What is the franchise relationship? It is a contractual, detailed franchise agreement between the franchisor and the franchisee. In this video we cover what a realistic relationship with a franchisee will look like. You will also be able to define what your contractual relationship will be with your franchisees.
The Franchise Disclosure Document defines the commercial relationship between the franchisor and the franchisee. It is up to the franchisor to provide the support, skills, and guidelines in your franchise system.
Video Transcript:
Let’s talk about the franchise relationship. A lot of people will look at franchising and hear terms like, the franchisee is my partner, or the franchisee is a member of my family. Put that aside, because it’s not true. The franchise relationship is a contractual relationship between grown-up people, a franchisor, and a franchisee. It’s not generally a handshake, it is a detailed franchise agreement 40 to 50 pages long for the average franchise system.
There will also be licenses in addition to the franchise agreement. There will be Operations Manuals that will allow the franchisor to adjust the relationship in many ways - new products, new services, new design, new decor, new color schemes, new brands. Think of Midas Muffler today as Midas. Think of Kentucky Fried Chicken today and now it’s KFC. All of those types of changes, the new product breakfast offerings at McDonald’s, the apples offered at McDonald’s, all that came about because of operating manuals. This is a business relationship between a franchisor and a franchisee and it’s based upon the contract between the parties.
It’s a commercial relationship where the licensee is substantially associated with the license or trademark. You don’t see “Bob’s Marriott.” The customer is going into Marriott, the business that is operated under the trademark Marriott. So the commercial relationship is where the licensee is substantially associated with the trademark.
The franchisee is required to meet you brand standards; you are going to exercise control over the franchisee to a certain extent - not day to day, but to your establishing the standards, what assistance you’re going to provide to the franchisee, and how the franchisee is going to be measured against your standards. Remember, there is nothing in the franchise rules that will dictate to you what you have to offer to a franchisee. There’s nothing in the relationship that says you have to have a 1 2 3 4 or 5 percent royalty; there’s nothing that says you have to provide a franchisee with one day of training or six months of training. There’s nothing that’s going to say you have to give a franchisee more than their own location as a territory, or whether you’re going to give them a whole county.
There’s a thousand decisions that you’re going to be making when you’re developing your franchise system. None of them are written into the law. What you’re going to be doing in that commercial relationship is defining what your system needs, what you can afford to provide, and that’s going to be part of your offering. And in all of that, the franchisee’s going to pay you an initial fee, and a continuing fee, and that initial fee is not for any of the services, the continuing fee is not for any services. Think of it as a country club. I pay an initial fee to join the country club, and I pay a continuing fee to stay as a member. The services that you’re going to provide to the franchisee are, in the real world, the services that you need them to have so that they can execute your brand standards to your standards. You want to make certain that they have the skills and the support to do that, but don’t think that your initial fee or your continuing fee is tied to those services; they’re not, in the real practical world.
It’s not a partnership, this relationship. You don’t have a fiduciary relationship between the franchisor and franchisee. There are going to be a lot of times where you’re going to make a decision that is good for the brand and the system as a whole, but may not be good for an individual franchisee. The fact that you don’t have a fiduciary relationship with that franchisee allows you to make those decisions.
It has to feel, though, like a partnership. You’re going to be going to franchisees’ weddings, and funerals, and bar mitzvahs and christenings; it has a feeling of a family partnership, but it’s not. You have a feeling of being interdependent; your success is garnered by how successful your franchisee is. The other franchisees, to a great extent, are going to be relying on whether that franchisee is going to be successful. Each of you have your own roles in the relationship, but always remember that it’s the franchisee who is contractually obligated to follow your direction, even when they disagree with it. And that’s one of the reasons why franchisees can’t be entrepreneurs - they have to put aside their own personal wishes because they’ve signed a contract to follow your decisions.
A franchisee is not your child; you’ll sometimes hear people talk about the “child-parent relationship.” It feels that way sometimes, if you think about it, the franchisee enters the relationship often like an infant, they get all of their knowledge about the business, the early guidance, their training, their support, their criticism - just like with a child, you’re going to sometimes scold them; you don’t scold an adult. But you are going to make certain that you enforce your brand. That’s what takes place.
Then, like a child, the franchisee is going to grow up. A natural part of it is that they start to think that they understand the business better than you do. A little bit of an adolescent feeling comes into play. Not that franchisees are a bunch of sixteen-year-olds, but it’s a natural piece of running any business to have a pride in your local business, to see that the franchisor is doing things at a global level that may not be exactly what you want, and you really have that bit of time where you start to act a little bit like an adolescent. And then, like any relationship, you grow up. Franchisees will mature, they’ll acquire a second location, they’ll have a relationship with other franchisees, they’ll get to understand the benefit even better of being part of a standardized system that’s marketing. Good things will happen, bad things will happen. That maturity is where franchisees really start to shine in franchise systems and can move from that early stage franchisee to a mature franchisee, start to make a lot of benefit and expand.
Franchising is not right for everyone. It’s not right for every business owner. It’s also not right for every individual that wants to become a franchisee. It’s a wonderful way to do business but for the true entrepreneur, the restrictions of being a franchisee can be overwhelming. They just will not be able to work with those issues.
Franchisees need to voluntarily agree to follow the franchisor’s system. But, they can innovate within the system to outperform the competition. There are great franchisees in the system, and there are folks that are not great franchisees. The great franchisees take the system and just execute it better; they smile better, their service is better, the way they deliver is better, the way they market is better. So franchisees will innovate within the system to outperform the competition, and that’s one of the great joys of franchising.
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