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Lessons from the Field
A Common Sense Approach to Success in the Hospitality Industry
By Dr. John Hogan, CHA MHS CHE, March 2009

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Getting the Most Out of Your
Hotel Franchise Investment

Evaluating the franchise business model as a potential franchisee
(Part 2 of 3)

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By Dr. John Hogan CHE CHA MHS 
March 6, 2009 

“You read a book from beginning to end. You run a business the opposite way. 
You start with the end, and then you do everything you must to reach it.” 
Harold Geneen , CEO of IT&T 1959-1972

Previously, a recap of why and how franchises became an important part of the hospitality industry during the past 35 years was discussed. (See Part One – Understanding the business model and its evolution).

In today's global competitive hotel market, being part of a group of hotels that share a recognized brand and provide services such as sales and marketing channels, a central reservation system, training, technology savvy and specific operational business protocols could mean the difference between financial success and collapse. 

Part Two outlines a series of questions that should be asked and identifies a number of considerations that should be evaluated in the review and analysis period.

Buying a Franchise in the USA : A Consumer Guide 1
 
When one buys a franchise,  one can then offer goods and services that have instant name recognition, and presumably acquire training and support to help your success. The reality is that purchasing a franchise is like every other investment: there’s no guarantee of success.  
The United States Federal Trade Commission (FTC) is America’s consumer protection agency. It has a number of informational resources that explain in detail how to examine franchise opportunities, the obligations of a franchise owner, and questions to ask before you invest.
The UFOC is an abbreviation for "Uniform Franchise Offering Circular" 2 , and is a required legal document used in the franchise process in the United States. 

Franchisors must give a UFOC to franchisees at least 10 business days before any contract is signed and before any money changes hands. It contains extensive information about a franchisor, which is intended to give potential franchisees enough information to make educated decisions about their investments. The information is divided into 23 categories:

1. The Franchisor, its Predecessors and Affiliates
2. Identity and Business Experience of Key Persons
3. Litigation History
4. Bankruptcy
5. Initial Franchise Fee
6. Other Fees and Expenses
7. Franchisee's Initial Investment
8. Restrictions on Sources of Products and Services
9. Obligations of the Franchisee
10. Financing Arrangements
11. Obligations of the Franchisor
12. Territory
13. Trademarks
14. Patents and Copyrights
15. Obligation of the Franchisee to Participate in the Actual Operation of the Franchise Business
16. Restrictions on Goods and Services Offered by the Franchisee
17. Renewal, Termination, Repurchase, Modification and/or Transfer of the Franchise Agreement
18. Public Figures
19. Earnings Claims
20. List of Franchise Outlets
21. Financial Statements
22. Contracts
23. Acknowledgment of Receipt
Effective July 1, 2008, a revised FTC rule that governs franchise disclosure documents and  the document known as the Uniform Franchise Offering Circular, or UFOC, was changed to the Franchise Disclosure Document, or FDD.   This new FTC rule both changed the name of the document and imposed new requirements for its contents. Franchises whose FDDs are not fully compliant with the rule change risk FTC penalties, lawsuits, and more.

Buying a Franchise in Canada:  Here, the Uniform Franchise Offering Circular (UFOC) is called the Disclosure Document. Like UFOCs in the US, the Disclosure Document must provide complete information about the franchise opportunity.  The government site offers Checklists for Franchisees3 , as well as additional detailed supporting information. 

Australia has special purpose franchise legislation made under Australia’s anti-trust and consumer protection legislation, known as the “Franchising Code.” 4   The code requires a disclosure document in a prescribed form to be provided to a prospective franchisee at least 14 days before a franchise agreement or any agreement to enter into is signed or before any non-refundable payment is made.  A compulsory seven-day cooling off period and the requirement to obtain certain certificates from prospective franchisees affect the sales process.  The mandatory disclosure document format requires information on 23 subject areas, many of which will be familiar to US franchise companies.  The code also affects a number of relationship issues, such as requirements to terminate the franchise agreement, the ability to withhold consent to a transfer and the requirement for mediation of disputes.

