Franchise or Management Agreement? The Price of the Brand and the Hotelier's Dilemma
- Kostas Falangas
- Aug 9
- 3 min read
As Europe rapidly 'flags up' — brand affiliation was estimated by HVS at 41% in 2022, up from roughly one third a decade earlier, while in the US it reaches about 70% — more and more hoteliers face a critical question: franchise, management agreement, or a combination of the two? There is no single answer; it depends on capital, expertise and, above all, on how much control the owner is willing to surrender.
Two models, two philosophies
Under a franchise, the hotelier 'rents' the flag: he gains the name, the reservation system, the loyalty programme and the franchisor's distribution tools, but continues to operate the hotel himself, carrying the full business risk. Under a management agreement, the chain or a third-party operator runs the property entirely on the owner's behalf, while the owner still bears the employment contracts, maintenance and FF&E liabilities. In the first model the hotelier keeps the steering wheel; in the second he keeps only the treasury and the risk.
The typical costs
A franchise is not a cheap affair. According to HVS, the total cost (initial fee, royalty on rooms revenue typically 3%–7%, marketing fees of 1%–4%, reservation and loyalty charges) averages 10.8% of rooms revenue over an initial ten-year horizon, with a median around 11.8% and the possibility of exceeding 15% over the term of the contract, which typically runs 10–15 years. Under a management agreement, the base fee has historically ranged from 2% to 4% of gross operating revenue, to which an incentive fee calculated on GOP or AGOP is added, plus marketing, technology and training charges. After payroll, brand and management fees rank among a hotel's largest operating expenses.
Pros, cons — and the question of identity
A franchise offers international recognition, access to powerful distribution channels and corporate accounts, while operational control remains with the owner. The price: strict brand standards, mandatory property improvement programmes (PIPs) and no say whatsoever in brand changes. A management agreement offers professional operations and the chain's full ecosystem, but it distances the owner from the daily life of his own business; without robust performance tests and termination rights, a poorly drafted contract can bind him for decades. There is also a deeper cost, rarely priced in: the near-total disappearance of the hotel's identity. The historic name, the family character, the local imprint retreat behind the international flag. The guest now books the brand, not the hotel; and when the contract expires, the owner often discovers that the market has forgotten who he really is.
The combination: manchising and third-party operators
The market is responding with hybrid solutions. So-called 'manchising' provides for a management agreement during the first 3–7 years, while operational maturity is built, followed by conversion into a franchise, returning control to the owner. In parallel, third-party (white-label) operators are growing rapidly in Europe, with hotels and rooms under their management up roughly 40% since 2012, offering lower fees, shorter terms and flexible exits. It is no coincidence that franchising now accounts for approximately three quarters of the European pipeline, while chains reserve management agreements primarily for their luxury flags.
So what serves the hotelier best?
If he has an experienced management team and wants the brand's distribution without handing over the wheel, a franchise, hard-negotiated on royalty, Area of Protection and term length, is the rational choice. If operational expertise is lacking, a management agreement makes sense, but only with clear performance tests, termination rights and caps on shared services. And for those unwilling to erase the soul of their hotel, soft brands and hybrid formulas offer the golden mean: the power of the network, without the loss of the name. In hotels, as in life, the most expensive mistake is signing someone else's contract.
Bibliography
1. HVS (2020). U.S. Hotel Franchise Fee Guide. Average total franchise cost of 10.8% of rooms revenue over an initial ten-year horizon.
2. HVS (2024). 2023 U.S. Hotel Franchise Fee Guide: A Comparative Analysis of Hotel Brands. New York.
3. HVS (2022). Hotel Franchising in Europe – The Push Continues for New Ways to Expand.
4. HVS (2017). An Overview of Hotel Management Contracts in Europe.
5. Choufany, H. M. / HVS (2025). Weighing Up the Options: Franchise, Management Agreement, or Third-Party Operator?
6. Hospitality Net / HVS (2023). The Rise of Third-Party Operators of Hotels in Europe.
7. HVS (2020). Evolution of Hotel Management Agreements and Rise of Alternative Agreements.
8. Catala Consulting (2022). Hotel Management Agreement vs Hotel Franchise Operators. London.
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