Franchise and Management agreements

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From the course by ESSEC Business School

The fundamentals of hotel distribution

453 ratings

ESSEC Business School

The fundamentals of hotel distribution

453 ratings

Course 1 of 4 in the Specialization Hotel Management: Distribution, Revenue and Demand Management

In today’s hotel sector an increasingly complex network of traditional and web based channels have to be managed to insure hotel success. Key questions include: how should you distribute over the web? What should you include on your brand.com website so people book through it? How can you maximise the potential of online travel agents (OTAs)? With the distribution environment both highly complex and constantly evolving, this course will give you comprehensive foundation of current industry practices to help jumpstart your career in this fascinating domain. Acknowledgements: Claire Bertrand, Vincent Chatain, Jessica Moses, Benjamin Six (ESSEC Business School), Emilie Dupré (Image-In), Gregory Halidy (Triplay)

From the lesson

Setting the scene

The hotel business has evolved from its early days to today. Through this evolution, it has become increasingly specialized. This module introduces the business models, strategies for growth, levels of competition and biggest changes and challenges hotels have to face today.

Franchise and Management agreements4:02

Growth and the value of branded hotel chains4:07

Meet the Instructors

Peter O'Connor
Professor of information systems, Director of the MBA in Hospitality Management
Information systems
Nicolas Graf
Professeur
Management

[MUSIC]

Franchise agreements are legal and

binding contracts between a franchisee and a franchisor.

The franchisee is often an entrepreneur who wants to operate his own business

without taking the risk of developing his own concept of brand.

Thus he or she decides to pay various fees,

such as royalty fees to a franchisor.

The franchisor, the firm owning the trademark, and operating procedures and

manuals.

Hotel franchises essentially provide operating procedures, trademark, and

access to reservation systems, and other technologies to the franchisees.

The value of a franchise is thus related to the ability of the franchisor to give

up it's brand name as well as providing reservations at the lowest possible cost.

A proper definition of a franchise agreement is the following.

It is a legal contract in which a well established business consents

to provide it's brand, operational model and required support to another party for

them to set up and run a similar business In exchange for a fee and

some share of the income generated.

The franchise agreement lays out the details of what duties

each of the party needs to perform in what compensation they can expect.

A typical franchise system offers value to its franchisees by

offering the following services.

Marketing and advertising.

Brand recognition.

Reservation systems.

Cross-selling within the network.

Proven mode of operations, technology, soft and hardware, training, design

plans and specifications, financing, site selection and market analysis, PR and

promotions, quality assurance programs, and purchasing benefits.

The costs and fees of franchising include initial fees, simply to enter the network,

which is typically a mix of the flat fee plus a certain amount per room.

For instance, a franchisee could pay while submitting its application

a flat fee of 40,000 Euros plus 300 Euros per room.

Other costs may be incurred such as PIP, or Property Improvement Plan costs, and

others such as signage.

In addition to the initial fees,

the franchisee needs to paying continuing fees, generally on a monthly basis.

Which includes royalty fees between 3 and

7% of room revenue, marketing fees from 1 to 5% of room revenue, and reservations

fees ranging from 1 to 10% of room revenue or fixed amount per available room.

Other fees may exist too including loyalty program fees.

Management agreements, or contracts, can be

either extension of franchise agreements when they involve a branded operator or

simply, legal contracts between a property owner and a management company.

The contract lays out the services that is rendered by the management company and

the fees the owner will have to pay in exchange.

The generic definition of a management agreement is the following.

It is the written agreement between owner and

operator of the lodging facility, in which the owner contracts with the operator to

manage the facility in a professional manner.

The owner provides the lodging facility and working capital while the operating

company provides the professional expertise to manage the hotel and

receives management fees for services rendered.

The roles and responsibility of the management company and

of the property owner may vary but generally include the following.

The management company is responsible for managing all operating activities,

including hiring, trading, purchasing, repair maintenance, and

most importantly pricing, distribution marketing and sales and driving demand.

The property owner is then responsible for providing the facility and

necessary working capital to operate it.

He or she is also responsible for paying any pre-opening expenses and

provide exclusive right to manage the property as well as paying all fees and

real estate taxes.

The fees associated with the management agreement vary but

often include base fees as a percentage of total revenue, and

incentive fees frequently based on gross operating profits.

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