What are the features of a franchise relationship? And how can you (either as a franchisor or franchisee) ensure that everything runs smoothly?
A mutual understanding must be created in the franchise relationship in order to promote the mutual success of a new franchise opening. There are several primary interactions that define the franchise relationship. These include the purchase of the franchise, the renewal of the franchise, the potential transfer of the franchise, and the arbitration or settlement of potential disputes. These interactions are vital to understanding as both a franchisor and franchisee.
Mutual understanding in the franchise relationship promotes the success of a new franchise opening.
Purchase of a Franchise
Choosing between a franchise or independent business
There is no easy decision when it comes to choosing between purchasing a franchise or starting an independent business. Honestly, there are benefits to both, however, what separates franchising from the latter option are three major factors: security, investment, and brand recognition.
In regards to security, owning a franchise means knowing a company has pre-existing stability. The franchise has already established themselves in their specific industry, as well as tested and optimized its product lines and business model for the market place. With an independent business, it is much more difficult to maintain a strong level of security because of the rollercoaster of testing products and services in the marketplace. With a franchise, the franchisor has handled most of the work for you already.
The investment costs are significantly lower for a franchisee! It is still important to follow the rules and obligations of the franchisor, however, the startup and operational costs of a franchise are less than that of an independent business. In some cases, the franchisor may offer a generous business incentive to ease the costs even more.
When your brand name becomes a notable business, you know you have made it. Most franchises have secured name recognition through intense marketing strategies. Media, both social and press, are the most effective ways to get your business’ name out there. For independent business, it may take years and a substantial amount of money to perfect your marketing strategy and gain a consumer following. With franchising, all the costs and time-consuming efforts are completely eliminated. The millions of followers on social media and extensive press coverage are already in place!
How to find the right franchise
There are multiple ways to find the right information pertaining to the ideal franchise for you. Searching online and seeking information directly on the franchisor’s website is a great first step. If you find they don’t have all the answers you’re looking for, try these more transparent options:
- Attend a franchise expo
- The International Franchise Association Franchise Expo lays out all the franchise options out there for entrepreneurs.
- You can compare franchise opportunities, ask franchisor’s relevant questions, and attend a promotional meeting with the franchisor, all in the same space.
- Here are some question ideas: ask how many outlets the franchise has or what their initial franchise fee is. Does the franchise have continuing royalty payments and what controls does the franchisor impose? What are the startup costs like?
- Make sure to do some background research beforehand to narrow down your options and who you want to speak to.
- Look through franchise handbooks and manuals
- Type into your search bar “franchise opportunities handbook” and several results will pop up. Looking through these handbooks will help you narrow down your search for the opportunity and industry that fits your interest.
- These books list available franchises and provide general information about each individual business.
- Look into a franchise broker
- Franchise brokers look into franchises, review the amount of money you wish to invest, and guide you down the right business path.
- When looking into owning a franchise, there is a lot of necessary paperwork that needs to be filled out. Brokers help ease the stress of this process.
What should you consider?
Once you weigh your options and follow these steps to the right information, then it’s time to consider a few things before purchasing a franchise. First, think about the product demand for the specific franchise you’re looking at. Is the product or service trending right now, or more seasonal? Will customers return repeatedly to buy the product, or is it a one-time purchase? Remember, if the demand for the product is low, you might not want to make the investment.
Other things to consider are the local and national levels of competition. It is important to examine similar companies in the area and their success or popularity. If you think the market is oversaturated, this may not be a smart investment for you.
Unfortunately, franchises don’t always succeed. However, knowing the possible implications of the franchise possibly going under, the kind of training and support services the franchisor offers, and all the other factors listed above gives you a better and more realistic understanding of your potential franchise investment.
Renewal of the Franchise
Eventually, franchise agreements expire and when it comes time to renew, many franchisees find them in a difficult position. Perhaps the franchisor wants them out of the system or they want to change the terms and conditions of their previous agreement. As a result, the franchisee may face difficulty in protecting their rights in the renewal process. Many franchisors see the franchise renewal as an opportunity to coerce their franchisee into accepting stricter or more legally harmful terms. While hiring a franchise attorney upon renewal is a good way to guard your rights, there are several things to know before going into franchise renewal negotiation.
