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 Guide¹

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.
 
References:

¹ 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 www.canadabusiness.ca
⁴ www.accc.gov.au/content/index.phtml/itemId/6118
⁵ www.franchise.org/Country-Profiles.aspx

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

Disclaimer:  the author is not an attorney and is not offering legal advise, but rather is sharing experiences and examples on how to effectively work within the franchise business model.

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 a frequent speaker and seminar leader at many hospitality industry events.  He is a successful senior executive with a record of accomplishment leading organizations at multiple levels.  His professional experience includes over 35 years in hotel operations, food & beverage, sales & marketing, training, management development and asset management, including service as Senior VP of Operations.   

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