Keeping Score: Boomerang Hotels

Last year, I reported on the AAHOA Performance Appraisal Reports of Accor, Carlson, Choice, La Quinta and Wyndham. In October 2008, I began a series of reports about hotel franchise companies which promote their compliance with AAHOAs 12 Points of Fair Franchising. These reports are based on self-evaluation by each of these companies. So far, I have reported on Vista Inns Hospitality Solutions, Vantage Hospitality (Americas Best Value Inns and the Lexington Collection) and Budgetel Inn & Suites.

This month, I will focus on Boomerang Hotels which offers franchises for Settle Inns and Suites and GuestHouse properties. Senior Vice President of Franchise Development Terry L. Kline stated,"Our company, Settle Inn, LLC, was organized in 2005 and founded upon the cornerstone principal of fair franchising and the foundational element of building strong franchisee/franchisor relationships through establishing mutual levels of trust and respect. Our franchise agreement was written in collaboration with the AAFD (American Association of Franchisees and Dealers) according to their established criteria for fairness. Their association then graded our agreement as 99.3% compliant against these conformity standards. AAHOA is represented on the AAFD board by C.K. Patel, who is also currently serving as the Secretary & Director at Large, of the AAHOA Executive Committee. I invite you to review additional information on our company web site."

According to my rating system, the nine franchise companies scored as follows:

 

Point 1: Early Termination and Liquidated Damages

AAHOAs Position: 1(a) Most Franchisors assess liquidated damages at unfair and punitive rates, often 36 to 60 months of royalty fees. AAHOA states that Franchisees should only have to pay 6 months of royalty fees.

Boomerang Position: Our franchise agreement gives the franchisee the security of a long term agreement, (10 years w/subsequent 5 year renewal options) but yet allows them the opportunity to manage their asset and franchise relationship with flexibility and without fear of excessive liquidated damages. We grant each franchisee the ability and right to exit our franchise system at any time and for any reason after the first 24 months of operation by simply giving us a 12 month notice. Should the property be under performing, (50% occupancy or less during the prior 12 month period) they have the right and ability to give us just a 60 day notice of their intent to exit our system and to terminate the franchise relationship. In either of the aforementioned situations, the franchisee can decide whether and for how long they want to continue to operate during the respective notice periods. They may elect to exit immediately and to pay the corresponding fees that would be due or to simply operate within the system until the end of the notice period and owe us nothing beyond that date.

Point 2: Impact/Encroachment/Cross Brand Protection

AAHOAs Position: All Franchisors should establish a fair and reasonable formula to protect a Franchisee’s assets, and the formula should be included as a contractual provision in their franchise agreements, including a geographic “area of protection” (AOP).

Boomerang Position: Our franchise agreement contains a specified “area of protection” clause for each location. This “area” is determined and mutually agreed upon by both the franchisor and franchisee after consideration of the specific location, size of the lodging facility, population base, traffic patterns and the overall demand generators and demographics.

Point 3: Minimum Performance & Quality Guarantees

AAHOAs Position: If a Franchisee’s hotel is not able to maintain certain occupancy levels over a designated period and has not received a minimum level of reservations, Franchisee should be able to terminate the agreement without penalty.

Boomerang Position: Our franchisees are each provided a full array of training, operational, quality assurance and standards manuals, as well as various franchise support and services systems designed to help enhance the consistency and operation of each facility. We must help ensure that the stay of each guest at each respective property results in a satisfactory experience to build customer and brand loyalty.

While it is impossible to provide any type of performance guaranty for individual franchisees, the structure of our franchise agreement transfers control to the owner. Remember, the agreement allows for our franchisees to manage their asset and control their exit strategy! This means that as a franchisor, we must continue to deliver value at each location or we will run the risk of losing their business and franchise contract!

Point 4: Quality Assurance Inspections/ Guest Surveys

AAHOAs Position: All Franchisors should have the same standards for each of their facilities operating under a specific brand name in the franchise system. All Franchisors should conduct their Quality Assurance (QA) inspections in a fair, reasonable and unbiased manner, and use their best efforts to prepare QA reports that are accurate and complete.

