LESSON 1

Franchising is a system used by a company (franchisor) that grants others (franchisee) the right and
license (franchise) to market a product or service under the franchisor’s name, trademarks, service
marks, know-how and methods of doing business. It is a system for distributing products or services
through independent resellers.it is a format of mutual dependence which allows both the franchisor and
the franchisee realize profit and benefits.

Key terms in Franchising

Franchisor-franchisor owns the overarching company, trademarks, and products, but gives the right to
the franchisee to run the franchise location, in return for an agreed-upon fee.

Franchisee- One who purchases a franchise. The franchisee then runs that location of the purchased
business. He or she is responsible for certain decisions, but many other decisions (such as the look,
name, and products) are already determined by the franchisor and must be kept the same by the
franchisee. The franchisee will pay the franchisor under the terms of the agreement, usually either a flat
fee or a percentage of the revenues or profits, from the sales transacted at that location

Royalty- The periodic charge that the owner of a franchised business needs to pay to remain part of the
franchise system that provides branding, advertising and administrative support. The royalty fee for a
franchise is typically some percent of either the overall or net sales of the business and the payment is
required each week, month or quarter.

Franchise consultant is a professional who specializes in helping you find the right franchise fit. He or she
will help you identify your goals – what do you really want to achieve through business ownership? –
and narrow down the list of businesses that fit those goals. They know the questions to ask, how to help
you find financing, the information you’ll need to collect and many other nuances in the complex world
of entrepreneurship.

Franchise agreement is, essentially, an agreement between two parties that allows one party to use the
brand, product or production process of the other party. In return, the brand owner charges franchising
fees or royalties. Franchising typically occurs when a company has a successful business model that
would suit heavy expansion, but the company does not have the capital necessary to support said
expansion. Instead, the company licenses local businesses to carry its brand, product or service in return
for fees and royalties.

Types of Franchises
Business format

A business franchise is the most common type of franchise. The franchisor grants the franchisee the full
use of an established business, including its name and any related trademarks. The Franchisee is allowed
to run the business independently but is due to pay an agreed upon amount in royalties or franchising
fees. With this type of franchising, the franchisee typically enjoys a lot of support from the franchisor
and also has the option, or is legally obliged to, buy his supplies from the franchisor. A business format is
generally characterised by a lot of support with almost no independence. McDonald’s is a classic
example of a business franchise. There is little autonomy among the retail outlets and the individual
owners have no control over the products on offer.

Product format

A product franchise is a type of franchising agreement where the manufacturer allows retailers to sell
products and use names and trademarks. This is most common for Franchisors that don’t have any
direct retail locations but instead sell their products through either supermarkets or third party retail
stores. Within this type of franchising arrangement, the manufacturer retains a lot of control over the
distribution process. In trade for fees or a purchase of a minimum amount of products, the retailer is
allowed to sell the manufacturer’s products and use his name and related trademarks. A product format
franchise is almost always based on a dealer-supplier relationship.

Manufacturing format

A manufacturing franchise allows the franchisee to assume the responsibility of producing the
Franchisor’s good or service, in addition to the use of its name and trademarks. I a business or product
format, the franchisees are not allowed to actually produce the good or service that they are selling.
With a manufacturing format, however, the production process is integral to the franchise agreement.

Advantages and Disadvantages of

Franchising
Advantages of Franchising

The brand is already established - You are starting off using an already existing brand, with all the perks
that come with it. Your products/services will already have the customer loyalty and brand recognition
associated with the franchise brand.

The business model has a proven track record- When starting up a business, your business model is
likely to require a lot of revision and adjustment as you become more familiar with your market. When
you decide to get into franchising, you’ll most likely adopt the business model that is common
throughout the other outlets. This saves you the trouble of setting up a business model from scratch
since the standardised business model already has a proven track record.

Training programs-As part of the franchise, your employees can benefit from training programs provided
by the franchisor. This will allow you to get your staff on point a lot faster than usual. If you plan to
actively manage the business yourself, you can most likely also benefit from the management training
programs that the franchisor offers.

Ongoing support-You don’t have to do it alone! Whenever you run into issues, you have a strong
support structure to fall back on. The franchisor has likely been in business for a while and therefore has
corresponding support and failsafe systems in place, in case anything goes wrong.

