Photo: www.flashydubai.com
The hotel owner, franchisor, or franchisee should think carefully before choosing the partner and try to get the best effort for mutual beneficiaries. The number of percentage of the fee, incentives, and other payment depend on the negotiation. Hotel chains financial performances related with the effectiveness and efficiency. Effectiveness related with the way of using resources in order to maximize return of capital investment in a long term perspective. It means that things are well done compare to a particular objective. Then, efficiency focuses on the relationship between inputs and outputs, describe the optimization of the resources used to obtain a result. Good things are done regarding to cost constraint (Perrigot, Rozenn., Gerard Cliquet., Isabelle Piot-Lepetit., 2008).
The franchisor having a plural form chains will use the company owned units as laboratories for testing the innovation, as locations for training the new franchisees, as direct touch points with the final customers to get information about the market, to control the brand diffusion and its extension and its evolution. This part of the chain composed of company owned units will enable them to become more efficient because they can benefit from direct contact with the customer and use the company owned store as laboratories. At the same time, the franchisor will benefit from external criticism and feedback coming from the franchisees running their own business. The experience category is expected positively related to the sales and occupancy rates of the hotel chain. Old hotel chains are supposed to perform better than young hotel chains because of knowledge acquisition over time on market and on consumer expectations, and also brand name reputation.
The example of management contract negotiation of the financial term such as (Bell, 1993):
a. The original base fee of 5% of gross revenue has been reduces to 4% in some case and, with hard negotiating, 3% is possible.
b. Because group services are minimal, the company should agree that the most an owner has to pay for regional sales support and marketing (including public relations and advertisement, directly related to the hotel) is 1.5%, or even 1%, of sales. An open-ended sharing such expenses should not be accepted.
c. The incentive fee should be 10%, or at most 15%, and should be calculated after these deductions from the gross operating profit, property taxes, the reserve for furnishing, fixtures, and equipment, and building insurance.
d. The reserve of furnishings, fixtures, and equipment should be a percentage of the gross revenue, starting at 1% in year one, 2% in year two, and rising to 4% or even 5% in year five.
e. The incentive fee may even be calculated after debt service, at 20 to 30% of the net cash flow after debt service