Hotel chains dominate the hospitality market, and some hotel chains are among the largest and most well-known franchised brands in the world. As a result, many prospective franchisees find the idea of owning a hotel to be a desirable one, and they believe that the substantial up-front investment will more than pay off in the long term.
While this is certainly the case for some hotel franchisees, building and operating a successful hotel is a challenge even for the most-seasoned business owners. When you add in the costs and inherent challenges involved in operating under a franchised model, finding success as a hotel franchisee is far from certain. At the Goldstein Law Firm, in addition to representing prospective hotel franchise owners in franchise agreement negotiations, we also have extensive experience representing hotel franchisees in litigation with their franchisors. If you are thinking about buying a hotel franchise, here are some of the key risks to keep in mind:
1. Substantial Initial Investment
Although many franchises can be launched with less than $100,000, building or renovating a hotel is generally a multi-million-dollar endeavor. While much of this initial investment is attributable to costs you would incur regardless of whether you were building a franchised or non-franchised hotel, you will still be required to pay a significant up-front initial franchise fee to the franchisor. In any case, before making such a significant investment, it is critical to ensure that you have taken appropriate legal measures to protect yourself as much as possible.
2. Economic and Regional Considerations
It is no secret that some hotel brands find more success in certain locations that others. So, is your chosen brand well-suited to your desired location? Will you be building in a location with a fairly stable economy that consistently attracts a lot of travelers, such as Washington, D.C.? Or, are you choosing to target an area that is currently undergoing significant redevelopment, such as Detroit? If the latter, will you be able to withstand an initial period of limited profitability if change happens slower than you are anticipating?
3. Seasonality
If your hotel will be located in an area where travel is seasonal, will on-season revenue be enough to carry you through the off season (especially in light of your royalties and marketing fund contributions)? Do your franchise agreement and business plan adequately account for this seasonality, or might some amendments be necessary?
4. Upgrades and Modifications
While all virtually franchisors reserve the right to upgrade and modify their system standards, the compliance burden can be particularly substantial for hotel franchisees. Does the franchisor have any major redesign plans in the works? Will you have adequate reserve capital to make mandatory upgrades and avoid defaulting under your franchise agreement?
5. Intra-brand and Inter-brand Competition
Hotels tend to be geographically concentrated, and this means that competition for guests can be fierce. As a franchisee, will you be protected against competition from other hotels within your brand? What about inter-brand competition from other chains in your franchisor’s portfolio?
Speak With National Franchise Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise lawyer who has more than 30 years of experience representing hotel franchisees in franchise agreement negotiations and litigation. To discuss your hotel franchise opportunity in confidence, call the Goldstein Law Firm at 202-293-3947 or request a free consultation online today.