Marketing Assistance- You will benefit from every promotion that the franchisor is running on their
brands. You don’t have spent any time or money on designing and creating brands and marketing
materials. In most cases, you can instead just order them from the franchisor. This type of value
exchange helps the franchisor in keeping its brand consistent across all outlets.

Disadvantages of franchising

High startup costs - Next, to the regular costs of starting a business, you are also going to have to pay an
initial franchising fee to become part of the franchise. Additionally, depending on your contract, you will
most likely be paying royalties or a percentage of your revenue to the franchisor, as long as the franchise
agreement lasts.

Profits aren’t guaranteed-Starting a business is always a risky venture. Becoming part of a franchise
does not mean that you will share in the profits of the entire company. The brand company might be
making a large profit but that does not apply to you. Your business operates independently and you are
therefore responsible for running your own profitable business.

Limited independence- No matter how you look at it, becoming part of a franchise means limiting your
independence. Whereas with a regular start up, you can decide what you want to sell, how you want to
position your brand, etc. As part of a franchise, you no longer have that freedom. You are legally
required to conform to the franchises range of products/services and branding strategy. The Franchisor
can also prescribe rules that you have to follow in order for you to use their brand.

Conflict of Interest-Usually, the franchisor is supporting your effort to make your franchise business a
success. But if this is not legally established in your franchise agreement, you might run into trouble.

Franchising, chains and licensing

Chain- is a group of identical businesses that use the same logo, products, marketing, etc. (just like a
franchise) where each individual location is owned by the parent. This means that a location can have a
store manager who runs day-to-day operations, but that person does not own the business. With a
franchise, as we know, each location is owned by the individual.

Licensed- store has slightly more subtle differences. It is very similar to a franchise in that the brand
owner (licensor) gives permission to the individual (licensee – are you sensing a theme here?) for the
brand to be used and products to be sold, but the structure and fees associated differ widely. Typically,
the licensor has little to no operational control of the licensee, and the licensee receives significantly less
training from the brand.

Reasons for franchising

*Obtain operating efficiencies and economies of scale.

*Increase market share and build brand equity.

*Use the power of franchising as a system to get and keep more and more customers—building
customer loyalty.

*Achieve more rapid market penetration at a lower capital cost.

*Reach the targeted consumer more effectively through cooperative advertising and promotion.

*Sell products and services to a dedicated distributor network.

*Replace the need for internal personnel with motivated owner/operators.

*Shift the primary responsibility for site selection, employee training and personnel management,

*local advertising, and other administrative concerns to the franchisee, licensee, or joint venture partner
with the guidance or assistance of the franchisor.

Distribution in different type of franchise

From manufacturer to retailer- this type of a franchise is a very flat structure in this particular type of
franchising the manufacturer directly gives a franchise to a particular end buyer.
From manufacturer to wholesaler- this type of a franchise is very commonly observed in the food
market, the apparel industry and the technology industry.

From franchisors to service provider- Do you again very similar to the business level franchising which
described above. and this format the franchisor who is The trademark holder Looks for the franchise
which can get customers for the franchisor. this franchise is generally service providers.

Lesson 2

Three stages of franchisees

Starting out -the franchisee is keen to focus on independence. They

want to run their own business, but the very reason they have selected
franchising is because they want to minimize risk. These people are not
the "go-getter" entrepreneurial personality types that are risk-takers.
Franchisees are more conservative in their business approach, andthis
is appealing.

Established franchisees-who have a business doing well, want to do

better but also want people to know they are good at their job.

Old-timers seeking retirement-the kinds of individuals who wish to

make a contribution. They don't want their years of franchising
experience to go to waste. They want to retire, but leave some kind of
legacy.

Typical Franchise offers

Franchise fee – your one-time fee to the franchise in return for using
their brand, business model, etc.

Training – any cost you will incur while you learn all about your new
franchise, including travel expenses and the cost of the training itself.
Leasehold Improvements – costs associated with any necessary
improvements to the physical location of your franchise.

Real estate – the cost of procuring your physical location. Not all FDDs
include this, as real estate prices are constantly fluctuating and not all
franchises require a physical location.

Equipment – If your franchise is one that requires equipment (a gym,

for example), this section will lay out the costs

Professional fees – the costs of professional services, which may

include a CPA, lawyer and actually creating your business entity.

