HOTEL FRANCHISING FOR THE FIRST TIMER

As in any new business endeavor, there is both good and bad news. If the good nets out substantially on the plus side, then it bears looking into. This is a brief introduction to a potentially high- investment-return business; ownership of a hotel. A successful hotel operation can bring huge returns on a three-fold basis. This is the good news:

(a) profits from operating a business that does not require high cost of sales (amortization cost of the room plus maid service, heat/ac, light and power),
(b) a rapid appreciation of the real estate value, based on those profits, and
(c) a high FF&E depreciation rate sheltering taxes on both capital gains and operating profits.

But in the 21st century, the road to successful hotel ownership must be paved with a national franchise affiliation.

Securing a franchise from a reputable, successful, franchisor is absolutely critical for:

1. Securing financing for both interim construction and permanent mortgage.

2. Securing a chain affiliation with a recognizable brand image, signifying product quality, service, and safety.

3. Reservations generated through a central reservation system.

4. National, regional and local marketing through the franchise system.

So, how does the first- timer start a hotel franchise ? First, the bad news, because of the significant up-front costs of land acquisition, development, and time of construction, liquid assets are a necessity. For even a modest size property with an economy rating, one would require perhaps $500,000-$1,000,000 in liquidity, but for those that have a well prepared business plan with an identified location, and reasonable business acumen, there are any number of investors willing to share the equity burden, and in many instances, the franchisor has a list of passive investors who would consider partnering with the right entrepreneur.

As a guide, then, the steps to a franchise should follow in this order:

1. Research the need for a hotel facility in the area selected. Use the resources of the local government and the tourist, recreational, educational, and or business organizations that can help on the need, the feasibility, type of property, the business generators and the competition. All of this information should be provided at no cost to you other than the time necessary to solicit and compile the information.

2. Find a specific location that would support a hotel property of the type that would be in keeping with the surroundings, and the research.

3. Determine if the location will allow the use, density, height, and soil conditions to support development of the
hotel being considered.

4. Google hotel franchisors and view the extensive information on economy, mid-rate and first class hotel franchisors. See HVS.com (Hospitality Valuation Services) for their 2007 comprehensive survey on hotel franchisor rates, services, and rankings.

5. Not required, but helpful if a rough architectural sketch could be made showing layout of hotel on property.

6. Using your research of competitive hotel properties, make or have made, a preliminary five year pro forma of your expected operating, revenue, costs, and income. Development and construction costs need not be formed at this time because the franchisor can and will assist in that phase.

7. Only then, consider approaching the franchisor with your proposal for discussion. In most cases, select a well-known franchisor with a long record of success. Even with higher costs, the reputable quality franchisor will cost less in the long run.

Warning: When discussing franchise requirements, ask specific questions in the following areas:

a,. Length of affiliation. For your protection, should not be less than 10 years, nor more than 20. Whether 10, 20 or in-between, insist on intervals of windows of exit, i.e, a three year 60 day window to review franchise effectiveness, and if unsatisfied should be able to terminate without penalty. Most franchisors still insist on liquidated damages for termination. That's why you need exit strategy.

b, Be specific about territory of franchise and competition, current and future. You should have at least a five year assurance of your exclusiveness.

c. Transfer of Franchise. You should be allowed to transfer when you wish to sell. If not, requiring a purchaser to ante up for refranchising or requiring change of franchise may prevent sale.

Good luck. There are few investments more satisfying than creating a successful and profitable hotel.


(Reference: www.hvs.com/Bookstore/HVS 2007U.S.HotelFranchiseFeeGuide.pdf)

Author: Edward F. MacMillan www.him-llc.com efm@him-l lc.com