An Overview of the Franchisee-Franchisor Relationship
The key to fostering a mutually profitable franchise relationship is understanding the key principals of franchising.
Franchising is a mutually dependent relationship between a franchisor and a franchisee which aims to achieve the following key business goals:
- Finding and retaining customers through meeting and exceeding customer expectations, resulting in satisfied customers,
- Dominating the market and gaining disproportionate market share,
- Achieving high levels of economic performance.
The franchisor brings the following elements to the relationship:
- Operating system
- Administrative and field support
- Market share.
In return, the franchisee provides time, money and motivation. The franchisee pays an initial franchise fee, which covers:
- Trademark registration and protection
- Franchisee selection
- Initial training
- Opening assistance.
The franchisee also pays an ongoing royalty fee, which is a portion of the revenue generated during the prior reporting period. The rationale behind the ongoing royalty is based on the following factors:
- The franchisor's brand name brought in the customer.
- The franchisor's operating system brought the customer back again.
- The franchisor's support services helped the franchisee use the brand and operating system to get and keep customers.
The main point to understand, however, is that the franchisee pays the initial franchise fee and ongoing royalty for the right to use the brand, operating system and support. The franchisee does not "buy" anything. For better clarity, let's compare the franchise license to a driver's license. In both cases:
- The user pays a license fee.
- The license expires at the end of the term.
- The license can be revoked.
- The user must comply with certain conditions.
- The user must follow the manual.
- The user cannot sell or transfer the license.
- The user doesn't own the license.
- If the user defaults, the license may be revoked.
Like any license, a franchise license limits the use of the license to specific criteria outlined in the franchise agreement. Most problems associated with franchisee/franchisor disputes arise from both parties not understanding the nature of franchising. The franchisee does not buy the license but merely rents it for a period of time.
Image © 2012 Heather Cuthill