Marketing – any costs that cover the marketing of your new location

Additional funds – the working capital you will need for the time period
between opening your doors and making a profit. Typically, the FDD
specifies a 3-month timeframe.

Franchise Disclosure Document (FDD)-is a legal disclosure document

that must be given to individuals interested in buying a U.S. franchise as
part of the pre-sale due diligence process. It contains information
essential to potential franchisees about to make a significant
investment.

Franchise Disclosure Document: Rights of the Franchisee

According to the FTC, franchisors have an obligation to provide the

franchisee with the financial disclosure document at least 14 days
before it needs to be signed or before any initial money is exchanged.
The franchisee has a right to a copy of the FDD after the franchisor has
received the application and agreed to consider it.

Sections of the FDD

The FDD contains information essential to potential franchisees about

to make a significant investment. These include:
1. The franchisor and any parents, predecessors, and affiliates

2. Business experience

3. Litigation

4. Bankruptcy

5. Initial fees: A franchisor must disclose any fees charged to franchisees.

6. Other fees: This section must also include any other fees. Any hidden or undisclosed fees can be a
source of dispute later on down the road, so a franchisor must be careful and fully transparent.

7. Estimated initial investment: The franchisee must be aware of what the low and high range of the
initial investment must be, including an estimate of his working capital.

8. Restrictions on sources of products and services

9. Franchisee’s obligations

10.Financing

11.Franchisor’s assistance, advertising, computer systems, and training

12.Territory: While there is no obligation to give a franchisee any range or territory to do business, this is
the space to indicate any geographical restrictions a franchisor is putting on the franchisee.

13.Trademarks

14.Patents, copyrights, and proprietary information

15.Obligation to participate in the actual operation of the franchise business

16.Restrictions on what the franchisee may sell

17.Renewal, termination, transfer, and dispute resolution

18.Public figures
19.Financial performance representations

20. Outlets and franchisee information

21. Financial statements: A franchisor must provide three years of financial statements to the
franchisee as part of the financial disclosure document. This includes balance sheets,
statements of operations, owner’s equity, and cash flows.

22. Contracts: This is where the franchisor outlines the franchise agreement. It may also include
financing agreements, product supply agreements, personal guarantees, software licensing
agreements, and any other contracts specific to the franchise's situation.

23. Receipts: This is the last and final section of the FDD. Here, the franchisor will review the
disclosure and business decisions outlined between the two parties and provide the franchisee
with any additional information.

Financing your franchised business

Franchisor financing- Many corporations with franchise business models offer tailored
financing solutions exclusively designed for their franchisees, either through partnerships with
specific lenders or by providing capital directly from the corporation.

Commercial Bank loans-A term loan is what most people think of when they think of any form
of loan financing, a bank or alternative lender offers you a lump sum of cash up front, which
you then repay, plus interest, in monthly installments over a set period of time.

Alternative lenders- Typically, alternative lenders have less stringent requirements and shorter
turnarounds than traditional financing options. They offer a variety of loan options like
equipment financing, business lines of credit and even term loans.

Crowd funding- You might choose to set up and promote your own personal crowd funding
page or look towards specific organizations that crowd fund for businesses and franchises.
There are also websites that crowd fund for specific industries and business types, which they
then lend those funds to people in need of financing.

Friends and Family loan- If you do choose to take a loan from a friend or family member, be
sure to write up a contract that includes repayment terms and expectations. If everyone
understands the agreement before signing, breakups and disagreements will be less likely later
on.
Exit strategy, or plan, outlines-how a business owner plans on selling their investment in their
business. Exit strategies help business owners have an out if they want to sell or close the
business. Entrepreneurs must create a business exit plan before starting a business and tweak it
as the business grows and the market changes.

Merger- In a merger, two businesses combine into one. Mergers increase your business’s value,
which is why investors tend to like them.To go through with a merger, you still need to be a
part of the business. Through a merger, you will be an owner or manager of the new business.
Your employees might be employed by the new merged business. But if you want to sever your
ties with your business, a merger is not the best exit strategy for you.

There are five main types of mergers:

1. Horizontal: Both businesses are in the same industry

2. Vertical: Both businesses that are part of the same supply chain

3. Conglomerate: The two businesses have nothing in common

4. Market extension: The businesses sell the same products but compete in different markets

5. Product extension: Both businesses’ products go well together

Acquisition - is when a company buys another business. With an acquisition exit strategy, you
give up ownership of your business to the company that buys it from you.

