Hotel Franchise Agreements – Key Negotiation Points For Owners
In the highly competitive hotel industry franchise agreements define the relationship between brand companies and hotel owners. Franchisees are able to negotiate better terms than franchisors, even though they typically have the upper-hand in these negotiations.
Geographical restrictions
Geographic restrictions are a common topic of discussion in franchise agreements. Franchisees will often include clauses to prevent their franchisors from allowing competitors to operate within a specified radius of the property. These clauses vary according to the local market. In rural areas, restrictions are usually between 4 and 6 miles. To minimize competition, franchisees define competing hotels in the broadest possible way.
Choose between Term and Renewal Options
Negotiation points include the length of the franchise contract and the conditions for renewing. Some franchisees choose shorter contracts to limit their liability, whereas others prefer longer agreements with multiple options for renewal. Most franchisees want to remove any condition for renewal, other than continuing to comply with the agreement.
Termination clauses
The termination provisions are crucial, because they define when a franchisee may leave the agreement. Franchisees must negotiate early termination window that allows them to end the contract within a specific time period, usually around the 5th year, without incurring any penalties. Also, franchisees need to ensure that termination clauses have materiality thresholds as well as cure periods in order to stop franchisors from cancelling the agreement due minor violations.
Personal Guarantees
Franchisers will often ask franchisees to give personal guarantees, particularly those who have less experience. Negotiating guarantees often involves setting liability caps and excluding any punitive damages. It is common to have a burn-off period after which the guarantee expires. This usually lasts around five years.
Third-Party management and vendor exclusivity
Most franchise agreements require that franchisees retain control of their operations. However, many franchisees prefer third-party managers. To streamline the process, franchisees may want to negotiate that pre-approved third party managers are included in the contract. Franchisees should also request that the franchisor pre-approve a list of vendors and suppliers to benefit from volume discounts, and other favorable terms.
Transferability
The transferability of a franchise agreement is also important. Franchisees must negotiate terms that will allow them the transfer of their rights and responsibilities to family members or affiliated companies without any interference by the franchisor. Franchisees must also define the change in control. Typically, this is a 50% transfer of equity. This will prevent the franchisors from blocking transfers.
Negotiating a hotel-related franchise agreement requires careful consideration of key provisions. These provisions can have a major impact on the profitability and business operations of the franchisee. Franchisees can achieve more favorable terms by focusing on geographical restrictions, term and renew options, termination clauses and personal guarantees. They should also consider third-party management and vendor exclusivity.
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