Globally, franchise laws differ greatly. 

The International Franchise Association (IFA), founded in 1960, is a membership organization of franchisors, franchisees, and suppliers. Their web site is dedicated to providing their members and guests with a one-stop shopping experience for franchise information. For a snap shot, the IFA has representative general overviews of various international approaches to franchise regulations and guidelines on their site. 5

If one has made the decision to obtain a franchise, there are major questions relating to the management aspect of the business to be addressed. 

There are three forms of hotel management for a franchise:

  1. The franchisor’s management team retained by the franchisee
  2. A third-party management team not affiliated with the franchisor                  . 
  3. Self-management by the franchisee
There is no automatic best choice for every decision on management.  Some franchisors have excellent reputations managing properties for owners.  These management contracts are usually mid to long term and have a series of conditions for both sides.

There are literally hundreds of management companies globally that manage for a combination of their own portfolios and for other investment groups.  As in the case of franchisor management agreements, these contracts have a series of conditions for both sides and may vary in length.

While I do not have a specific percentage, my professional experience has shown me that many individuals and family opt to self manage their hotel franchise.

The following 12 questions are offered for those considering this self-management approach.

12 Potential Questions   

1. Who specifically will be operating your new hotel/franchise on a day-to-day basis?  Movies and TV shows have made all businesses appear to be on auto-pilot, but those of us in this industry learned long ago this can be a complex business depending on the market segments served, availability of staff, competitive situation and the strength of both the location and the brand affiliation

2. If the answer to #1 is that this hotel/franchise will be operated by the owner, the follow up questions address the level of knowledge and experience of the owner, whether the hotel will be one of a number of businesses overseen by the owner, does the owner physically office and work at the hotel, etc.  

3. Will this hotel have partners or other key people that you can rely on?  Is the decision making authority resolved prior to assuming operations?    Qualified general managers often successfully operate properties of all types, but they are not the ones usually financially responsible for the franchise legal agreement and obligations.  

4. If this is a family business and many properties today are successfully operated by different generations of a family, has the plan for assigning responsibility, accountability and decision making authority resolved prior to assuming operations?

5. Have you as a potential franchisee actually met or spoken with the corporate management team of the franchisor?  The franchise sales and development staff are very knowledgeable professionals but their responsibility is to attract and retain franchisees.  Direct interaction with the corporate management team of the franchisor might give you insights to the long-term relationship , which is very important to the business decision.

6. How many current franchisees have you actually met with or spoken to?  Have you asked them a series of questions about marketing and sales organization, training provided, purchasing options on supplies, staffing, internet and online support, etc?  Have you asked them if their satisfaction level with the services promised and delivered? Have you asked them if they would choose this franchise brand again?

7.  Have you sought out some former franchisees that might have terminated their affiliations? Most franchisors are required to disclose the nature of their active litigations, which may indicate the types of problems they face with their hotel owners.

8. Part one of this series identified a sampling of the many brands that are controlled by a relatively small number of franchisors.  These groups have successfully positioned themselves as leaders in this business model and have done it well by offering options.  Do you understand the property specific market protection and product line segments by the franchise you are considering when contrasted by some of the other brands the franchisor might have in their portfolio?  Are you comfortable with the positioning of the brand you are considering? 

9. The principal advantage of a hotel franchise affiliation is the brand's ability to generate additional profitable occupancy, which should lead to improved profits. Have you asked for a comparison of actual operating results for other similar markets to determine the positive occupancy impact provided by such an affiliation?

10. Some companies require multiple development projects as part of the approval process for their franchise.  This often gives additional development for the franchisor and potential area protection within time limits for the new franchisee.  If this is the case for what you are considering, are you comfortable with the obligation to develop additional projects?

11. What is the role of the franchisee advisory council within the brand you are considering?  Have you spoken with the elected president or head of the council to get insight from that structure?  Many brands have excellent dialogues with their licensees and you should explore your specific council.

12. Everyone wants a new business relationship to be successful and long term.  Are you completely aware of how either the franchisor or franchisee can make any changes in the initial agreement?  This requires legal counsel and review, but understanding the perspectives of all parties is an important part of the evaluation process.