Sell to someone you know

You may want to see your business live on under someone else’s ownership. In many cases, you
can sell to someone you know as an exit strategy.

Take a look at some of the people you could sell your business to:

• Family member (e.g., child)

• Friend

• Employee

• Business colleague

• Customer
Before selling your business to someone you know or are acquainted with, consider the
drawbacks. You don’t want to jeopardize personal relationships over your business. Disclose
things like liabilities and the profitability of your business before a family, friend, or
acquaintance buys it from you.

Initial public offering-An initial public offering, or IPO, is the first sale of a business’s stocks to
the public. This is also known as “going public.”

Unlike a private business, a public business gives up part of their ownership to stockholders
from the general public. Public businesses tend to be larger. They also (generally) go through a
high-growth period. By taking your business public, you can secure more funds to help pay off
debt.

Liquidation- Another exit strategy for small business is liquidation. With liquidation, business
operations end and your assets are sold. The liquidation value of your assets go to creditors and
investors. However, your creditors—not your investors—get first dibs.

Liquidation- is a clear-cut exit strategy because you don’t need to negotiate or merge your
business. Your business stops and your assets go to the people you owe money to.

LESSON 3

Franchise associations:

The Good: Consecutive, unlimited renewal terms, with renewal

agreements that do not materially differ over time.

The Bad: Limited renewal rights, expressly allowing material, adverse

changes to renewal agreements.

The Ugly: No renewal rights, with franchisor claiming the right to

acquire the franchisee’s business at the end of the term for the fair
market value of the hard assets… “

Five habits of successful franchisor

Strategic, long-term thinking-Franchisors need to be big picture
thinkers that see the potential of their brand. Franchising is a long-term
commitment, therefore there has to be potential for long-term growth
of the brand. If a franchisor is too involved with operations of a
company owned outlet or outlets, he or she often does not have the
time

Dedicated resources-To be successful at implementing a franchise

network, the organisation needs dedicated resources. We refer to a
‘franchise champion’ or manager who takes custody of the franchising
efforts including the work needed to become franchise ready,
finalisation of a country development plan, ensuring that franchisee
support documents and training is available, recruiting franchisees who
fit the desired profile and constant promotion of the franchise
opportunity.

Sales and marketing ability-Franchisors must be brand evangelists with

supreme passion for their brand and what it represents. They need to
sell the franchise to landlords, potential customers and potential
franchisees alike.

People skills-Franchising is ultimately driven by the relationship

between the franchisor and franchisees. It has to be a win-win
relationship. We have seen franchises fail and disappear due to
insurmountable relationships issues, including a lack of trust and
commitment from both parties.

Planning and scheduling resources-Franchising can be capital and

resource intensive, especially in the beginning phases when there are
not many franchisees contributing to royalties. The franchisor must
have the ability to plan for adequate cash flow and distribution of
resources where it is needed most. Economies of scale can contribute
to a successful franchise if executed properly.

3 Habits of a Good Franchisee

Positive Attitude – Starting a franchise is no different to starting any

business. You must have a positive, “can do”, attitude. You will no
doubt be faced with many challenges along the way and you must
believe that you will be successful and that your business will thrive.
Surround yourself with positive and supportive people and believe that
your Franchisor is there to help you, not to take advantage of you.

Understand and Follow the System - Suppress you desire to “innovate”

and to do it “my way”. A good franchisee must be willing to follow the
system that the franchisor has set. Franchises are successful for a
reason - they have a proven system and franchisees follow it. That
doesn’t mean that you have to be a robot, you still need that
independent spirit and creativity, but you need to understand that the
system is successful and you should follow it. Most good franchisors are
willing to listen to new ideas, so if you have a good one, then discuss it
with them before you change anything.

Not saying ‘I Know!’- Be in business for yourself, but not by yourself.

This is exactly what a franchise system provides. You have your own
business but there are people willing to help you. Saying “I Know”
means not asking the franchisor or other successful franchisees for help
and learn from their mistakes and successes. You must also be willing
to seek skills and knowledge, in sales, marketing and finance, to
improve yourself and become a better person in the process. Good
Franchisor normally organizes on-going training events, so make sure
you don’t miss any.

