Lots of people dream of owning a hotel. Each morning, you wake up, have a cup of coffee, and take in the view while your guests come down for breakfast. With a great location, you have reliable revenue, and you are growing an asset that you will one day be able to sell to fund a very comfortable retirement.
Or, at least that’s how it’s supposed to go.
For many people, opening a hotel involves buying a franchise. There are many well-known franchised hotel brands, and buying into a franchise system with a name that is instantly recognized around the world allows you to hit the ground running. But, while buying a hotel franchise can have valuable benefits, it also carries significant risks—as franchise lawyer Jeffrey M. Goldstein explains:
What Are the Benefits of Buying a Hotel Franchise?
First, we’ll cover the benefits of franchise ownership in a bit more detail. The franchise industry is huge, and there are clear reasons why so many people choose to buy a franchise instead of starting an independent business. For aspiring hotel owners, the main benefits (at least in theory) of buying a franchise are:
- Instant Brand Recognition – Hilton, Holiday Inn, Best Western—these names are instantly recognizable for travelers in the United States and around the world. Jane Doe’s Roadside Inn? Not so much. Most travelers want to know what they can expect when they book a hotel, and this generates loyalty with trusted brands. As a franchisee, you can benefit from this loyalty without needing to convince travelers of other reasons to stay.
- Trade Dress and Operating Systems – Along with the franchisor’s brand name, you also get to use the franchisor’s trade dress and operating systems. Franchisors know what travelers want and what works (at least in theory), and being able to take advantage of this can help you quickly begin working toward profitability.
- Franchisor Support – As a franchisee, your franchisor has a vested interest in your success. As you build out your hotel and start welcoming guests, you can rely on your franchisor’s experience and support to make sure you are on the right path.
What Are the Risks of Buying a Hotel Franchise?
Now, what about the risks? While buying any type of franchise can be risky, this is especially true with franchises that have a large initial investment—like hotels. Some of the main risks associated with buying a hotel franchise are:
1. Not All Franchise Systems Are Created Equal
While all franchisors are supposed to provide a well-protected trademark, reliable systems and effective support, the reality is that some do and some do not. If your franchisor loses control of its brand, if its trade dress or operating systems become outdated, or if you can’t get the support you were promised before you signed the franchise agreement, this could significantly diminish the value of your investment.
2. Some Franchised Hotels Fail
Even with a strong brand, systems and support, some franchised hotels still fail. From bad locations and bad management to franchisor-franchisee disputes and global pandemics, there are numerous issues that can force franchised hotel owners to shut down.
3. Your Franchisor’s Fees Will Eat Into Your Profitability
Another factor that can hinder hotel franchisees’ chances of success is their obligation to pay fees to their franchisors. Initial franchise fees, royalty fees, marketing fund fees and renewal fees—among others—can all make operating a franchised hotel much more expensive than operating an independent business.
4. Disputes Can Lead to Additional Costs (and the Risk of Termination)
If you end up in a dispute with your franchisor, this will further add to your costs of franchise ownership. Franchisor-franchisee disputes can involve a wide range of issues—from disagreements over revenue and royalty fee calculations to disputes regarding franchisors’ failure to uphold their end of the bargain. Not only can pursuing dispute resolution (i.e., mediation or arbitration) be expensive, but disputes can also present a risk of termination in some cases.
5. You Do Not Have Total Control Over Your Own Success
Ultimately, as a hotel franchisee, you do not have total control over your own success. You must abide by your franchisor’s system standards, and you may rely heavily on your franchisor’s advertising efforts. Even if you want to upgrade your hotel (or you disagree that your franchisor’s mandatory upgrade is worthwhile), you will be beholden to your franchisor’s decision-making.
How Do You Make an Informed Decision About Your Investment?
With all of these considerations in mind, how do you make an informed decision about your investment? Should you buy a hotel franchise? If so, which brand should you choose?
There are several steps involved in evaluating hotel franchise opportunities. If you are thinking about opening a hotel and considering a franchise as a path forward, you will want to compare multiple franchise offerings as you do your due diligence. How do their fees compare? What about their terms and conditions? Are their franchise networks growing or shrinking? Are they targeting expansion in your geographic area?
Once you narrow down your options, one of your next steps will be to hire a franchise lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement. In many cases, it will make sense to have your lawyer negotiate the franchise agreement as well. Your lawyer will be able to advise you regarding the unique risks associated with your chosen franchise opportunity, and then you can rely on your lawyer’s advice to make an informed decision about moving forward.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
Do you have questions about buying a hotel franchise? If so, we invite you to contact us for more information. Firm founder and franchise lawyer Jeffrey M. Goldstein has decades of experience representing hotel franchisees. To request a free consultation at the Goldstein Law Firm, give us a call at 202-293-3947 or tell us how we can reach you online today.