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The Fundamentals of the Franchise Relationship
Franchising is a very simple concept, and when both franchisor and franchisee understand how it works, it can work beautifully! Unfortunately, some people, some of the time, try to make franchising as complex as possible, and that’s when it usually doesn’t work! Here, then, are the Fundaments of Franchising.
A franchise is a license. It’s a legal document offered by a franchisor to a franchisee. Essentially, the franchisor licenses the franchisee to operate a specific business, in a specific location, in a specific way, for a specific period of time. A franchise relationship is consummated when a franchisor and a franchisee authorize and sign the franchise license, commonly called the franchise agreement.
Both parties, the franchisor and the franchisee, assume obligations in a franchise relationship.
The franchisor is responsible for creating the brand, developing the day-to-day business operations (commonly called the business system), creating advertising and marketing to promote the brand, and authorizing brand expansion via franchising. Other responsibilities are designated in the franchise agreement.
The franchisor’s most critical responsibility is the development and ongoing improvement of the operating system. That’s why people buy franchises! You have a choice when you start a business. You can do everything on your own – which is everything that a franchisor agrees to do – or you can buy a franchise where someone else (the franchisor) has done the start-up work (and more) for you.
The franchisor’s second most critical obligation is to transfer knowledge to franchisees. In other words, it’s the franchisor’s job to teach franchisees how to operate the business successfully. The word successfully implies that a franchisee will operate the business profitably.
Clearly, franchisors carry a huge burden in the franchise relationship. It’s their job to create a viable, profitable business, and then to teach franchisees how to duplicate their success. It’s not unusual for franchisors to invest several million dollars before they begin franchising. Starting out, franchisors don’t have all the answers. But through trial and error (which costs money) they develop the system that generates a successful business.
The franchisee agrees to establish and operate a unit (or units) of the brand, or the business, as specified in the franchise agreement. The franchisee is obligated to follow the franchisor’s business system as specified in the franchise agreement, and may be penalized for violating the system. The franchisee does not own the brand. In fact, the franchisee owns only the rights designated in the franchise agreement, which may be limited to 5, 10 or 20 years.
Franchisees must be capable of learning how to operate the brand’s business system, including how to select a location, how to hire, motivate and fire employees, how to work with suppliers, how to attract and keep customers, and much more. At all times the franchisee may rely on the franchisor for guidance, and providing said guidance is a franchisor’s third most critical obligation.
None of this is complex. The franchisor creates and trains . . . the franchisee learns and follows. And the rules and regulations, for both the franchisor and the franchisee, are clearly spelled out in the franchise disclosure document, which every U.S. franchisor must provide to prospective franchisees at no cost.
At this point you might be asking, “If it’s so simple, then why do some franchise relationships fail?” Good question, and I’ll explain why in a future article.