Overcoming Franchise Development Obstacles

 Whether you are unflagging your hotel property to a better brand within an existing company, changing to a new flag under a different company, or simply seeking to maintain the current flag, satisfying the requirements of the Franchisor can be challenging.  Each decision that you make during the development process to upflag, reflag or remodel under the existing flag can substantially affect the bottom line.  By overcoming development obstacles, you will save both time and money and ensure a smoother transition to the upgraded property.

The first step during the unflagging or reflagging of a hotel property is the site inspection by the franchisor representative.  As the franchisee, you want to ensure that the franchisor fairly evaluates the property.  You also wan to ensure that the franchisor has an opportunity to inspect the entire property and that there are no surprises that the franchisor could later claim as a basis to hold you in violation of the franchise agreement.  You also want to ensure that the franchisor does not later suggest changes or modifications to the property that would be substantially more expensive than what has already been contemplated or completed.  For example, if you are going to renovate an entire hotel room, then a model room should be created for viewing by the franchisor representation so that the model room can be approved for installation throughout the hotel.  The same approach should be utilized for lobby, lounge, meeting space, or front entry renovations.  Since interior and exterior upgrades are generally subjective, you can negotiate with the franchisor on such modifications.  The extent to which the franchisor can affect your renovation may be governed by your franchising agreement.  Since your improvement of the property should translate into increased revenue, and, in turn higher franchise fees to the franchisor, there is financial incentive for the franchisor to work with you during the development process.  Once you have satisfied the franchisor's requirement, then you can set your budget for the construction and there is less likelihood of problems during or upon completion of construction with the franchisor regarding the nature and quality of the renovation.

If you are upflagging or reflagging your property, the franchisor will conduct an initial inspection of the property.  After the inspection, you will receive a survey of the property indicating all of the changes, modifications, and repairs required by the franchisor to satisfy the upflagging or reflagging of the property.  Depending upon the items on the survey, the franchisor requirements could be extensive and very expensive.  It may be that after receiving the survey from the franchisor that the cost of satisfying the franchisor requirements is prohibitive and that upflagging with the particular company may not be financially feasible.  It is better to know this in advance so as to ensure you can satisfy any lender's requirements.  Although a franchisor generally prefers not to modify a survey once it is issued, the franchisor's requested modifications are negotiable.  You should take the opportunity to meet with the franchisor's representative to determine what the minimum requirements are to become a member of the company flag.  You can also negotiate the timing for performing the items on the survey so as to allow for the changes to be made in phases, over time, within the available financing and to minimize disruption to hotel operations.  You can certainly negotiate with the franchisor as to the timing for joining the franchise reservation system before renovations have commenced or have been completed so that you will have the opportunity to obtain advance bookings under the new flag.

While many franchisors have a standard roofline faade, entrance, window and doors, and signage, these aesthetic features are all subject to negotiations.  Furniture quality, style and layout are also subject to discussion with the franchisor.  All of these features can vary from beachfront to business hotel location and from city and state throughout the country.  Since one of the reasons why you have chosen to flag the property with a reputable company is for its experience and expertise, you should take advantage of the architectural and interior design professionals on staff at the franchise company which are available to render valuable advice.

While many of the renovations may be performed with working capital or may be built into the bridge loan or construction loan obtained from conventional financing, several franchisors offer interest free or low interest loans for the renovation of hotel properties to the particular flag.  You should inquire at the time of negotiating the franchise agreement as to the availability of these funds and you can make such funds a part of the inducement to join the franchisor.  Keep in mind that if you request funds from the franchisor, you can expect to be responsible for reporting to the franchisor on the use of those funds.  The franchisor may also seek to exercise certain controls over the manner in which those funds are utilized.  If they are directly tied to items on the survey, then the franchisor's involvement in this process has already occurred.  If you do not wish to have the franchisor dictate how you wish to renovate the hotel property, then the franchisor funds may not be the best source for financing renovations to the hotel property.

One of the most important features to your property is signage at the entrance and throughout your property.  Signage is also one of the first items that needs to be addressed with the franchisor because it may require substantial lead time to obtain approval of design and to complete construction.  If you are planning a grand opening of the property, then you will want to give yourself sufficient time so that your signage is complete when you open the hotel property.  Once again, signage is a negotiable item with the franchisor, but you can expect the franchisor to want to dictate colors and size of letters and perhaps the name of the hotel.  Keep in mind that the franchisor is not as familiar with your hotel property as you are, and therefore, what the franchisor may typically use for signage may not be best suited for your property.  You need to be firm as to what you believe will work and have a candid discussion with the franchisor about the benefits of your design and work with the franchisor to reach a mutual compromise.  Do not assume that whatever you design will be accepted by the franchisor without comment.  Virtually all franchise agreements require the franchisor's prior consent to any signage and the entity that constructs the sign may have to be an approved company to perform such work or must, at a minimum, execute a license agreement with the franchisor in order to copy the franchisor's logo.  There may also be an associated charge for the license which may be waived by the franchisor.

Before you begin any renovation, it is critical to determine the requirements of the local municipality governing the construction project.  Whether it is a city or a county can greatly effect the construction process.  You should determine to what extent permits are required for certain types of work and not required for others.  You should also determine the permitting requirements of the local municipality given the scope of work to be performed.  Speak to the local building officials and obtain recommendations from them of certain architects and builders who perform a substantial amount of work in the local municipality and who are familiar with the local regulations.  You cannot afford to have your project stopped midstream in order to address unpermitted work, unlicensed contractors, shoddy workmanship and work not in compliance with the code.   Not only will such occurrences cost you several thousands of dollars in potential fines, but additional time and money for correcting such deficiencies in workmanship.  In addition, an item that is a local code issue or life safety issue must be immediately addressed for safety reasons.  For example, pool fences, electrical upgrades, fire and security alarms, door locks, and emergency exists should be at the top of the renovation priority list.

As with any construction, a good schedule is a prerequisite.   Since it is very difficult to anticipate the availability of labor, materials, weather, and other factors, it can be very difficult to maintain a construction schedule.  Maintaining the construction schedule is especially important if the project is on a fast track in order to be open to capture seasonal business.  The franchisor may put scheduling deadlines on the construction that are either unrealistic or difficult to achieve.  Even if this construction schedule appears obtainable, events that are unforeseen can wreck havoc to the most conservative construction schedule.  It is critical that any agreement that you reach with the franchisor on a construction schedule provide some "float" for activities in the event of delay so as to avoid as much as possible any chance of being in breach of a franchise agreement because of a delay in construction.  At the same time, any franchise should contain a force majeure clause that provides for time extensions in the event of labor shortages; material shortages, weather, or other events beyond control which would provide grounds for an extension of the scheduled completion date.  While you will certainly seek to hold the contractor to the construction schedule, such anticipated events will give the contractor grounds for time extensions to the schedule and should give you similar grounds for time extensions with the franchisor lender without penalty.

While there may be obstacles to development of a hotel property from the franchisor, good planning and developing a good working relationship with the franchisor during the development process will help avoid unnecessary time and cost overruns and avoid unnecessary loss of revenue to your business.