Franchise Advisory Councils: Powder Puffs or Powerhouses?

On February 11, 2009, I was the luncheon speaker at the AAHOA Franchise Advisory Council Summit in Orlando.  In my talk, I made the following points:

• The essential requirements for a successful hotel brand are critical mass, brand awareness and name recognition by potential customers.  If the hotel brand fails in any of these vital areas, the franchisee will suffer failure also.  The universal image of a franchise is of a business person striving to share in the American Dream of business ownership—driven by an entrepreneurial spirit, but cautious enough to buy a franchised business to ensure success of the enterprise.

• This model franchise conjures up an image of the franchisor and franchisee working hand-in-hand to achieve financial success.  The franchisor has been described (mostly by franchisor organizations) as a partner, a mentor, a big brother, a coach in your corner- all images of benevolent, experienced, knowledgeable support center and resolve who is ready, willing and able to nurture, support and protect the franchisees of the system of the good of all.

• However, the history of franchising in the United States reveals a far different scenario.  In 1971, after a rash of scams, rip-offs and franchisor horror stories, the Federal Trade Commission (FTC) held public hearings on these fraudulent business practices.  After 30,000 pages of testimony describing some 5,000 complaints, the FTC instituted its Rule on Franchising which mandated that all franchisors must provide a Uniform Franchise Offering Circular (UFOC).  This document must disclose all material information to help prospective franchisees to make an informed franchise purchase decision.  More recently, the UFOC has been renamed the Franchise Disclosure Document (FDD) and requires more information than before.

• Nevertheless, franchise agreements are one-sided documents, drafted by franchisor attorney’s and presented on a take-it-or-leave-it basis to franchisees.  Why do hotel franchisees agree to these agreements?  They do it for these vital and important reasons:

  • To gain brand name awareness
  • To join a system that is identifiable and attractive to the traveling public
  • To join a system that has appropriate system growth
  • To receive beneficial reservation contributions

• Despite what many franchisees may think there are no federal rules, no duty of due care, no fiduciary duty even when the franchisor collects franchisee money in pooled advertising funds. The language of the franchise agreement is all that defines the relationship between the franchisee and the franchisor. It is for this basic reason that franchise advisory councils are so carefully named: they are mostly “advisory” only with no real negotiating clout.

• Are franchise advisory councils powerhouses or powder puffs?  My long experience with hotel franchising reveals many of them to be paper tigers with no real clout and no independence.  On the major issues: encroachment and impact, termination and liquidated damages, transferability, choice of venue and dispute resolution, FACs have little negotiating strength and no veto power. 

The Best FACs: Some are better than others.

1. International Association of Holiday Inns (IAHI)- created by Kemmons Wilson in 1956, it claims to be an independent association.  Despite its good works and its valuable voice, it nevertheless does not meet the test of a completely independent franchise owners association.  For example:

• The IAHI office is located in Holiday Inn headquarters
• Five members of the IAHI Board are appointed by the InterContinental Hotel Group and are not elected by members
• Important issues like areas of protection, encroachment and impact, termination and liquidated damages are essentially determined by IHG.
• Impact studies are done by in-house Holiday Inn employees

Nevertheless, I would characterize the IAHI as the oldest and one of the most effective FACs in the hotel industry.

2.  Choice Hotel Owners Council (CHOC) formed in 1967 to create a unified voice for owners of Comfort Inn, Comfort Suites, Clarion, MainStay Suites, Quality and Sleep Hotels.  The mission of CHOC is to represent the Licensees of the Company through a unified voice, protecting the greater interest of its members by providing ideas, advocacy programs and services.  The country is divided into thirteen regions, with a Regional Director elected from each Region to represent its Licensees.  Every year CHOC holds an annual conference to review Choice policies and to criticize how Choice Hotels International conducts business with its franchisees.  This annual Owners’s Summit is a perfect place for Choice owners to express their frustrations, blow off steam, and to make recommendations to bring the Choice franchise agreement in closer alliance with AAHOAs 12 Points of Fair Franchising, CHOC’s Summit works well as a relief value to give voice to franchisee frustrations.  But unfortunately, since Choice pays many of the expenses, the ultimate outcome of the Summit is predictable with only minor improvements in the franchise agreement.  The CHOC FAC is mostly advisory with no real power to negotiate as an equal partner but, as I observed first hand as a featured speaker in 2007 and 2008 it provides a good forum to raise major issues for negotiation with Choice management.

My recommendations to all the other hotel franchise advisory councils:

• Follow the IAHI and CHOC models
• Become as independent as possible
• Establish a separate headquarter office with your own executive director
• Form a purchasing coop
• Negotiate fair franchising clauses into your franchise agreement using AAHOAs 12 Points as a guide and model

About the author: Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services. Turkel’s clients are hotel owners and franchisees, investors and lending institutions. Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management. He is a member of the prestigious International Society of Hospitality Consultants. His provocative articles on various hotel subjects have been published in Blue MauMau, the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel-Online, AAHOA Lodging Business, etc. Don’t hesitate to call 917-628-8549 or email stanturkel@aol.com

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Do Hotel Franchisees Need Independent Associations?