Franchising is a business model based on a marketing concept. A company may adopt this marketing concept as a strategy for growth. Once a franchise agreement is implemented, the franchiser agrees to license intellectual property, procedures, and the technical know-how of the franchise to the franchisee. The agreement also allows the franchisee to adopt the franchiser’s brand, business model and the right to sell the franchisers branded goods and services.
The franchisee is bound, under the agreement, to: pay the franchiser certain fees and to follow certain obligations set out in the franchise agreement. Franchisers use this business model as an alternative strategy of ensuring business growth. This model of business is efficient in minimizing the franchisers risk of capital investment.
Just like any other business model, franchising is liable to risk. Nonetheless, if this strategy is properly implemented, the franchiser and franchisee stand to gain numerous benefits from the venture. Franchising offers companies the opportunity to venture into foreign markets and new areas in business.
The main advantage of franchising is the fact that a franchiser does not bear the risk and cost of getting into a foreign market alone. According to this business model, the franchisee bears the costs and risks. This places a burden on the franchisee to build a profitable establishment as soon as possible. Franchising enables companies to create a global presence at low risk and cost.
The main disadvantage associated with franchising is quality control. The franchisor requires the franchisee to ensure that his brand name conveys a certain message to customers: consistency and quality. Failure to do this may injure the franchiser’s reputation and might lead to business failure.
As a franchisor, you want your consumers to experience a consistency in quality regardless of where the franchise is located. This is a major issue with franchising. A bad experience in one franchise may prompt a customer to think that the same will be repeated in other establishments. Quality control is also affected by distance; it is difficult for a franchisor to detect poor quality in establishments located far away.
Best Practices in Franchising
Franchising is supposed to be a mutually beneficial arrangement built on transparency and trust. Franchisors should recognize the fact that franchisees invest hard earned money to the franchise and are, therefore, partners. Franchisees are not employees and they are not competition. A franchisor must exercise reason when enforcing standards and should be flexible enough to consider a franchisee’s feedbacks; this is not an easy task to accomplish. Below are some best practices in the franchise business.
Payment of fees is a potential conflict zone in a franchise agreement. There may be a point of contention between the parties; franchisees, often, feel that they earn little for their efforts. This being the case, they don’t enjoy paying fees under the contract.
The initial fees paid to the franchisor should cover the franchisor’s pre-opening training costs, assistance and development costs. A small portion of this money should pay for the use of intellectual property. These fees should not be the franchisor’s main source of income. It is, therefore, dangerous for a franchisor to enter an agreement in order to stay afloat. In the long term, this is not sustainable.
On-going fees should compensate the franchisor for his on-going assistance. Experts advise that the fees paid should be based on a percentage of the franchisee’s income. This is fair for both parties. It means the fees paid should be in relation to the franchisee’s income.
The process of assigning territories should be done in a scientific manner. A proper geographic survey should be conducted to ensure that the parties understand the demographics of a territory. It is also done to consider important elements such as accessibility and traffic. The franchisor should know how many franchises can be supported by a certain territory. This help to ensure that they support and compete fairly with each other.
It is considered fair for the agreement to allow the franchisee a first right of refusal in regard to the opening of new outlets within his territory.
Regular communication between the two parties is essential in ensuring a healthy business relationship. While the law does not make this a requirement, it is considered best practice in the field of franchising. Best practice requires the franchisor or his agent to visit the franchise regularly, so as, to answer queries and bring up concerns.
Restraint of Trade
A franchise agreement contains a restraint of trade clause to protect the franchisor’s intellectual property. However, this clause should not curtail the franchisee from earning income; it provisions must be reasonable.
Brittany Waddell is a contributing writer and media specialist for East Coast Wings. She often produces a content for a variety of franchise blogs.