When a cheap franchise may cost you dearly

CHOOSE a franchise wisely, and your hotel's ability to attract business and maintain the image desired will be enhanced.

The right choice may not be the company that charges the least: a poor choice could do your business more harm than good. When evaluating a potential hotel franchise, one of the most important financial considerations is the structure and amount of the franchise fee.

Franchise fees are typically calculated on the basis of the number of guestrooms, and as a percentage of rooms revenue. The chart below compares the level of franchise fees set by major international franchisors.

But first is a breakdown of the key items that most commonly feature as components within the franchise fees as charged.

lInitial fee: an application fee is made to cover the franchisor's costs of reviewing any potential property as well as to cover ongoing pre-opening costs. This fee usually takes the form of a flat minimum fee plus a fixed amount per room.

lRoyalty fee: this is levied to compensate the franchisor for use of its trade name, logos, service marks and other services. Usually, this is calculated as a percentage of rooms revenue.

lAdvertising/marketing: the advertising or marketing fee generally covers all chain-wide marketing efforts. Often, this fee is paid into a fund that is administered by the franchisor and does not yield any profit to the franchisor. It is usually calculated as a percentage of rooms revenue.

lReservation: the reservation fee covers the cost of operating the central reservation system. It may be calculated as either a percentage of rooms revenue, a fixed amount per reservation that goes through the system, or a combination of both.

lMiscellaneous Fees: These include fees for training the franchisee and other services provided by the franchisor. These are usually fixed amounts.

We have surveyed those franchises currently active in Europe, to compare the costs in obtaining a hotel franchise. Since each company structures its fees differently, we have used a uniform system to achieve an accurate comparison.

We used a financial model to simulate a hotel's room revenue over a 10-year period, and then calculated the franchise fee as a percentage of room revenue over 10 years.

Based on our calculations, franchise fees ranged from a low of 2.5% for Best Western to a high of 8.4% for Park Inn, with a median fee of 6.6% of rooms revenue.

These figures should only be used as a starting point in choosing a franchise. Simply choosing the company with the lowest fees will not guarantee cost savings. Many other factors must be considered to make sure that the proper affiliation is chosen.

The extent of franchising in Europe is far below levels in North America. We believe franchised opportunities in Europe will continue.

Independent hotel operators are finding it more difficult to compete against the growing number of internationally affiliated hotels and are realising the benefits of an international franchise affiliation.

lHVS International specialises in hotel valuation and consulting for hotel companies and financiers.

lThe Spring National Franchise Exhibition will be held at Olympia, West London, on 15-17 April.