The franchisee may face difficulty protecting their rights in the renewal process.
There are several conditions that come with the franchisee’s right to renew a franchise. These conditions are outlined in the Franchise Disclosure Document and should be considered before the franchise is purchased at all.
For one, many franchisors provide set renewal periods, which give the franchisee a renewal deadline. If the franchisee waits too long before renewing their franchise, they may miss out on the opportunity to continue with their business.
“Then-current” terms is a way that the franchisor is able to amend the terms and conditions of the initial Franchise Agreement. Often, the franchisor uses this as an opportunity to raise royalty fees or limit rights and protections of the franchisee.
Updates or upgrades is another financial burden on the franchisee that often seems to come out of the left field. Many franchises require their facility or outlet to be upgraded each year with new systems, products, etc. Fitness franchises, for instance, frequently require that the franchisee upgrade or update all machines once every several years. This is extra finance that the franchisee should consider.
The franchisor may also implement the obligations to cure. Should the franchisor accuse you of breaching the franchise agreement, you may be required to “cure” the breach before you renew the franchise. Depending on the accused violation, this cure period can be time-consuming.
Should you decide to renew your franchise, make sure that you know the date by which you must notice the franchisor. Also take extreme care in avoiding any activity that may be considered a breach of the franchise agreement. Review the system’s current standards and be sure that you are able to comply. Finally, understand the difficulty that comes with the renewal process. The franchisor may try to alter the terms and conditions to your detriment. Be prepared to counter this possibility.
Transfer of the Franchise
If a franchisee wants to terminate their franchise agreement before the expiration date, their primary option is to transfer the franchise to another party. The requirements of franchise transfer may differ between different franchise agreements but generally, these guidelines are specified within both the FDD and the agreement.
When a franchise is transferred, the franchisee transfers the franchise to an assignee, who takes over the rights and responsibilities of the franchise agreement. Generally, the former franchisee is still at liberty to open or run a business after the transfer, however not the same franchise.
Although some franchise agreements state that a transfer cannot be assigned, they are generally permitted within the agreement, given that certain requirements are met. These conditions vary depending on the franchisor or franchise. Most often, these guidelines specify items like:
- A contract that establishes the assignment and transfer of the franchisee where the assignee agrees to take over all of the obligations in the franchise agreement, including royalties or remaining fees.
- Before the transfer, the franchisor must receive prior written notice of the assignment, including necessary personal information about the assignee.
- The assignment must have written consent from the franchisor.
Often there are fees associated with the franchise transfer, which is often specified in the franchise agreements. While the fees vary from franchise to franchise, they are used to compensate for the costs associated with producing the transfer documentation and training the new owner. In some cases, a franchisor may charge a new franchise fee similar in amount to the initial franchise fee.
Arbitration of Disputes
Not all franchisor and franchisee relationships are perfect, and sometimes there are disagreements. If there is a conflict between you and your franchisor, you need to know how to proceed. Arbitration is a common route taken by the two parties, however, it does have mixed opinions. The mandatory concept appears regularly in the Franchise Disclosure Document and is the course of action to resolve disputes, or legal conflicts, through an arbitrator, as opposed to a court system. A neutral third person is appointed to settle these conflicts and determine the amount of reward.
Arbitration is sometimes the right route: it’s a time-saver, eliminates court costs, and attorney fees. However, there are also some drawbacks: an arbitrator could be a financial burden depending on the nature of the dispute. Even though they are a neutral third party, their previous experiences in certain fields could form a bias, which could cloud their judgment of the situation. If you want to learn more about the pros and cons of arbitration, check out our article “Franchise Arbitration Disputes.”
Making the Decision
Deciding what career path you want to go down is a difficult decision to make, and purchasing a franchise is a tremendous step. There are risks you must consider, but there are many benefits you receive when becoming a franchisee. Don’t be afraid to ask the franchisor questions, do your background research, and crunch the numbers. When you know this is the right investment for you, take the leap. Hard work, dedication, and a positive relationship with the franchisor will make you successful!