Boomerang Position: Our quality assurance department inspects each location a minimum of 2 times each year based upon consistent criteria and standards. We make every effort to deliver QA reports that are accurate and complete. As stated above, we attempt to provide each franchise the support systems, tools and training necessary to help them succeed in their day to day operations.

Point 5: Vendor Exclusivity

AAHOAs Position: In general, all Franchisees should be free to buy conforming goods from any vendor, not just those mandated by the Franchisor.

Boomerang Position: Our franchisees are free to purchase any conforming goods necessary for the operation of their lodging facility from vendors of their choice. We will strive to create relationships with vendors for the benefit of the system, but will not mandate the purchase from any one specific vendor, nor enter into any type of vendor relationship whereby we receive any system revenues or commissions.

Point 6: Disclosure and Accountability

AAHOAs Position: There should be greater disclosure and accountability on the part of the Franchisors concerning the expenditure of marketing and reservation fees collected from their Franchisees. On an annual basis, all Franchisors should disclose how the marketing and reservation fees are spent, including identifying the specific products and services that are paid for with the fees. A Franchisor should not profit directly from the marketing and reservation fees it collects from the Franchisees, or use such fees to pay for marketing and advertising related to a Franchisor’s sale of hotels.

All Franchisors should have their books and records audited on an annual basis concerning the collection and disbursement of marketing and reservation fees, and should share the results of the audits with the Franchise Advisory Councils (FAC), or the designated audit committee of the FACs.

Boomerang Position: Our franchisees can request financial information from us at any time. We conduct a full annual audit and will not profit from collected marketing and reservation fees. This information is made available to our FAC.

Point 7: Maintaining Relationships with Franchisees

AAHOAs Position: All Franchisors should strive to maintain and build on their relationships with the Franchisees by actively seeking feedback from the Franchisees themselves, and by working with the various councils and associations that represent the Franchisees, including the Franchise Advisory Councils (FAC) and AAHOA.

Boomerang Position: Our franchise agreement, Section 7 (R), recognizes the organization of the FAC, its right to adopt its own by-laws and establish its own agenda. We explicitly state that we will not interfere with the right of our franchisees to freely associate with, and participate in, an independent franchisee association. We have actively participated in, supported and sponsored AAHOA events since the formation of our company.

Point 8: Dispute Resolution

AAHOAs Position: In all franchise agreements, the Franchisor and their Franchisees should commit to establishing an independent and fair process for the resolution of any disputes concerning the terms of the franchise agreement itself, or the relationship between the parties. Specifically, the Franchisors and their Franchisees should agree to participate in good faith in an informal, in-person meeting between the authorized representatives of the parties in an attempt to resolve their disputes.

If the informal meeting is unsuccessful, the parties should agree to participate in a non-binding mediation, before a mediator who is neutral and mutually acceptable to the parties, including a mediator associated with the National Franchise Mediation Program.

If the mediation is unsuccessful, the dispute should not be submitted to binding arbitration unless and until all of the parties agree to do so, including mutually agreeing on the arbitrator who will hear the dispute, the location of the arbitration proceedings and the corresponding rules and procedures for the arbitration.

Boomerang Position: Our franchise agreement, Section 11 (A) and (B), explicitly recognized the resolution of disputes by good faith discussion, mediation and arbitration.

Point 9: Venue and Choice of Laws Clauses

AAHOAs Position: In the event a dispute between a Franchisor and Franchisee has not been resolved by participating in an informal, in-person meeting with authorized representatives from the parties, or by participating in mediation proceedings, the party pursuing its claims in a court of law should do so in the country and state in which the subject Facility is located. Further, any lawsuit or claims should be governed by laws of the country or state in which the lawsuit or claims are filed.

Boomerang Position: Our franchise agreement, Section 11 (B), states that arbitration rules are modified to permit discovery pursuant to the rules of civil procedure for the state in which the lodging facility is located. Arbitration may also take place at a location mutually agreed upon by the parties.

Point 10: Franchise Sales Ethics and Practices

AAHOAs Position: All Franchisors should mandate fair and honest selling practices among their salespersons and agents.

