Hotel business explained: What is the difference between a franchise and management agreement?

by | Mar 22, 2019 | Experts

Christine Ravanat from AccorHotels explains how major hotel groups expand their network footprint through franchise or management agreements, a win-win deal for hotel groups and owners.

Hotel Groups do not own their hotels

In the hotel business, Hotel Groups such as AccorHotels, IHG, Marriott, or Hilton are mostly asset light. This means these groups do not own the hotels that carry their brands. For instance, you may be surprised to learn that the Holiday Inn across the street is not the property of IHG, the Sheraton you stayed in for your last vacation does not belong to Marriott and AccorHotels does not own the Novotel where you had your last business meeting.

These hotels belong to many different kinds of owners, ranging from wealthy individuals, companies or even institutions, who all want to maximize business from their property. They therefore turn to Hotel Groups to provide services and support their business.

Win-win deals

Hotel Groups need the hotel owners to expand their network footprint and to generate fees against the services provided, and on the other hand, hotel owners need Hotel Groups to select from renowned hotel brands and benefit from powerful distribution and loyalty systems, the latest technology capabilities and hospitality expert teams. This win-win deal transforms either into a Franchise Agreement or into a Management Agreement.

Franchise Agreement key facts

In this case, the Hotel Group (ex: AccorHotels) is the franchisor, and the hotel owner (ex: an individual) is the franchisee. They sign a Franchise Agreement for a specific hotel brand (ex: ibis).

The overall principle of a Franchise Agreement is that the franchisee operates its own hotel, in compliance with the brand standards.

The franchisee is required to pay:

  • A franchise fee, including the brand trademark, based on a percentage of the hotel’s turnover.
  • Mandatory services fees, which usually cover marketing and sales fees, distribution and loyalty fees, IT fees, hotel quality control and brand compliance audits fees.

The franchisor is required to provide all the brand standards and to deliver the mandatory services.

The better the hotel’s topline is, the better the franchisor’s revenue is.

With AccorHotels, Franchise Agreements are very common for economy and mid-scale brands.

Management Agreement key facts

In this case, the Hotel Group (ex: AccorHotels) is the manager, and the hotel owner (ex: a financial company) is the managed owner. They sign a Management Agreement for a specific hotel brand (ex: Sofitel).

The overall principle of a Management Agreement is that the manager operates the hotel for and on behalf of the managed owner, in compliance with the brand standards.

The managed owner is required to pay:

  • A base fee and a brand trademark, corresponding to a percentage of the hotel’s turnover.
  • An incentive fee, based on the hotel’s gross operating profit.
  • Mandatory services fees, which usually cover marketing and sales fees, distribution and loyalty fees and IT fees.

The manager is required to best optimize the operation of the hotel and to deliver the mandatory services.

The better the hotel’s topline and bottom line are, the better the manager’s revenue is.

With AccorHotels, Management Agreements are very common for upscale and luxury brands.

More services on demand

In both franchise and management cases, the parties can agree on additional service delivery. Most Hotel Groups have a range of optional services that answer specific needs, throughout the hotel’s lifecycle.

These optional services cover many fields, such as hotel renovation, revenue management, exposure on distribution channels, learning and development for hotel staff, procurement and much more.

These optional services are sold at an additional cost to the franchisee or managed owner. The franchisor / manager’s role is to recommend these optional services when best needed, as an answer to an issue encountered by the hotel. It is always the franchisee / managed owner’s decision to agree on optional services.

How to choose?

So how does an owner choose between a franchise or management agreement? The decision can be made based on numerous factors, but in general, a franchise agreement is best for an owner who wants to have “hands on” involvement in the daily operations of their hotel. This person may already be an experienced hotelier.

A managed owner may instead be someone who does not have the desire or experience to run the hotel themselves. Their expertise or business interest is more strongly linked to the real estate investment aspect of hotel ownership.

While the type of agreement chosen is important for the Hotel Group, it has no impact on the guests. Based on the application of the brand standards, they enjoy the same experience whether they stay in a franchised or managed hotel of the same brand.

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