Reference no: EM132903539

Is a Franchise Right for Me?

Tom graduated from a prestigious hotel management program last year. After completing his master's, he became interested in buying his own franchise hotel. From his educational and traveling experience, he knows that opening and managing his own hotel could be the experience of a lifetime. There are several benefits to opening a franchise hotel, including name recognition, marketing support, and access to a centralized reservation system. There are also some potential drawbacks, including high start-up costs, monthly franchise fees, and the requirement to meet brand standards.

To make the decision of whether or not to franchise, Tom will need to look at the costs associated with buying a hotel. He is considering franchising a budget hotel, and his initial fees are as follows:

The initial license fee to start a franchise is $40,000. This fee covers the first 100 rooms. Beyond that, there is a $100 per room charge. If Tom wanted to open a 150-room hotel, his initial license fee is $40,000 + $100 * 50 (for the rooms over 100 rooms) = $40,000 + $5,000 = $45,000

In addition to the initial license fee, he would also have to pay monthly fees based on the amount of sales each month. Under this agreement, he would pay five percent of the monthly room revenue as royalty and four percent as a program fee. That's a total of nine percent right there. Because he is choosing to open a budget hotel, there are no additional fees to pay for food and beverage or other amenities. However, if he were interested in a full-service hotel, he could pay 10 percent or more in additional fees.

These fees do not include the costs of building the hotel, furnishing the hotel, or any other legal and building related costs. Depending on the location, costs could be as much as $50 million before the franchise fees.

Tom has not yet made the decision to pursue hotel ownership. He is calculating the fees he needs to pay each month. He has paid the initial license fee of $45,000, so now the monthly fees are simply the percentages of sales, which includes the royalty fee of five percent of revenue and the program fee of four percent of revenue. Based on other like properties, he is assuming an average rate of $55 per night, and an average occupancy of 60 percent each month.

Discussion Question

Based on the projected occupancy, average rate, and the fees associated with the franchise, should Tom become a franchisee, or should he pursue other options? Why did you make that decision?