Boomerang Position: Our company culture of fair and friendly franchising mandates fair and honest dealings with all franchisees by all company personnel at all times. We truly subscribe to the building of valued franchisor/franchisee relationships at all levels of interaction. Our franchise agreement, Section 19 (E), provides for the acknowledgement of and creates the opportunity for the disclosure of any other prior written and/or oral agreements or representations prior to the execution of the documents.

Point 11: Transferability

AAHOAs Position: In situations in which a Franchisee seeks to transfer its property to an unrelated third party, the Franchisor should not delay, withhold its consent, or impose conditions on the transfer in an unreasonable, arbitrary or capricious manner. Transfer fees should be fair and reasonable (i.e., generally no more than $1,500), and based solely on the estimated administrative costs to process the transfer.

There should be no fees for a Franchisee’s transfer to a spouse, child, parent, sibling, niece, nephew, descendent, spouse’s descendent, or other family member, if the transferee is legally competent to assume the Franchisee’s obligations under the franchise agreement.

There also should no transfer fee for the Franchisee’s buyout of other shareholders or partners who have an interest in the Facility, or for the addition of any shareholders or partners who will gain an interest in the Facility.

In the event of a requested transfer, the Franchisors should not condition the granting of the request on a requirement that the Franchisee or new owner adopt an extensive renovation or modernization plan for the subject property. Any required renovations for the subject property in connection with a transfer should be limited to only those specific items identified in the last two (2) quality assurance (QA) inspection reports for the subject Facility that were issued prior to the requested transfer.

To the extent a Franchisor approves a requested transfer, the Franchisor should not seek liquidated damages (LDs) from the prior Franchisee, or seek any increased fees from the new Franchisee owner of the subject Facility because the Franchisee sought to transfer its Facility prior to the scheduled termination date of its franchise agreement.

Within ten (10) days of the completion of an approved transfer of a subject Facility, the Franchisors should automatically release the prior Franchisee from any and all obligations it had under the terminated franchise agreement, and provide it with a written letter of release in connection therewith.

Boomerang Position: Our franchise agreement, Section 17, addresses the transfer and control of existing franchise agreements. We attempt to facilitate and complete the transfer of the franchise document in a timely and reasonable manner without mandating unfair conditions or requirements. We believe our transfer fees to be fair and reasonably necessary in covering the costs incurred for our processing of the new owner’s application, conducting the credit reports and the legal fee application fee and a $2,500.00 transfer fee for a total of $5,000.00. In cases where the agreement is transferred to a family member or wherein there is a transfer between partners of the original ownership group, there is no transfer fee assessed. A “common sense” approach is always utilized to recognize the unique characteristics surrounding the transfer of each specific franchise. We strive to apply the flexibility necessary in each case to negotiate the appropriate terms that are mutually agreeable to all parties.

Point 12: Sale of the Franchise System Hotel Brand(s)

AAHOAs Position: The new franchise company should maintain the same or higher level of quality as the prior Franchisor and strive to ensure that the transition is a smooth one. The new Franchisor should work closely with the existing Franchisee Advisory Councils and honor existing guest loyalty programs.

Boomerang Position: We fully concur with the position of AAHOA on this point. We do address the issue somewhat in our franchise agreement, Section 18 (D), wherein it states an assignment of a franchise agreement by us would be to an entity that would fulfill the franchisor’s obligation to the agreement.

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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 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:

· If you need help in negotiating your franchise agreement

· If you have a problem with encroachment and impact

· If you need an expert witness in a hotel litigation law suit

· If you need a featured speaker at your company or organization.

Stanley Turkel is available as a featured speaker at on the following subjects:

• From Ragas to Riches: The Origin and Growth of the Asian American Hotel Owners Association
• Great American Hoteliers: Pioneers of the Hotel Industry
• Franchise Advisory Councils: Powerhouses or Powderpuffs?
• Henry Morrison Flagler: The Robber Baron Who Invented Florida
• Fred Harvey: Great Food, Unique Hotels and the Harvey Girls