Understanding the Relationship Between Franchisor and Franchisee

The key to fostering a mutually profitable franchise relationship is understanding (i) the basic principals of franchising and (ii) how the franchisor and franchisee work together toward a common goal – the success of the franchise business.

The Basic Franchising Relationship

Franchising is a mutually dependent business relationship between a franchisor and a franchisee which aims to achieve the following goals:

Finding and retaining customers by consistently meeting or exceeding customer expectations, resulting in a satisfied customer base which remains loyal to the brand,
Dominating the market and gaining a disproportionate market share over the competition,
Achieving or exceeding revenue projections.

The Franchisor's Contributions

The franchisor brings the following elements to the relationship:

Recognizable brand (for example: Starbucks, McDonalds, H&R Block, The UPS Store),
Franchise operating system, which is basically a tried-and-proven method to help new franchise owners start up and operate their business and plan their future growth.
Intellectual property, such as trade marks, logos, proprietary software, etc.
Equipment, materials, supplies, maintenance.
Administrative and field support, including training, guidance, development of new products and services, quality control, etc.
Marketing programs and strategies.

The Franchisee's Contributions

In return, the franchisee provides time, effort, money, motivation and entrepreneurial spirit. The franchisee pays an initial franchise fee, which covers:

Costs of the franchise application and the franchisee selection process,
Initial training,
Marketing and advertising,
Sales commission,
General start-up costs and assistance in opening the franchise outlet.

The franchisee also pays an ongoing royalty fee, which is a portion of the revenue generated during each 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.

Right to Use vs. Ownership

It is important to understand that the franchisee pays the initial franchise fee and ongoing royalty for the “right to use” the brand, the trademarks, and the operating system. The franchisee does not “buy” anything and does not “own” any part of the franchisor’s system or intellectual property.

For better clarity, let’s compare the franchise license to a driver’s license. In both cases:

The user pays a fee for the license.
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 in its obligations, the license can 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.