Question

The owner of Fairfax Inn, Will Loy, is considering franchising a national brand to increase his property’s visibility to a broader market of travelers. After visiting the Franchise Office of the brand company, Mr. Loy learned that, to join franchise, he needs to pay the following fee:

One time initial fee at the signing of the franchise agreement: $150 per room ($12,500 Minimum)

Annual royalty fee: 3% of gross sales

Annual Advertising fee: 2.8% of gross sales

Reservation fee: $2 for each confirmed reservation by the central reservation system

The Fairfax Inn has 100 rooms, ADR is $125, and occupancy is 75%.

The brand company told Mr. Loy that he should expect an estimated 20% of the reservations generated by the brand central reservations system.

Assume Fairfax Inn projected 3% sales increase for the next three years and the brand company will increase the reservation fee to $2.5 for year 2 and $3 for year 3 for each confirmed reservation by its central reservation system.

Required: Help Mr. Loy to determine franchise fees each year from Year 1 – Year 3 and the total franchise fees for the three years.

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $.

Year, n	Linkage	1	2	3
Rooms	A	100
ADR	B	125
Occupancy	C	75%
Annual Sales	D = A x B x C x 365	3,421,875	3,524,531	3,630,267
Annual confirmed reservation	E = A x C x 365	27,375	27,375	27,375
Reservation through central reservation system	F	20%
Reservation fees	G	2	2.5	3
Annual Royalty fees	H = G x 3%	102,656.25	105,735.94	108,908.02
Annual advertising fees	I = G x 2.8%	95,812.50	98,686.88	101,647.48
Reservation fees	J = E x G	54,750.00	68,437.50	82,125.00
One time initial fees	K = max (A x 150, 12500)	15,000.00
Franchise fees	H + I + J + K	268,218.75	272,860.31	292,680.50

And the total fees for the three years =  268,218.75 + 272,860.31 + 292,680.50 = 833,759.56