Today's Franchisee Wields More Bargaining Might

Today's Franchisee Wields More Bargaining Might

Paradoxically, as franchisors consolidate, their individual bargaining position with franchisees appears to be slipping. This may or may not be a temporary phenomenon, but it is worth noting.

It's no secret that an even smaller group of companies is coming into ownership of the national flags. Unfortunately, the debt-service costs associated with "affiliation chain" acquisitions are impairing a wide range of services offered by today's franchisor. Many programs, such as national advertising, marketing assistance and quality maintenance standards, are slipping or being sacrificed altogether.

Franchisees know this is occurring. They're initially happy because of less franchisor oversight at the property level; however, the ultimate consequences may be weaker brand differentiation and a general lowering of standards.

As programs beneficial to the franchisee - and costly to the franchisor - are moderated, the sales staffs of the franchisors are being beefed up. These sales staffs - responsible for signing up more flagged hotels - are essential if chain overhead and corporate-debt costs are to be paid.

The lodging industry's franchisors now must attract a smaller group of available hotels, and they must do it with fewer services to offer and more competition. Naturally, franchisee entrepreneurs sense a strengthened bargaining position.

Not So Non-Negotiable

In negotiating a franchising contract today, previously non-negotiable clauses are being routinely individualized to the needs of the franchisee. What are some of these important, and negotiable, sections of the standard-form franchise agreement?

Fees - A franchisee can now ease into full-fee payment over a two-year to three-year period, and I've heard of some that have gone out as long as five years if the franchisor wants the property enough.

Term - Franchise contracts generally run 10 years. A franchisee can now negotiate a length to suit his needs.

Cancellation - This is the most important clause for a franchisee to discuss, and one where he will run into a lot of franchisor resistance. Overcome the resistance. A franchisee must have an "out" in the contract.

Are the promises given not being fulfilled by the franchise-system's reservation machine? Are services being cut? Is another similar brand from the same company being franchised in the franchisees marketplace? When a franchisee sells his hotel, if the new buyer wants to change affiliation, does the seller want to be stuck paying hundreds of thousands in termination penalties?

The answers to all these questions are apparent.

Upgrading - These days, money is dear. Therefore, while franchisors have an upgrading wish list that might be substantial, we find them willing to modify their wishes to "the basics" and allow reasonable time periods - usually nine months to eighteen months - to accomplish an agreed upon punch list. Remember, while the franchisor may let a franchisee into the system with moderate upgrading requirements, his customer base may suffer without a market-acceptable job.

Financing - The chains know that they've got to help finance upgrading. Therefore, several have assisted in linking up franchisees with lenders who will lend into credit-worthy situations for capital improvements.

In summary, today's competitive franchising market allows for rigorous bargaining by the franchisee in all areas, including the franchise contract.