The selection of an appropriate hotel franchise affiliation affects a property�s ability to compete in the local market, generate profits, achieve a certain image or market orientation and benefit from referral business.  Because the success of a hotel is primarily based on the cash flow it generates, owners must weigh the benefits and services of a national franchise affiliation against the total cost of such a commitment.

The cost of a hotel franchise affiliation is based on various fees and expenses charged by the franchisor for the use of the brand�s name, logo, identity, image, good will, procedures and controls, marketing, and referral and s\reservation systems. Franchise fees normally include an initial fee paid with the franchise application, plus continuing fees paid periodically throughout the term of the agreement.

The initial fee typically takes the form of a minimum monetary amount based on a hotel�s room count, For example, in the United States the initial fee many be a minimum of US$45,000 plus US$300 per room for each room over 150. The initial fee covers the franchisor�s cost of processing the application, reviewing the site, assessing market potential, evaluating the plans or existing layout, inspecting the property during construction, and providing services during the preopening and conversion phases. The continuing fees are typically paid monthly over the term of the agreement and include the following costs.
 

Periodically, HVS International reviews the franchise documents of 89 major franchise hotel companies to determine the various fees they are charging their franchisees. Three models utilizing different revenue assumptions representing the economy, mid-rate and first-class hotel brands provide the basis for determining the total cost of the affiliation over a 10-year holding period.

The table below shows the results of the HVS franchise fee survey for the two lowest and the two highest total 10-year costs for each of the three class assumptions. The table breaks out the initial cost, royalty cost, reservation cost, marketing cost, frequent traveler cost, miscellaneous cost, the 10-year cost and the 1-year cost as a percentage of the assumed rooms revenue during that 10-year term.

Obviously the cost of a hotel franchise affiliation is an important consideration when selecting a franchisor. However, other factors such as the strength of the brand, the ability of the reservation system to deliver customers, the availability of other services such as a frequent traveler program are all critical factors that go into developing a price-value relationship necessary for making the correct decision.

Note: Parris Jordan and Zubin Saxena of HVS International developed the data for the HVS 2005 Hotel Franchise Fees Analysis Guide.