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In a recent article on – "5 Ways to Leave your Franchise Agreement" – Shawn A. Turner identifies issues that hotel franchisees should consider when terminating a franchise agreement.

Like all franchisees the starting point for evaluating "termination issues" must start with your franchise agreement. This analysis should be followed by an assessment of the tangible assets and property rights associated with your hotel. In his article Mr. Turner provides some practical factors to consider‚ including:

  • Looking closely at the franchise agreement – It is advisable to have your legal counsel review your franchise agreement prior to signing it to make sure you are fully aware of the final terms and conditions. If already involved in the franchise agreement and you are looking for a way out of your franchise agreement, the terms and conditions listed should be reviewed as well.
  • Know your window of opportunity – Franchise agreements often vary in length of time. Some have two-year or five-year windows while other agreements are long-term. A franchisee should keep in mind that a long-term franchise agreement can cause a franchisee and franchisor to be with each other longer than what they want while on the other hand a shorter-term franchise agreement goes both ways allowing the franchisee or the franchisor to initiate getting out of the franchise relationship.
  • Be prepared to pay – When terminating a franchise agreement prior to the agreement term being completed franchisees may be asked by their franchisor to pay liquidated damages. Hotel franchisees should be conscious of what payments will be due for liquidated damages if they signed a liquidated damages agreement when they bought the franchise. 
  • Negotiate – While it may not work in all instances another thing a hotel franchisee leaving a franchise agreement may want to consider is negotiating with the franchisor. The outcome of this varies widely and the franchisee may not get anything they ask for but it doesn't hurt to try.
  • Be wary of customized FF&E – Some franchisors are now setting up exclusive agreements with furniture‚ fixtures and equipment suppliers (FF&E). These agreements may complicate a franchisees exit from a franchise agreement and may result in significant costs if considering going from one hotel franchise brand to another. The franchisee may possibly required to replace the hotel furniture‚ fixtures and equipment to the new brand's required FF&E. This is something that should be kept in mind when transferring from one hotel brand to another and not so much for a franchisee considering leaving the hotel franchise business completely.

Mr. Turner's points are valid and raise factors that franchisers must consider. Your franchise agreement is critical and prior to triggering any termination or default it is critical to plan and structure your "legal exit" from the franchise system. Also "furniture‚ fixtures and equipment" (branded and unbranded) consistently raise potential costs associated with a franchise transfer. Your obligations as to these assets must be carefully scrutinized.

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By Charles Internicola July 28, 2011

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