange for a fee
A network of interdependent business relationships
allowing a number of people 1) to share brand
identification, 2) to develop a successful method of doing
business, and 3) to establish a strong marketing and
distribution system.
Franchise benefits
For the franchisee, franchising helps reduce risk
-Proven operational methods are used
Franchisees and their financial capital expand the brand
faster than franchiser could do solo
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Franchising:
Regulations Related to Franchise Relationship or Agreement

Supply potential franchisees with disclosure document at either the

first face-to-face meeting or ten business days before any money is
paid by franchisee to franchiser
Provide evidence, in writing, of any earning claims or profit forecasts
made by franchiser
Disclose number and % of franchisees achieving earnings rates advertised
in any promotional ads that include earnings claims
Provide potential franchisees with copies of basic franchise agreement
used by franchiser
Refund promptly any deposit monies legally due to potential franchisees
who elected not to sign a franchise agreement with franchiser

Do not make claims orally or in writing that conflict with written

disclosure documents provided to franchisee
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Franchising:

Franchise Offering Circular (FOC) include

Name of franchiser and type of franchise it offers for sale
Business experience of franchise companys officers
Fees & royalties that must be paid
Initial investment requirements
Rights & obligations of franchiser & franchisee
Territorial protection offered by franchiser
Required operating policies
Renewal, transfer, and termination procedures
Earnings claims
A sample franchise agreement
Specific info required by each state in which FOC is to be filed
Name and address of legal representative of franchiser
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 The Franchise Agreement

A franchise relationship exists with a franchise agreement.

Franchise agreement: legal contract between business

owners (franchisor) and buyers(franchisee), which describes
duties & responsibilities of each in the franchise relationship

Hotel Operations Management, 1/e 2004 Pearson Education

Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 The Franchise Agreement: Major Elements
Franchise agreement includes:
Names of parties signing agreement
-Name of legal entity representing the brand as well as corporation,
partnership, or sole proprietor owning the business

Detailed definitions
- Any definitions subject to misinterpretation by parties to the
agreement are defined.
License grant
- Description of how the owner is allowed to use the brands logo,
signage, and name of the business.

Term (length of agreement)

- The most common franchise agreements are written for 20 years.
- Also include windows at fifth, tenth, & fifteenth years with early outs.
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 The Franchise Agreement: Major Elements
Franchise agreement includes: (continued.)

Fees
- Affiliation fees / royalty fees / marketing fees / reservation fees

Reports
- Room revenue generated, occupancy levels, & occupancy taxes & ADR
Responsibilities of franchiser
- Inspection schedules, marketing efforts, & brand standards enforcement

Responsibilities of the franchisee

- Signage requirements, operational standards & payment schedules
Assignment of agreement
- Ownership transfer & its affect upon the agreement

Hotel Operations Management, 1/e 2004 Pearson Education

Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 The Franchise Agreement: Major Elements
Franchise agreement includes: (continued.)
Termination or default
- Events that permit a termination, or define a default, by either party
Insurance requirements
- Owner should provide types & amounts of required insurance
- Proof of general indemnification policies, automobile insurance, &
mandatory workers compensation insurance
Requirements for alteration
- Rights of the franchiser to change the agreement
Arbitration and legal fees
- Responsibilities of each party related to legal disputes
Signature pages
-Authorized representative of the brand & owners of the hotel will
sign the franchise agreement
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 The Franchise Agreement:
Selecting a franchise
Basic considerations for a selecting a franchise brand:
Quality and experience of the brand managers
- owners, not brand managers, bear financial risk of poor brand
management

Perceived quality / service level of the brand

-Travelers associate some brands with higher quality, service levels,
and costs, than other brands.
-Franchisers offer brands at a range of quality and guest services
The amount of fees paid to franchiser
- Fees paid to a franchiser are a negotiable part of franchise agreement

Direction of the brand

Hotel Operations Management, 1/e 2004 Pearson Education

Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
Selecting a Franchise: Franchise Questionnaire
Figure 12.2: FranchiseSurvey
Contents in franchise questionnaire

1. Application fees
2. Area of protection
3. Recurring fees
4. Standards
5. Mandatory service programs
6. Operating performance
7. FOC
8. Fair franchising
9. Financing assistance
10. Termination

Hotel Operations Management, 1/e 2004 Pearson Education

Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Selecting a Franchise:
Negotiating the Franchise Agreement

Franchise agreement is negotiable.

Franchise agreement tends to be written in franchiser's favor.
Owners should evaluate all components of proposed franchise
agreements.
owners have demanded that impact studies, prepared by an
independent party, be undertaken and paid for, when
appropriate, by franchiser.
G.M.s must become adept at operating hotels in best interests of
their owners, as well as in compliance with their owners
franchise agreement.

Hotel Operations Management, 1/e 2004 Pearson Education

Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Management Operating Agreement
Major elements of management agreement include:
Length of the agreement
Procedures for early termination by either party
Procedures for extending contract
Contract terms in the event of hotels sale
Base fee to be charged
Incentives fees earned or penalties assessed related to operating
performance
Management company investment required or ownership
attained
Exclusivity (Is the management contract company allowed to
operate competing hotels?)
Reporting relationships and requirements
Insurance requirements of the management company
Status of employees
Hotel Operations Management, 1/e 2004 Pearson Education
Hayes/Ninemeier Pearson Prentice Hall
Upper Saddle River, NJ 07458