REPORT FROM THE U.S.—Not all relationships are built to last. When a partnership between a franchisor and franchisee turns sour, a termination could be in order.
HotelNewsNow.com asked hoteliers from across the industry to offer their tips on how to handle what often can prove a sticky situation. Listed below are their five pieces of advice.
1. Look closely at the agreement.
First things first: Read the agreement closely. Believe it or not, there are hoteliers who don’t look closely enough at the franchisor/franchisee agreement, said Tim Shuy, VP of owner relations and franchise management at Choice Hotels International.
Have a lawyer look over your contract before you put ink to paper.
“Some franchise companies—not ours—put clauses in offering certain terms, but those terms can disappear,” Shuy said. “Make sure you understand these terms and what could constitute those terms being revoked.”
2. Know your window of opportunity.
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Vijay Dandapani president Apple Core Hotels |
Many agreements have “windows” built in allowing the sides to exit after, say, a couple of years. This could help prevent having to wallow through 20 years of a franchise relationship that does not suit one side or the other.
“I won’t accept a long-term agreement, no matter who it is with,” said Vijay Dandapani, president of Apple Core Hotels. “I will definitely be looking for windows—two-year windows, five-year windows.”
Be warned. Franchisees who insist on a window could end up kicking themselves.
“It’s a mutual window,” said Roger Bloss, president and CEO of Vantage Hospitality Group. “Now the franchisor has a window. It could open it up for the franchisor to terminate you.”
It might be a good idea to “date” before setting up a franchisee-franchisor marriage, Bloss said. “Twenty years is a long time for a relationship with someone you don’t know,” he said, referring to the typical length of a franchising contract.
3. Be prepared to pay.
Franchisors want a stream of income and are going to want that income stream even if a franchisee wants to leave, hoteliers said. So payment of liquidated damages could be in order if a franchisee bolts before the contract is up.
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Christian Stegmaier attorney Collins & Lacy |
“If you sign a liquidated damages agreement, you’re going to be held to it,” said Christian Stegmaier, an attorney at Collins & Lacy who represents franchisors. He added, “Before you jump ship, do you know what you’re getting yourself into?”
There is also a price to pay in lost guests, said Ron Burgett, executive VP of development at AmericInn. “Some of the (loyalty program) guests will move on,” he said. “There is a cost to convert. There is a loss of revenue. Anytime you leave a brand, you will lose revenue due to the loss of guest loyalty.”
4. Negotiate.
While technically the contract dictates the terms of the agreement, there still could be room to negotiate. For instance, if a franchisee has kept his or her hotel in order and been a good member of the system over the years, a franchisor might look the other way on certain contract terms, executives said.
“The dynamic has changed for the better for the franchisee,” Dandapani said. “Individual franchisees, especially the ones with a good operating history, have more leverage than in the past.”
Burgett agreed that negotiation is not out of the question. “In most cases, a franchisor will negotiate with you … It might depend on if they have a quick replacement.”
5. Be wary of customized FF&E.
Bloss said some franchisors are now setting up exclusive agreements with furniture, fixtures and equipment suppliers. Such agreements could complicate a franchisee’s exit, Bloss said, because it means the franchisee’s hotel will be filled with proprietary FF&E material that likely will need to be replaced (at a significant cost) before moving on to the new brand.
“It can make it fiscally impossible to change brands,” he said.