The lodging industry is booming. Even with a slowdown caused by the COVID-19 pandemic, the lodging industry in the United States has experienced an average growth of 7.1 percent per year since 2018. As more people continue to travel both to and within the U.S., the industry appears poised for long-term growth as well.
Does this mean it’s a good time to consider a hotel franchise?
As with all types of franchises, this is ultimately a business decision that requires a careful analysis of the finances involved. We are certainly seeing individuals and groups buy hotel franchises in 2023. But, just because people are buying, this doesn’t necessarily mean that this is the right decision for everyone. Of course, along with the financial considerations, there are legal considerations as well, and if you are considering a hotel franchise opportunity, it will be important to work with an experienced franchise lawyer who can help you make informed decisions.
7 Legal Considerations for Buying a Hotel Franchise in 2023
When you buy a hotel franchise, you will be required to sign the franchisor’s standard franchise agreement. While there are terms that you can (and should) negotiate, there are also terms that most franchisors won’t be willing to touch. Knowing which is which—and how to negotiate the relevant terms effectively—is crucial for protecting your legal and financial interests during the business process.
With this in mind, here are seven key legal considerations for individuals and groups that are thinking about buying a hotel franchise in 2023:
1. Location, Location, Location
While the location you choose for your franchised hotel is ultimately a business decision, there are several legal considerations involved with site selection as well. You will also want to be very careful to ensure that your territory is appropriately defined.
Early on, one of the biggest risks you can face as a franchisee is the risk of failing to obtain site selection approval. If you don’t select the site for your hotel (with the franchisor’s approval) before you sign the franchise agreement, you will only have a limited amount of time to do so. If you are unable to find a suitable location in time, you could lose your franchise—and your initial investment.
Regarding your territory, you will need to have your franchise lawyer review the franchise agreement to determine what rights you are receiving. While franchisors often label franchisees’ territories as “exclusive,” they aren’t actually exclusive in many cases. So, along with negotiating the size of your territory, you will need to work with your lawyer to determine if you need to negotiate the scope of your territorial rights as well.
2. Area Development Rights
Many hotel franchisees choose to enter into area development agreements that give them the right to open additional locations over time. While this increases franchisees’ profit potential, it can increase franchisees’ risk as well.
Here, too, prospective franchisees must work with their lawyers to ensure that they have a clear understanding of their rights and obligations. What is the timeline for opening each hotel? What are the consequences if you miss a deadline? Will you be required to sign the franchisor’s “then-current” franchise agreement for each unit? These are just three examples of numerous important questions that you will need to carefully consider.
3. Franchisor Control and Approval
As a franchisee, you will need to operate in accordance with the terms of your franchise agreement and the Operations Manual. This means that your operations will be subject to the franchisor’s control in many respects, and many of your business decisions will require franchisor approval. This is the trade-off of franchise ownership. While you get to benefit from the franchisor’s systems, trade dress and brand recognition, you must operate within the confines of the franchisor’s standards and requirements.
4. Future Capital Expenditures
Along with establishing standards and requirements, hotel franchisors also generally reserve the right to modify these standards and requirements over time. If your franchisor decides to do a brand refresh, adopt a new reservation or payment processing system, or overhaul the look of its lobbies and guest rooms, you will need to comply—and you will need to do so at your expense. These additional capital expenditures can add significantly to the cost of ownership, and they may trigger the need for additional financing. While hotel franchisors are usually pretty adamant about their right to update the system, an experienced franchise lawyer may still be able to help you negotiate reasonable protections.
5. Force Majeure
What happens if there is a pandemic and no one can stay at your hotel? While this question may have seemed far-fetched five years ago, today it is a very real concern. In today’s world, the force majeure clause is a key point of negotiation during the franchise buying process, and, as a franchisee, it is critical to do what you can to ensure that you will not lose your hotel due to forces beyond your control.
6. Transfer Rights
The hotel franchise transfer market is sizable. If you have an interest in selling your hotel in the future, you will need to ensure that you have adequate protections in your franchise agreement. By default, most franchisors reserve a right of first refusal, and franchise agreements typically impose several one-sided conditions on franchisees’ “right” to transfer.
7. Termination Rights
Hotel franchisors typically reserve broad termination rights so that they can expel underperforming and “problem” franchisees. Hotel franchise agreements also typically impose substantial post-termination obligations and restrictions, including obligations to pay “lost future royalties” and wide-reaching non-competes. When negotiating your franchise agreement, you will want to carefully consider these terms with your franchise lawyer as well.
Discuss Your Hotel Franchise Opportunity with Franchise Lawyer Jeffrey M. Goldstein
Are you considering a hotel franchise opportunity in 2023? If so, we encourage you to contact us for more information. Franchise lawyer Jeffrey M. Goldstein has extensive experience representing prospective and active franchisees in the hotel sector. To get started with a free, no-obligation consultation, please call 202-293-3947 or contact us online today.
