Your Guide to Franchises and Franchising

There are two parties to the franchise agreement, the franchisor and the franchisee, the first grants the latter the right to distribute its products, techniques, and trademarks for a fee. Various deliverables are made available by the franchisor including marketing, training of employees and advertising efforts. The length of franchise agreements are provided for in the contract and usually lasts for three to twenty years. Contracts are usually unilateral, favoring the franchisor. At once glance, this may seem unreasonable. This is fueled perhaps by the fact that most contracts are rigid and nonnegotiable in terms. Franchisors argue that this is mainly for the protection of the franchise, for the operating style it has survived and the name it has established. That is why the contract is usually replete with rigid provisions, mostly restrictions in the part of the franchisee. This provides a litany of actions the franchisee is prohibited to do that may prove detrimental to the name of the business itself. Even premature terminations of most contracts result to onerous consequences in the part of the franchisee.Owning a franchise means access to the system, trade secrets and operating techniques of the franchisor which are highly valued for the continuance of the business, thus, requires a certain level of care. One must be part of the system itself before such information is divulged to him. In a nutshell, the franchise company is more likely to command the agreement as it has knowledge of the business; it is in a better position to tell what operating style is viable and likely to survive. The franchise agreement usually requires payment of a certain sum of money as initial franchise fee. Depending on the size, the reputation and popularity of the franchise company, the initial franchise fee can range from few hundred bucks to as high as hundred thousand dollars. This fee, depending on the agreement of the parties involved, can be nonrefundable and is necessary for the franchisor to lay the grounds of the contract. The rest of the fees come in the form of continuing royalties, as a percentage of the monthly gross revenues or operating income while the franchise operates. On the part of the buyer, the initial franchise fee includes the payment of premium known as goodwill. He actually pays not only for the business itself but for the name of the franchise also. For the fees he pays, the franchisee gets a package of both tangibles and intangibles. He earns the brand name, the trademark and the right to utilize the franchise company’s system of doing things. He will enjoy the operating, technical and management support from the franchisor from the day of the execution of the contract to the start of operation proper and beyond. The franchisee’s employees will usually be trained to take advantage of the best practices propagated by the franchise company in selling its products or services. More likely than not, the franchisor has previously done thorough market research before opening up a store or two. In this case, the franchisee enjoys a certain level of confidence that there is a viable market for its products and the supply chain is established. The franchisor also gives the franchisee a vivid grasp of the market forces, the competition and how he would position himself in order to survive and succeed. Finally, the franchisee can take advantage of the concept of economies of scale. There is strength in number as this say. Similarly, it wouldn’t be that tedious to arrange purchase of materials and supplies as you are backed up by the franchisor. You wouldn’t have a hard time negotiating locations and lease terms compared to if you are an independent contractor working singlehandedly. Looking at the other side of the coin, there are disadvantages also of acquiring a franchise. One is a limited locus of control. Although the franchisee operates the brand name, system and trademark, the same is inflexible as the franchisee is rendered powerless to make modifications and innovations. Any substantial change must be approved by the franchisor, thus dampens creativity. Secondly, there is no guarantee of financial success. Although of course, the franchising agreement is founded on the ‘future earnings’ doctrine, it is still not guaranteed that the company’s good reputation will translate into good financials. Third is the propensity of conflict between parties. The agreement being unilateral, nonnegotiable and rigid might create tension especially because on the inability of one to fully comply with the terms and stipulations of the contract. In this case, the responsibilities of either party must be set out clearly and plainly and all conflicts must be resolved in most just and swiftest manner. For aspiring entrepreneurs, a series of questions must be answered thoroughly and candidly before venturing in a franchise business. He should be very clear of his product’s objectives, targets and strategies to properly match this with his desired business. Possessing right and sufficient information is an immense tool for deciding. A cost-benefit analysis should be done to weigh the pros vis-à-vis cons of acquiring a franchise. If possible, these factors should be quantified.