Answering these questions will help guide you in choosing whether to become a franchisee, with which brand and which form of management makes sense for you.
 
The final portion of this series will address additional marketplace challenges in: Part Three– Working with your franchisor for everyone’s success

1 http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm
2 (My thanks to Dr. William Frye of Niagara University, a LEADING HOTEL SCHOOL OF THE WORLD Charter Member, for his input on the US "Uniform Franchise Offering Circular".)
3 http://www.canadabusiness.ca/servlet/ContentServer?pagename=CBSC_FE/display&c=GuideFactSheet&cid=1081945275607&lang=en
4 http://www.accc.gov.au/content/index.phtml/itemId/6118
5 http://www.franchise.org/Country-Profiles.aspx



 

Feel free to share an idea for a column at johnjhogan@yahoo.com anytime or contact customized workshops, speaking engagements or me regarding consulting. 

Autographed copies of LESSONS FROM THE FIELD – a COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES can be obtained from THE ROOMS CHRONICLE www.roomschronicle.com and other industry sources. 

All rights reserved by John Hogan and this column may be included in an upcoming book on hotel management.   The opinions expressed in this article are those of the author and do not necessarily reflect the views of this publication

John Hogan, a career hotelier and educator, is frequently invited to participate at franchise meetings, management company and hospitality association industry events.  He is a successful senior executive with a record of accomplishment in leading hospitality industry organizations at multiple levels, with demonstrated competencies as a strong leader, relationship builder, problem solver and mentor. He conducts mystery-shopping reviews of quality in operations and marketing, including repositioning of hotels.

He writes weekly columns for a number of global online services (hotel online.com, eHotelier, 4 Hotels, Hotel Resource, etc) and has published more than 400 articles & columns on the hotel industry.  He co-authored (with Howard Feiertag, CHA CMP) LESSONS FROM THE FIELD – a COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES, which is available from info@smartbizzonline.com, ROOMS CHRONICLE www.roomschronicle.com  and other industry sources.  He resides in Phoenix, Arizona and expects to publish in 2009 his 2nd book based on his dissertation – The Top 100 People of All Time Who Most Dramatically Affected the Hotel Industry.

Hogan’s professional experience includes over 35 years in hotel operations, food & beverage, sales & marketing, training, management development and asset management on both a single and multi-property basis, including service as Senior Vice President of Operations in a specialty hotel brand for six years.

He holds a number of industry certifications (CHA, CHE, MHS, ACI) and is a past recipient of the American Hotel & Lodging Association’s Pearson Award for Excellence in Lodging Journalism, as well as operational and marketing awards from international brands.  He has served as President of both city and state hotel associations.

John’s background includes teaching college level courses as an adjunct professor at three different colleges and universities over a 20-year period, while managing with Sheraton, Hilton, Omni and independent hotels.  He was the principal in an independent training & consulting group for more than 12 years serving associations, management groups, convention & visitors’ bureaus, academic institutions and as an expert witness.  He joined Best Western International in spring of 2000, where over the next 8 years he created and developed a blended learning system as the Director of Education & Cultural Diversity for the world’s largest hotel chain. 

He has served on several industry boards that deal with education and/or cultural diversity and as brand liaison to the NAACP and the Asian American Hotel Owners’ Association with his long-term involvement in the Certified Hotel Owner program.  He has conducted an estimated 3,200 workshops and classes in his career. 

Expertise and Research Interest
• Sales Management and training
• Turn-around and revenue management
• Professional Development & Customer Service 
• Hospitality Leadership and Executive Education
• Making Cultural Diversity Real
• Accreditation & Developing Academic Hospitality programs

Service to the Industry and Hospitality Education includes working with the Educational Institute Certification Commission of the AH&LA, the Hospitality Industry Diversity Institute, the AH&LA Multicultural Advisory Council, the Accreditation Commission for Programs in Hospitality Administration, the Commission for Accreditation on Hospitality Management Programs, the AH&LA and AAHOA Education and Training Committees, the Council of Hotel, Restaurant and Institutional Educators (CHRIE), the International Hotel Show and the Certified Hotel Owner program for the Asian American Hotel Owners’ Association.