Issue #1: A Lack of Communication

A lack of communication can take a serious toll on franchise owners,

particularly in the realm of finances. Changes can trickle down from a
corporate level to individual restaurant owners without clear
communication to or feedback from those owners, restricting
franchisees’ abilities to voice concerns and providing limited time to
make necessary adjustments to the menu, sales forecasts, and
operations.

Issue #2: Franchisees Taking the Fall

With a restaurant group large enough to be franchised, mistakes and

times of controversy run the risk of instant scrutinization by the media
and the public. It’s not uncommon for the mistake or decision of one
store to impact several others, but it’s worse when the change comes
straight from corporate.

Issue #3: Costs and Royalties

Franchisees benefit from built-in brand recognition of their restaurants,

but have to (quite literally) pay the price. On top of an initial license fee,
franchisees must pay regular royalty fees to franchisors. These are
either percentage-based or fixed dollar costs that go to marketing and
operations for the entire business.

Issue #4: Technology Woes

Most will agree that choosing the best systems to help restaurants run
smoothly is in corporate’s ballpark.

However, some franchisees are less receptive to change than others,

which complicates accounting and reporting on both the franchise level
and the corporate level.

Conversely, some franchisees are ready and willing to adopt new

systems, but corporate is reluctant to change operations at their
hundreds or thousands of locations.

Issue #5: Assuring Franchisees Meet Corporate Standards

We’ve been putting a bit of the onus on franchisors in this article, but
there are instances where franchisees can step up to improve this
business relationship. Franchises work in part due to consistency of
brand, menu, design, and service. A variation of any of these factors
from one location to another calls into question the consistency of the
business, which defeats the very purpose of a franchise business model.
Thus, franchisees must recognize the type of business they are
operating and hold themselves accountable for meeting certain
standards.

Issue #6: Disagreement on Brand and Market Positioning

There are multiple reasons to buy one restaurant franchise over
another, with some of the popular choices being the branding and
concept of the restaurant. Unfortunately, it’s not uncommon for
corporate to spot an opportunity in the market, seek to embrace
change, and reposition the brand and position of the restaurant. This
move can disrupt the franchisee’s vision for his or her business. When
sales take a dip, it causes friction in the franchisor-franchisee
relationship.

Issue #7: Pressure

Just reading over the list of the past six issues threatens to raise the
stress levels of franchisors and franchisees.Restaurants that franchise
are multi-million or even multi-billion dollar companies, with constant
scrutiny from consumers, stockholders, and the media. With all of that,
it’s easy to see why franchisor-franchisee relationship can so quickly
boil down to a purely transactional one.

International franchising- refers to a domestic business’s expansion

into foreign countries and markets.International franchising is a
complex process that requires thorough considerations of many
factors, such as feasibility, adaptability, and benefits versus risks. Main
aspects of international franchising are as follows;
Replication: During the process of international franchising, companies
often strive to replicate successful domestic business models in foreign
markets.

Challenge: Differences in language, laws and financial systems,

between franchising business and host foreign market can pose serious
challenges during international expansion.

Benefits: International franchising means new markets with new

customers and selling potentials. International franchising also places
company’s name and presence in a global market.

Adaptability: learning to adapt to the needs and demands of a new

foreign market can attract local customers and buyers and lead to
higher business success in a new country.

Counsel: International franchising experts help companies understand a

foreign market before expansion. Consultants advise businesses on a
number of subjects, from financing to culture gaps.

Advantages of International Franchising

• There is a higher likelihood of success since a proven business formula

is in place. The products, services, and business operations have already
been established.

• Bankers usually look at successful franchise chains as having a lower

risk of repayment default and are more likely to loan money based on
that premise.
• The corporate image and brand awareness is already recognized.
Consumers are generally more comfortable purchasing items they are
familiar with and working with companies they know and trust.

• Franchise companies usually provide extensive training and support

to their franchisees in effort to help them succeed.

• Many times products and services are advertised at a local and

national level by the main franchise companies. This practice helps
boost sales for all franchisees, but individual franchisees don’t absorb
the cost.

Disadvantages of International Franchising

• Franchises can be costly to implement. Also, many franchises charge

ongoing royalties cutting into the profits of franchisees.

• Franchisors usually require franchisees to follow their operations

manual to a tee in order to ensure consistency. This limits any creativity
on the part of the franchisee.

• Franchisees must be very good at following directions in order to

maintain the image and level of service already established. If the
franchisee is not capable of running a quality business or does not have
proper funding, this could curtail success.

