What is franchising?
In short, franchising is a network of independent businesses who all have a right to market a product or service using another business’ brand.
In the hotel sector, franchising involves the licence of an entire package of services (i.e. the name, style, brand and system of operation of a well-known hotel) from the franchisor (the owner of the hotel brand) to the franchisee (the owner of an independent hotel), in exchange for a fee. Crucially, however, the franchisee will retain control over the management of the hotel.
Some of the most recognisable brand names and leaders in the hotel franchise industry include Hilton, Marriott and Sheraton.
Hotel franchise agreements: what are they?
A franchise agreement is essentially the licence which allows the franchisee to trade under the name and style of the franchisor. Generally, the agreements are drafted by the hotel brand which means they are very one-sided.
Key terms in a hotel franchise agreement
Some of the key terms in a hotel franchise agreement are, as follows:
1. Fee Structure
Provision on fees which will outline the structure relating to how the franchisee will make payments to the franchisor. This could include a variety of different types of fees, including royalty fees, marketing fees and ‘reward clubs’ fees.
Typically 10 or 20 years.
Very specific obligations to operate and maintain the hotel in accordance with the franchisor’s standards of service. Some of the responsibilities may include the requirement to provide high-quality service, or an obligation to promote the franchisor’s products.
4. Hotel Brand and IP
A restricted, non-transferable, non-exclusive licence to make use of the franchisor’s hotel brand (including the name, emblems, logos, taglines) and the franchisor’s system of operation for the time period outlined by the agreement. At no point will the franchisee receive ownership of the intellectual property rights to the franchisor’s hotel brand or system.
5. Indemnification and Insurance
Every agreement will oblige the franchisee to refund the franchisor for any loss it suffers because of a negligence act or wrongdoing of the franchisee.
There are often obligations to obtain and maintain insurance with a reputable insurer and a requirement for the franchisee’s insurance policy to include cover for the franchisor. This means that the franchisor enjoys the identical protection as the franchisee, despite the franchisor not paying the insurance premium.
Obligations regarding training, seminars and conferences that the franchisee (and its employees) will have to undertake or attend.
The standard position is that the franchisee is expected to replace "soft goods" every couple of years (at their own cost), for example, franchisees may need to purchase new equipment for new product lines or change signage to reflect new logos or store designs. The franchisee is often obliged to carry out major renovations whenever the hotel is sold, and as required by the brand, to ensure the furniture and the décor conform to the current brand standards.
8. Rights to First Refusal
Generally, in circumstances whereby the franchisee is looking to sell or transfer the hotel, the agreement will include a provision which will require the franchisee to notify the franchisor immediately of its intention to do so and allow the franchisor the option to acquire the hotel.
How can we help?
If you would like to know more about franchising agreements or require assistance in the drafting or review of a franchise agreement, please get in touch with our dedicated Hotel Sector team.
This article was co-written by Sarah Milne, Solicitor in MacRoberts' Corporate Finance team.Find out more