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Contact:

Dr. John Hogan, CHA MHS CHE
johnjhogan@yahoo.com

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Also See: Getting the Most Out of Your Hotel Franchise Investment / Dr. John Hogan / Dr. John Hogan / March 2009
Four Steps: How to Make More Sales Calls than Any Other Way Or Trade Shows Can Be Invaluable If. . . / Dr. John Hogan / February 2009
A Baker’s Dozen of Strategies for Hotel Chief Engineers / Dr. John Hogan / February 2009
"A Baker's Dozen" of Strategies for Hotel  Banquet Managers / Dr. John Hogan / February 2009
Making New Year's Sales and Marketing Resolutions Real and Practical / Dr. John Hogan / January 2009
Planning in a Challenging Economy - Probing Hotel Expenses / Dr. John Hogan / December 2008
Planning in a Challenging Economy - Fundamentals of Hotel Sales Planning / Dr. John Hogan / December 2008
A Message for Hoteliers: Giving Thanks - and Not Just One Day Each Year! / Dr John Hogan / November 2008
Hoteliers Must Remember the Lessons of Reasonable Care! / John Hogan / November 2008
Enthusiastic and Sincere Attitudes Will Pay Off For Hotel Salespeople / Hotel Common Sense / John Hogan / November 2008
Unleash the Potential! Recognize the True Value of Your Front Line Sales People / Hotel Common Sense / John Hogan / November 2008
Defining Hospitality - Readers Respond with their Insights / Hotel Common Sense / John Hogan / October 2008
Understanding the Value and Power of Breakfast / Hotel Common Sense / John Hogan / October 2008
A Bakers Dozen of Strategies for Hotel Restaurant Managers / Hotel Common Sense / John Hogan / October 2008
A Bakers Dozen of Strategies for Hotel Food and Beverage Directors / Hotel Common Sense / John Hoganv/ September 2008
My Definition of Hospitality. What’s Yours? / Dr. John Hogan / September 2008
Principles for Success as a Hotel Manager: 6 Observations on Finding and Employing Problem Solvers / Dr. John Hogan / September 2008
10 Hotel Sales Action Steps to Succeed in Today’s Competitive Marketplace / Dr. John Hogan / September 2008
10 Hotel Sales Mistakes to Avoid in Today’s Competitive Marketplace / Dr. John Hogan / August 2008
Ways to Identify and Build Repeat Guests / Dr John Hogan / August 2008
Principles for Success As a Hotel Manager - Maintaining Relationships Throughout the Organization / Dr John Hogan / August 2008
Principles for Success As a Hotel Manager - Part four: Communicating with Clarity and Candor / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager - Part three: Using your management style effectively / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager - Part Two: Motivating the Team / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager Part One: Understanding the Organization / Dr. John Hogan / July 2008 
Updating Hotel Marketing and Sales Strategies Mid Year NOW Is Essential / Dr. John Hogan / June 2008
Don’t Underestimate the Impact of the Hotel Sales Office / Dr. John Hogan / June 2008
Factors for Successful Interviewing Potential Hotel Sales Candidates / Dr. John Hogan / June 2008
The Importance of Meaningful Sales Team Job Descriptions / Dr. John Hogan / May 2008
For Hotels with Limited Service, Fewer than 100 Rooms - How Do You Determine if You Need a Person Dedicated to Selling / Dr. John Hogan / May 2008
Extending Your Sales Team or Make Travel Agents A Regular Part of Your Sales Programs / Dr. John Hogan / May 2008
Finding Business Leads Can Be Easier Than You Think / Dr. John Hogan / May 2008
Understanding the Differences Between Marketing and Sales / Dr. John Hogan / April 2008
Identifying Your Customers / Lessons from the Field A Common Sense Approach to Success in the Hospitality Industry / Dr. John Hogan / April 2008
...


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