The hotel business owner (franchisee) signs an agreement with a hotel brand (franchisor) to operate the property under a franchise agreement in exchange for a franchise fee. Hotel owners or tenants set up their own team or engage an independent operator to run their hotel business, with whom they enter into an operating agreement.
The terms and provisions most tightly controlled by the franchisor in the franchise agreement are brand standards and guidelines, term, assignability, and franchise fees. Operators are commonly concerned about the compliance of the business owner with the franchise agreements because of their different – often conflicting – aims and objectives.
A manchise agreement is an arrangement with a hotel brand management company that contains an option to convert into a franchise agreement once the hotel business owner has developed the skill and knowledge to operate the hotel. The contract reverts to the brand's franchise agreement after the initial period of traditional hotel management provided by the brand operating company, which reduces the fees payable by the hotel owner at the later stage of the operating term.
Although a brand management company may offer the business owner both a hotel management agreement (HMA) and a franchise, they are separate agreements. Although the legal paperwork may be combined, they provide two different services.
The asset-light strategy of hotel brands to hold a reduced portfolio of properties in favor of lighter portfolios is commonly achieved through franchising. It allows hotel companies to grow business with limited requirements for capital and to focus on fee revenues and fee margins.