Negotiating a hospitality franchise agreement can help hotel owners and franchisors to align their goals, setting the scene for a successful partnership and long-term growth. Tatiana Veller, managing director of Stirling Hospitality Advisors, spotlights five key areas in franchise agreements where transparent and proactive negotiations can be mutually beneficial.

Franchise agreements are often viewed as rigid, non-negotiable documents, designed to preserve brand integrity and ensure consistency. However, in today’s rapidly evolving hospitality landscape, particularly in fast-growing markets like the Middle East, these agreements can and should be negotiated.

When approached strategically, a franchise agreement can become a powerful tool for mutual success for hotel owners and franchisors.

1- Contract lifespan and renewal clauses: ensuring flexibility and longevity

Franchise agreements are typically structured for 10-20 years, with many franchisors insisting on long-term commitments to maintain brand consistency. While long-term stability is essential, owners should aim for flexibility to adapt to changing market conditions.

Negotiating the initial term to 7-10 years, with an option to renew based on performance criteria, allows owners to reassess the partnership and adjust to market shifts. This approach provides the flexibility to make informed decisions as the property’s performance evolves.

2- Understanding franchise fee structures: flexibility in the details

Franchise agreements include several fees that impact the property’s bottom line, such as royalty, marketing, reservations and others. While these fees are typically presented by brands as ‘standard,’ there is always room for negotiation, particularly for owners in emerging markets or during the ramp-up phase of the destination.

The initial franchise fee (‘sign-on fee’), often a significant cost at the outset, can be negotiated, especially for high-profile properties or owners with multiple assets. In such cases, franchisors may be willing to offer reductions or deferrals, recognizing the long-term value of a multi-property commitment or a high-quality asset in a strategic market.

For royalty fees – which typically range from 3-5 percent, owners in emerging markets can negotiate reduced rates for the initial years to help ease the financial burden as the property builds brand recognition. Performance-based fee structures can also be introduced as an effective tool to ensure that the fees align with the property’s actual performance.

Marketing fees – typically 2-4 percent of revenue – are primarily allocated to supporting global brand campaigns and are also negotiable. In regions like the Middle East, where consumer behavior may differ significantly from global trends, it’s essential to request a breakdown of how funds are allocated to regional and local marketing efforts. This way owners can negotiate a higher percentage of marketing funds to be directed toward regional campaigns, ensuring that they are spent effectively to drive local business.

3- Performance-based clauses: aligning incentives for success

Traditional franchise agreements often lack performance-based clauses and only focus on clauses related to the global distribution systems (GDS). However, as the hospitality industry evolves, it’s increasingly important for both franchisors and owners to align their interests with clear performance metrics to accurately observe and ensure long-term success.

The introduction of mutually agreed-upon KPIs ranging from guest satisfaction ratings (typically set between 85-90 percent) to green building certifications (e.g. LEED or Green Key) ensures that the franchisor has a vested interest in maintaining both financial success and quality operations that meet local market demands and global trends.

Additionally, owners should include provisions allowing renegotiation or exit options if performance targets are not met for two consecutive years. While franchisors may resist early termination clauses, a well-structured agreement that allows both parties to reassess the partnership based on performance and market shifts ensures a fair and sustainable relationship in the long term.

4- Brand standards and flexibility: tailoring to local market dynamics

While global brand standards are vital to maintaining brand consistency, they can sometimes prove challenging when applied in markets with unique cultural or operational dynamics.

In diverse regions like the Middle East, where cultural and operational nuances play a significant role in guest satisfaction, it’s vital to build flexibility into the agreement. Owners should negotiate the ability to adapt certain brand standards to local preferences. This could include design elements reflecting local architecture or modifications to service offerings.

Owners should also negotiate exceptions in procurement requirements that allow for local sourcing of vendors or materials to reduce operational costs, while maintaining high-quality standards. Flexible staffing levels or culinary offerings can also be negotiated to ensure competitiveness in a dynamic market.

Moreover, owners can negotiate a grace period for newly opened properties, allowing them to delay adherence to certain brand standards for a set period. This helps mitigate the financial burden of renovations, ensuring owners are not faced with significant costs immediately after opening their property.

5- Operational transparency: mitigating hidden costs and risks

Operational transparency is often overlooked in franchise agreements but is critical for long-term success. Beyond the upfront franchise fees, hidden costs, such as technology infrastructure fees, brand upgrades and mandatory renovations, can add up quickly if not clearly defined.

Owners should ensure franchise agreements provide full transparency regarding all fee structures, including technology fees, service-related charges and mandatory brand upgrades. Technology fees typically range from
1-3 percent of revenue, but they should be capped or subject to periodic review to avoid unexpected costs. Renovation schedules should also be clearly outlined and ROI-based, ensuring that owners are fully aware of when and how much capital expenditure will be required for brand-mandated upgrades.

Additionally, franchise agreements should clearly define cost-sharing arrangements for areas like capital expenditures (CapEx) or upgrades required by the brand. Owners should insist on joint planning for major capital expenditures, ensuring alignment with the franchisor on costs and expectations, particularly as the property ages and requires reinvestment.

Ultimately negotiating a franchise agreement is not just about preserving brand integrity; it’s about crafting a mutually beneficial partnership that adapts to the unique market dynamics and the evolving hospitality landscape. When approached strategically, the agreement becomes a roadmap for mutual success, enabling both owners and franchisors to align their goals, whether it’s flexibility, performance or regional customization. By fostering transparent and proactive negotiations, both parties can create a foundation for long-term growth, ensuring profitability, sustainability and the ability to thrive amidst the ever-changing hospitality market.