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 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 understand 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
Making the decision between going the route of franchise or independent business can be difficult. While franchising is a top strategy that a company can use to capture market share, it also comes with many benefits that the independent business design does not.
1. For one, a franchise provides a certain level of security, considering product lines or business models of the company have already been tested and optimized for the market place. Since a franchise is like a big group alliance, it brings its pre-existing stability. With an independent business, however, comes the roller coaster of testing and trying products or services in the marketplace.
2. Investment costs are lower! While one does need to follow the rules and obligations of the franchisor, investment and operational costs of a franchise are lower than that of an independent business.
3. Name recognition, name recognition, name recognition. The 21st century revolves around media, both social and press. Building brand recognition is a costly and time-consuming effort and frequently requires outside professionals. With a franchise, however, that job is already done. The millions of followers and glowing press pieces are already in place!
How to find the right franchise
While searching through franchisors websites is one way to get information, there are other, more transparent options out there. Attending a franchise expo, like the International Franchise Association Franchise Expo, can give a franchisee a good perspective on all the options out there. Looking through franchise handbooks and manuals is another way franchisees can familiarize themselves with franchise opportunities.
Search online for a “franchise opportunities handbook.” These books list available franchises and provide general information about each business. This can help a franchisee narrow their search by their industry of interest.
As mentioned above, a franchise exposition allows a franchisee to compare many franchise opportunities at once. It’s helpful to do some background research before the expo, narrowing down which industry is most preferable. However, from there, ask the franchisor any relevant questions. 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? Often, at expositions, franchisors will give you an additional opportunity to attend a promotional meeting. This can be another helpful source of information.
If you don’t feel comfortable finding the right franchise by yourself, look into a franchise broker. Typically, these brokers can be found on the internet or in magazines. The broker will review the amount of money you seek to invest and guide you in the right direction. Brokers can also help you fill out the necessary paperwork.
What to consider while purchasing a franchise
Once you have selected the industry and informed yourself of the franchising options out there, think about the demand for the products your desired franchise provides. Is the product or service a fad or a seasonal thing? Does the service encourage customers to return or is it a one-time product? If the general demand for the product is low, the investment may not be a good idea.
Also consider the level of competition that you would face at the national and local level. Are there other similar companies in the area? How successful or well-known are they? If the market for the product or service is oversaturated, again, the investment may not pay off in your benefit.
Unfortunately, franchises don’t always succeed. Consider the implications on your part if the franchise goes under and the franchisor decides to stop franchising? Would you be capable of running the business solo?
Other factors, such as the franchisor’s training services and support systems are also important to consider before making an investment. All of these factors can give you a realistic idea of the future success (or lack thereof) of your 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 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 left field. Many franchises require their facility or outlet 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 an extra finance that the franchisee should consider.
The franchisor may also implement 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 can not 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
Mandatory arbitration is a legal route that receives mixed opinions. The concept, which frequently appears as a contract provision or in the Franchise Disclosure Document, requires parties to resolve disputes, or legal conflicts, through an arbitrator, rather than the court system. The conflicting parties select a neutral third person who is officially appointed to settle the dispute–and determines the amount of the award–at hand. In franchise law specifically, arbitration is the preferred form of alternative dispute resolution.
Arbitration is the preferred form of alternative dispute resolution.
Is Arbitration the Right Route?
While arbitration is a formal and viable alternative to settling a dispute in court, this option comes with its own benefits or drawbacks, which both the franchisor and franchisee should consider.
For one, arbitration avoids the length and cost that comes with the courts. A formal trial not only takes time to begin but is a costly option due to attorneys’ fees, civil court fees, among others that are often tacked on. Arbitration eliminates the time and financial costs of court.
Arbitrators also often have more knowledge on the subject matter being disputed. If the dispute stems from a construction-related contract, for instance, the parties can choose an arbitrator that has experience with construction matters. Whereas a judge may have a docket full of varying disputes and legal issues, an arbitrator can give more of his undivided attention.
While in court you are not able to choose the judges of your dispute, the parties get some control over the chosen arbitrator, as they are required to agree on a neutral judge. This can often result in a less hostile or stressful proceeding.
Although arbitration is less costly than the court system, that certainly doesn’t make it free of expense. In fact, an arbitrator, much like a lawyer, can reap a serious financial hit depending on the nature of the dispute. The American Arbitration Association (AAA), for instance, charges anywhere between $1,000 and $1 million, depending on the claim. An arbitrator’s daily fees can easily exceed $1,500 per day, according to the AAA’s website.
ARBITRATION IS LESS COSTLY BUT NOT FREE
While an arbitrator’s previous experience in certain fields may bring depth to their understanding of the dispute, it can also result in a biased viewpoint. Although an arbitrator is a “neutral third party,” it is possible that they may come with their own preconceived notions or perspectives.
Unlike the court system, arbitration makes an appeal all the more difficult. When one files an appeal in the court system, there is an increased likelihood that higher courts may catch mistakes in the decision making of the lower courts. Appeals are more difficult, and in some cases, impossible, if the route of arbitration is taken.
Many franchisors prefer the route of franchise arbitration as the route to resolve disputes or conflicts. Due to the method’s popularity, it has become a common practice in franchise law and has become a key part of The Franchise Agreement. Typically, both franchisees and franchisors tend to prefer this route as it allows them to settle matters quickly and privately. A public legal procession or scandal is the last thing that the franchisor or franchisee would want.
Typically, the third party selected is a franchisee arbitration attorney. These sources offer representation and help settle disputes in franchise agreements, breaches of contract, trademark violations, among others.