• Sometimes franchisors may be lax on their commitment to support

the franchisee. Also, they may make poor decisions that would have an
ill effect on the franchisee. Therefore, it is important to research any
franchise concept thoroughly before signing any agreements.
Benefits of International Franchising

Purchasing a franchise is one way for an entrepreneur to get started in

business. Franchises offer a proven business model to follow as well as
support in areas like financing and training. International franchises can
provide the opportunity to take advantage of growing global markets,
although the franchisee will need to overcome the hurdles associated
with adapting to the ways of a new country.

Have Passion for the Business- Starting a franchise is a lot of work. You
must be willing to devote the time and energy to do what it takes to get
your business off the ground. Your franchisor can only guide and coach
you, but you have to do all of the work.

Good Leadership Skills - Depending on the franchise you purchase, you

may have a team of employees. You must possess good leadership skills
to hire, train, and manage a good staff. Your business success will
depend on them! You need to start leveraging on your team to do

Have Fun – Business is just a game. So keep good score to know

if you’re winning or just breaking even. Your franchisor would
have already given you a set of Key Performance Indicators
(KPI) for you to keep score of the most important indices of
your business. It’s not just the sales. Make sure you understand
the customer satisfaction score, the quality score and
numerous others indices that keeps your business in tip-top
shape.
Focus on the outcome-There’s no substitute for good planning
and budgeting. The result of your business depends on
excellent execution of a set of plans. Executing the marketing
plan, the selling plan, the human resource plan and the
financial plan is key to ensuring that you stay on-course and
reap the desired results. Remember, business (and life) follows
the law of the farm. You will only harvest the fruits when you
plant the seeds and water the plant.

LESSON 4
Franchisor Roles and Responsibilities
The franchisor is the person who has a successful business
model, and is selling the right to use that model to another
person or entity.
Provide the FDD (financial disclosure document). The
franchisor should make this paperwork readily available to
potential franchisees. The document includes information
about profit and loss, business expenses and other costs. It
should also include biographical and professional information
about the seller, any information involving litigation or
bankruptcy, and definition of fees. Fees may include initial fees
and ongoing fees.
Vetting Franchisees. One of the biggest mistakes made by a
franchisor is to decide to sell the franchise because the
franchisee has enough money. For the franchise to be
successful going forward, yes, the franchisee must have
sufficient funds. But the franchisee also must have a great work
ethic, skill in hiring and training staff, and experience running a
business.
Site Selection. The franchisor knows why the business was
successful in a certain demographic. The franchisor wants to
choose a site that lends itself to success for franchisees. The
sites should be positioned so that there is no competition
between franchisees.
Training and Support. For franchising to work, training and
support must be ongoing.It can be offered in a variety of ways,
taking the shape of financial support, administrative services,
and use of established marketing and advertising. The
franchisee must know upfront, according to the contract
between the franchisor and franchisee, if there will be fees
associated with training and support.

