The Value of a Flag

Most lenders involved in lodging deals require owners to operate their hotel under the flag of a well-known franchise operator or management firm. The requirement arises because a well-known flag is important to a hotel's success. All flags are not equal, however, as Lori Raleigh points out in her chapter of Hotel investments: Issues and Perspectives (see "Reviews" next page).The fit between the property and the flag is a critical factor in whether an owner can meet debt obligations.

To help hotel owners assess which flag is the best match for their property, Gus Sader, president of the California-based Capital Management & Development, suggests seven tests for an existing or potential franchise relationship.

(1) Determine how much the existing flag is contributing to the property (if it has a flag). A monthly examination of the denial report shows the real consumption of rooms.

(2) Check the conversion rate of group business to establish the contribution of the chain's regional sales office.

(3) If the flag itself is to be acquired or merged, consider the buyer's reputation. Insist on an exit provision, because a new operator's objectives may not be congruent.

(4) Examine the flag's stability and performance. Representatives should be knowledgeable about trends that will affect a local property. An inordinate number of ownership changes is a potential warning sign.

(5) Evaluate the flag's services to member hotels, including sales and marketing, national or international advertising, the central reservations system, and guest programs. Consider also the flag's name recognition and whether it appears to favor big hotels over small ones in guest and business services.

Gus Sader: "When considering a chain affiliation, owners should do their homework, but they also must be honest with the flag operator about their own business plans."

(6) Find out what kind of support the chain offers for renovations. It should at least offer consultation and volume purchasing programs.

(7) Evaluate the effects of frequent-stay programs and participate only in those that meet the individual property's needs. Although such programs can enhance a chain's image, a program with a $59 rate that costs $16 to administer probably isn't worth the effort.

Sader points out that owners need to give existing and prospective chains appropriate information. For instance, he believes an owner should be forthright with the flag operator if the property is being sold so that the flag operator can tailor an appropriate business plan.

The owner should also keep the operation up to snuff. Sader suggests, for instance, that owners note and correct administrative and operations problems that will meet the chain's inspection standards. Some problem areas can be corrected with little or no capital outlay

Sader concludes:"Spending time at the beginning to research the right flag saves later grief. It also ensures a strong balance sheet and a productive flag relationship."-G.W

Cornell Quaterly

Client List