During its annual convention in early April, AAHOA announced a revision to its 12 Points of Fair Franchising, specifically for Point Number 12: Sale of the Franchise System Hotel Brand(s). Best practices related to Point 12 now recommend that each franchise agreement include a “Change of Control” clause to protect the franchisees in the event of a purchase, sale, acquisition or merger of one or more hotel brands between franchisors.
The need for the change arose from the swath of mergers and acquisitions in hospitality companies and their brands, said Laura Lee Blake, president and CEO of AAHOA. Marriott International acquired Starwood Hotels in 2016, Wyndham Hotels & Resorts (then Wyndham Worldwide) acquired La Quinta two years later, Choice Hotels International acquired Radisson Hotel Group Americas in 2022 and then sought to acquire Wyndham last year.
Fair Franchising
Franchising a hotel is very different from franchising a restaurant or retail store, Blake said. First, a potential owner has to find the right land and go through the process of acquiring the necessary real estate, which may or may not involve another building already on the site. Next, the owner has to build the property or oversee a conversion or adaptive reuse of the existing structure and make sure it meets the brand standards of whatever brand they want for the site.
A franchise agreement between the owner and a hotel company typically is in effect for 20 years, Blake continued. “So for the next 20 years, they are anticipating that they are going to be with this one brand that they signed up with under this one franchisor. They are anticipating they're going to be using their reservation systems, their property-management systems. They're going to be following their standards—everything from signs to the sheets and towels that they have to buy.” The owners then develop relationships with not only the executives, but with other owners of that brand at industry conventions. “There's a whole culture that goes along with it,” Blake said.
She then described the negative reactions an owner might have when learning of a major brand acquisition: “You wake up one day and you find out that there might be an entirely different franchisor that might now acquire this brand, and you have to start all over. You have to start over with new signs, new standards, new systems, new employee training—everything is suddenly new. New executives from a different franchisor, other franchisees—a brand new culture. It's not an easy change, especially when you own the real estate, because there are so many details that have to be attended to.”
Changes and Control
Over the years, Blake said AAHOA’s leadership has heard “concerns” by members who have been through some of these changes during acquisitions. “Typically they have faced financial consequences,” she said, noting that these can range from higher fees to the loss of direct sales to certain customers. “There [are] a lot of changes that can occur. And a lot of [franchisees] even have often said that if they had the choice, they would not have stayed with that brand after the acquisition had occurred.”
Getting out of a franchise agreement also can be a challenge for an owner. “The standard in the industry, if you want to terminate your franchise agreement before the 20-year period, [is] typically 36 months of royalty fees,” Blake said. “And for some brands, it's even 60 months of royalty fees.” Those fees—known as liquidated damages—can add up to hundreds of thousands of dollars if not millions, she noted, although she acknowledged that brands will sometimes negotiate that amount down or reconsider the LDs the franchisee must pay for early termination.
As such, AAHOA’s leadership took another look at Point 12, which addresses sales of the franchise system hotel brand or brands. The updated point calls for a grace period of one year after the finalization of a brand sale or merger to let an owner evaluate the new terms. “And if [the new terms are] not working for you, you could then give 30 days notice and you could leave without paying these full LDs.”
AAHOA provided an example of what such a clause might look like in a franchise agreement: “Change of Control” means (i) the direct or indirect sale or exchange, in a single or series of related transactions, by the board or shareholders of the named Franchisor of more than fifty percent of the voting stock of the company, (ii) a merger, acquisition or consolidation in which the named Franchisor is a party, (iii) the sale, exchange, or transfer of all or substantially all of the assets of the named Franchisor, or (iv) a liquidation or dissolution of the named Franchisor.”
The 12 Points, Blake said, are not a binding document for franchisors and franchisees, and even though the association is calling for a Change of Control clause, brands may not agree to such terms. A range of factors could determine if such a clause is appropriate for any given hotel, she added. As such, the revisions to Point 12 are more of an effort to educate the industry on what they should know to determine a fair agreement. “For franchisees, these mergers and acquisitions do have a significant long-term impact, and they should have ways that would be more fair to address their particular circumstances.”
Acquisition Education
“What really … impacted our decision to change this was the lack of education of what this meant for franchisees,” Blake said, noting that even AAHOA members may not be aware that such Change of Control clauses are standard in other franchise-friendly industries. “We're working with groups like the [Federal Trade Commission] and state attorneys general who are looking at the franchise industry. They often don't realize that these terms are also not standard [for hotels].”
The issue came to a head last year when Choice took steps to acquire Wyndham Hotels & Resorts, even after Wyndham’s Board of Directors rejected the bid. Blake recalled four different state attorneys general and members of Congress contacting AAHOA to learn more about how the acquisition would affect businesses. “We were getting a lot of questions from an educational viewpoint,” she said. “What does this mean for franchisees? Because the general public does not necessarily know what's involved in franchising, especially in the hotel industry.”
While it is difficult to know what the long-term impact of adding Change of Control clauses to franchise agreements might be, Blake acknowledged that including them in more contracts could affect large-scale mergers and acquisitions. “As the franchisor, if you want to acquire one particular brand, and 50 percent of the franchisees have a Change of Control clause in their agreements, you might stop and think about it,” she said. “If you were anticipating you'd be acquiring 1,000 hotels under that brand, but 50 percent of the owners would have the option to maybe walk away (if they were unhappy) within a year—maybe reconsider, right?”