Franchisee Roles and Responsibilities

The franchisee definition is the person or entity which
purchases the franchise from the franchisor.
The franchisee is responsible for operating the business and
making a profit. Franchisees by their contractual agreements
must run the business system in a prescribed manner, or the
franchise system won’t work.
Protecting the Franchise Brand. The franchisees must operate
the business in such a way that the franchise reputation is
upheld. One of the downsides to the system is the actions of
one person can affect many others.
Building the Business. Franchising isn’t a magic carpet ride to
business success. As with growing any business, long hours,
frustrations, setbacks and financial struggles are part of the
game. But one of the pros of franchising is that you won’t be in
it alone. Franchisors have already charted your path. Along with
the right to operate the business is the right to get assistance as
needed.
Hire and Train Employees. Franchisors have been down this
road and they know how important this process is to the
success of the business. The franchising business model should
include guidelines for the process of hiring and maintaining
employees, as well as an employee handbook. It’s a great
benefit to have a preestablished employee handbook, already
approved by someone’s human resources and legal
departments.
Advertising and Marketing – Franchisors most often provide
these materials, as well as the rights to use them. There may be
a percentage fee associated with advertising and marketing.
There may also be restrictions on how these materials may be
used.
What Obligations Do Franchises & Franchisees Have to Each
Other?
The legal obligations that a franchiser and franchisee have to
each other are spelled out in the franchise agreement. For a
business relationship to work, both sides need to understand
their basic obligations to establishing a successful company. It is
the skills, experience and determination that both the
franchiser and franchisee bring to the table that help to make a
franchise arrangement profitable.
Financial-The franchisee needs to get her financing arranged to
meet the franchiser's stated guidelines. The franchisee may be
required to pay facility costs, licensing fees, marketing fees and
initial staffing costs. The franchisee is then required to pay a
royalty fee based on the revenue generated and could also be
obliged to pay a grand opening advertising fee to the franchiser
for promoting the new location, the Bureau of Consumer
Protection website states. It is the obligation of the franchiser
to let the franchisee know what costs she will be responsible
for, and the franchisee is obliged to arrange financing in time to
open up the new location.
Marketing- A franchise grows based on the effectiveness of its
marketing programs. The franchisee buys into a franchise
agreement with the understanding that he will benefit from the
many years of franchise marketing experience that the
company has. It is the obligation of the franchiser to proactively
pursue effective marketing programs, and it is the obligation of
the franchisee to execute those programs and give feedback to
the franchise company to help improve future marketing
programs.
Administrative- Each franchise company has a proprietary way
of reporting income and keeping track of franchise financial
information. The franchise company is required to offer
administrative assistance to the franchisee, and the franchisee
is obliged to maintain the recordkeeping and reporting
standards of the company. The efficient flow of information
between the franchiser and franchisee is what keeps the entire
organization running smoothly.
Territory Development-in a franchise organization is the
responsibility of both the franchiser and franchisee. The
franchiser has the obligation of doing the necessary
demographic research to ensure that there is a sufficient
customer base to support a franchise in a geographic area. The
franchisee needs to maximize the available customer base by
getting involved in local marketing programs as well as
engaging in good customer service practices that bring repeat
customers back.
Understanding Franchise Territories
Three types of franchise territories:
1. Exclusive
2. Protected
3. Open or Nonexistent
What’s an Exclusive Territory?
An exclusive territory means no other franchisees in the same
franchise system can open another location in your designated
territory. That means your business is the only franchised
location(s) in the geographic area assigned to you. However,
even though the region technically belongs to you, owning the
exclusive
territory doesn’t give you the right to open more locations in
the same area unless the Franchise Agreements allows for it. If
that seems odd, that’s because exclusive territories are divided
in a myriad of ways.
Drawing the Lines- How are exclusive territories divided? Well,
a franchisor can deem an exclusive territory as small as the four
walls of your business or as large as an entire state. They
sometimes also divide them by postal zip codes, natural
boundaries, demographics or municipal limits. Ultimately, it’s at
the franchisor’s discretion.
What’s a Protected Territory?
Unlike an exclusive territory, in a protected territory,
franchisees in the same system are able to open a nearby
location in the same geographic area. Let’s say you open a
franchise on First and Park. You’re the only business of your
kind within a 5-mile radius until another franchisee from the
same system opens a location on Second and Park. You can
even see your customers walking into the other franchisee’s
business from yours. This practice is also known as
encroachment. Go through your Franchise Agreement
thoroughly to see if there is a possibility for encroachment.
Alternative Channels of Distribution
Other franchisees aren’t the only form of competition you may
face. Sometimes, the Franchise Agreement includes a clause
that allows the franchisor the right to sell their products or
services in the same territory but online or at a supermarket,
stadium, hotel, etc.
For instance, you may own the only Krispy Kreme franchise in
the Las Vegas area but the franchisor can still sell the same
donuts at local grocery stores in the same territory. The
Franchise Agreement refers to examples like these as
alternative channels of distribution. Especially with the advent
of e-commerce, this is becoming a more common practice.
What’s an Open or Nonexclusive Territory?
Some franchises don’t offer territorial protection at all. That
means the franchisor allows competing outlets like another
franchisee- or company-owned location to open their doors
near your business. Although you’d expect a franchisor would
not want to “cannibalize” their own business, remember that
without territorial rights, your business could be at risk of At
the end of the day, it’s important to have a full understanding
of your contractual rights.
Review the terms of your Franchise Agreement and Franchise
Disclosure Document with an experienced franchise lawyer to
determine whether you have exclusive, protected or
open/nonexistent territorial rights. If the franchisor is
established enough, you may even be able to negotiate better
territorial protections.