Mr. Belmonte

Franchising

The Rules of Franchising are Changing

By Steven Belmonte, CEO, Vimana Franchise Systems LLC

Maybe not yet, but I predict soon, the stodgy, old hotel franchises with the "our way or the highway" mentality will be a thing of the past. They will be as useless, and broken-down as the coin-operated vibrating beds that were once popular at hotels and motels across the country.

With the advent of the Internet and advanced technology, hotel membership brands and new, loosely structured franchises are flourishing. Third-party websites, Global Distribution Systems, and strategic alliances allow these new hotel companies to operate at a fraction of the cost of a typical franchise.

First, let me give kudos to one of my closest friends and hospitality colleagues - Mukesh "Mike" Patel. Mike is widely known throughout the industry for introducing the industry's pioneering "12 Points of Fair Franchising" during his chairmanship of the Asian American Hotel Owners Association (AAHOA) in 1998-1999.

In March 2007, Mike and his brother R.C. Patel, both veteran hoteliers, purchased the Budgetel brand from The Blackstone Group to create a new entity: "Budgetel Franchise System." The new upper-economy brand, which will consist mostly of conversions and new construction since there are no Budgetel properties operating in the United States, will become the hospitality industry's first minority-owned hotel franchisor.

Industry sources say that the new franchise organization was purchased to "spark an evolution for fair franchising throughout North America." The goals for this new entity include franchisee participation in brand development plus responsible, controlled growth to ensure long term value.

In a recent press announcement, Mike was quoted as saying: "Our first and most important step is to implement a superior infrastructure that can properly serve the new franchisees we are now actively pursuing . . . We're going to give franchisees a unique opportunity to control their own destiny - by owning their property and also by being partners with us in owning the brand. In other words, now they can really own their present and their future."

Again, kudos to you Mike. Your ongoing efforts to change the face of franchising are paying off for everyone!

The recent acquisition of Budgetel is just one example of how quickly the rules of franchising are changing. Let me now offer you an insiders' look as to why the roles of franchising are changing.

Negotiations is Best First Step to Settle Disputes

After more than 11 years as a franchisor in my former role as president of Ramada Hotels, and a career prior to that time as the owner/operator of hotels with one of the country's largest management companies, I found myself somewhere in the middle, questioning the franchise role that I wanted to play in the future.

What I had seen firsthand over the years was that many issues arise between franchisor and franchisee that have the potential to become contentious. All too often those issues cannot be resolved in meetings between the two parties and then one or both make the decision to hire legal counsel in order to get the matter straightened out. Suddenly what was a two-entity partnership now becomes four entities as legal teams from each side set their sites on resolving the case for the betterment of their respective client, but also improving the bottom lines financially of their respective law firms.

The Asian American Hotel Owners Assn., under the direction of Mike Patel and many others since, has done more than any organization in the history of the lodging industry to improve the relationship between franchisor and franchisee. However, it was obvious that there was still a need for a service that will help franchisors and franchisees resolve issues of conflict without the huge costs associated with traditional legal actions.

Therefore after leaving my position at Ramada, I became an advocate for franchisee rights by establishing Hospitality Solutions LLC, a company which calls for hotel franchise companies to produce franchise agreements that are more balanced and fair. Through Hospitality Solutions LLC, we have negotiated hundreds of new license agreements and termination/liquidated damage claims for hotel owners with most major hotel franchise companies.

Long-term franchise agreements, outrageous add-on fees and royalties, ridiculous costs involved with transfers, liquidated damages, and amenity creep are all key factors to dissention among franchisors and franchisees.

What is the alternative to belonging to a franchise? Why not consider the membership organization model.

Membership Organization Making a Difference

There is a real need for a hotel brand that offers all the bundled services of a good franchise company, such as state-of-the-art global reservations system, unparalleled global distribution systems, third party Internet website distribution, comprehensives Internet marketing resources, effective brand marketing, property support, purchasing power, and worldwide sales - without all the trappings of a typical franchise. A membership organization, such as The Lexington Collection of which I am now President and CEO, provides these services without the franchise obstacles.

In only its seventh year of operation, Vantage Hospitality, parent company of membership brands Americas Best Value Inn and the upscale Lexington Collection, is now the 12th largest hotel company in the world and ranked 492 on the Inc. 500 list of fastest growing private companies.

This incredible growth in such a short period of time proves there is a huge demand among hotel owners for more independence and it is the flexible membership brands that are giving owners the creative and financial freedom to operate their hotels the way they see fit. Where a hotel owner once only had the choice of which franchise to join, he or she can now choose the fee structure, the length of the contract, and determine amenities based on his or her market and demographic needs - all without having to pay royalties or liquidated damages.

It's not unusual today for a typical franchise to charge in the range of 11 percent of the owner's gross revenue, which is equivalent to the franchisor owning 30 percent of the hotel. On top of that, franchises are demanding long-term contracts, some as long as 15 years. Membership organizations, like Vantage, offer short-term renewable contracts, low, flat fees, and in the case of its brand The Lexington Collection, a top-of-the-line PMS by IQWARE is included at no additional cost. The PMS inclusion alone is a savings of at least $60,000.

So, membership organizations can provide an affordable alternative to franchising. Members enjoy low fees, short-term contracts, no liquidated damages, a voice and a vote in the brand's direction, and a choice of amenities to meet individual market demands.

As I have advocated for many years, the same structure can be very successful in franchising, as long as solid, equitable franchise contracts are being hammered out and franchisees are able to negotiate fair termination agreements, should the need arise.

I have worn out many pairs of shoes in the hospitality industry, literally going from 'mailroom to the boardroom.' At the age of 18, I was the youngest general manager in the history of Holiday Inn and I later bought and ran the hotel where my career started. From there, I held the title of longest standing President of a national franchise-hotel company while at the helm of the Ramada chain. I've been both a franchisee and the franchisor and I know there can be a good, strong relationship between the two, but in today's competitive market, the franchisor is going to have to become more flexible and offer owners more choices for the relationship to remain viable.

It seems the old adage is true - less is more. Less interference from the franchise, fewer demands for more royalties, and less amenity creep all equal more independence, more happiness, and more ROI for the hotel owner.

Since becoming the youngest general manager in the history of Holiday Inn at the age of 18 and later buying the hotel he started at, to holding the title of longest standing President of a national franchised hotel chain while at the helm of the Ramada hotel. In 2002, Mr. Belmonte returned to his entrepreneurial roots and launched Hospitality Solutions LLC, a full-service, nationwide consultation firm. Drawing on over 35 years of experience and key contacts both inside and outside of the industry, Hospitality Solutions was designed to offer franchise negotiation services for hotel, restaurant, and quick service restaurant owners nationwide. Mr. Belmonte can be contacted at 407-654-5540 or steve@vimanafs.com Please visit http://www.vimanafs.com for more information. Extended Bio...

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