What is a contract review? A contract review is the process of thoroughly examining the key provisions of an agreement. The objective of a contract
While a franchisor is the owner and administrator of a licensed business model, the franchisee operates the business and benefits from it by buying the rights to use the business model and its brand’s trademarks.
The relationship between a franchisee and a franchisor is one of a mentor and an apprentice.
The franchisor contributes to this relationship with a brand and prototype business that is licensed for use, and the franchisee pays an upfront fee and royalties in exchange for the provided knowledge and intellectual property.
The franchisor will offer the franchisee the necessary tools to facilitate the management of the franchise business. He will provide guidance, training, support, market knowledge, a proven business model, and assistance to clear the path to franchising success.
To establish the terms of the franchisor-franchisee relationship, the franchisor will provide a franchise agreement. The FA dictates the rights and obligations of both parties in the franchise.
This legal document determines the extent to which the franchisor will be involved in the franchise business and details the fees and royalties the franchisee must pay. The franchisee must adhere to the guidelines established by the franchisor for selling products and providing services. A franchisee is subject to these rules, so there is no complete freedom in decision-making.
While some franchisors only provide the business model and trademarks as part of their franchising offer, others include ongoing support, business management systems, marketing materials, and inventory software to accelerate the profitability of the franchise business.
A franchisor is an individual or business entity that sells the rights to operate a business using its trademarks and business model.
The franchisor is usually the person that started a business and, because of the success of the initial business, he allows other people to replicate its system in exchange for a fee and agreeing to certain conditions.
The responsibilities of a franchisor vary depending on the specific business model and the terms that are stipulated in the franchise agreement.
Some common franchisor responsibilities include:
The franchisor will develop a business concept, brand, plan and operational procedures and allow its licensed use. This is one of the most valuable assets franchises offer because franchisees can benefit from a recognized brand name and have access to an established customer base.
The company’s core strategy for making a profit is the foundation of the franchise business. The franchisor details information such as the products and services, processes, target audiences, prices, and anticipated expenses so the franchisee can replicate the operations.
It’s of the utmost importance that the business model is also scalable and sustainable to ensure it is apt for franchising.
It’s easier for the franchisee to obtain profit from the business, for the franchisor will proportionate him the industry expertise, insights about their current customers, and how to attract new clients.
To buy a franchise, a franchisee is required to pay an upfront franchise fee, also called an initial franchise fee. This is a one-time payment used by franchisors to offset the start-up costs and other expenses.
Additionally, once the franchisee has officially entered the business venture, the franchisor will require a weekly or monthly royalty fee. This fee is typically based on a percentage of the branch’s gross sales.
Other fees that may be required are advertising funds, which are allocated to the creation and placement of advertising, and are usually required at the same time as the royalties.
The franchisor is responsible for setting the terms and conditions under which the franchisee will have the right to use its brand. The franchising agreement usually includes terms such as:
It’s essential that the franchisor guides the franchisee on how to conduct the day-to-day operations and other key activities related to administration, hiring and training staff, sourcing supplies, and more. The franchisor will have to offer support for his franchisees initially, but also on an ongoing basis, and help them solve concerns regarding inventory, operations, or advertising.
The franchisor needs to set up guidelines for the style of the imagery and formats of the marketing materials. The franchisor may provide signage and ad templates to ensure the overall image of the brand is cohesive. The franchisee may take care of the local advertising efforts, while the franchisor is responsible for the massive distribution.
Although a franchising business has more probability to succeed than a startup, not everyone is apt for buying a franchise and operating it optimally. For this reason, franchisors need to ensure candidates have business knowledge, people management skills, financial savvy, and the willingness to adhere to the franchise rules.
To ensure the quality and consistency of the product every branch offers, the franchisor must provide a list of approved vendors they can get their supplies from. This list can also include suppliers where they can find equipment, software, and other assets that are essential for the functioning of the business.
Franchisors have access to the franchisees’ finances to monitor the performance of the business, assess its practices and provide support if needed.
A franchisee is an individual or company that obtains the rights of using a licensed brand and selling its products in exchange for abiding by specific rules, paying an initial fee, and periodical royalties.
Franchisees are usually small business owners, and they get the opportunity to operate at an exclusive location that is away from other businesses of the same franchise.
After making the corresponding payments and signing the franchise agreement, a franchisee will be able to operate a branch of the franchising business.
The role of a franchisee is to replicate the original business model with the objective to expand its operations at a regional or national level. The franchisee must follow the proven model and adapt some details according to his needs, but always under the limitations determined by the franchisor.
Usually, a franchisee will have the following responsibilities:
The franchisee will independently manage the daily operations of the business, such as opening the store, supervising day-to-day activities, ordering inventory, and analyzing the financial performance of the business.
The franchisee will determine how business is conducted, based on the guidelines set by the franchisor. A branch can offer different prices, as long as they are wtihin the established range.
The franchisee will also engage in local marketing activities that must be previously approved by the franchisor, as well as contribute to the franchisor’s national advertising campaign.
By buying a franchise, a franchisee has access to a proven business model, which decreases the chances of failure. However, to benefit from it, franchisees must follow the rules that are assigned by the franchisor. These guidelines cover different aspects of the business, from uniforms and advertising, to protocols and softwares.
A franchise business relies on the experience each of its branches provides to its clients. For this reason, a franchisee must meet the required quality standards in its services and products and ensure to keep a positive overall image of the franchise.
Regularly, the franchisor will delimit a specific territory where the new franchise will be able to operate, in order to avoid competing with other businesses of the same franchise. However, it is the role of the franchisee to find a location within this area that has a high demand of the product. The franchisee will also be in charge of its construction or lease.
Opening a franchise requires leasing and bulding a location, acquiring equipment, furniture, utensils, and other assets. All the costs related to developing the business are to be covered by the franchisee.
Additionally, the franchisee is responsible of the operating expenses of the franchise business. This includes payrolls, supplies, taxes, and all the cost related to operating the franchise location.
The franchisee is going to take care of the team that will move the business forward. A franchisee will take care of the recruitment process, review applications, put out job postings and interview candidates.
A franchisee must have a clear understanding of the procedures and operations to be able to communicate it to the team and replicate the same system.
A franchisee must consider the monthly payment of royalties among the fixed expenses of the business. These royalties are key for a franchising business because they make the model sustainable.
A franchisee has to regularly inform about the financial performance of the business so the franchise owner can monitor its profitability.
Since it’s likely that the franchisor will have access to the franchisee’s financials, the latter must be transparent about the profits and losses of the business.
The following chart explains the differences between a franchisee and a franchisor in terms of ownership, responsibilities and decision-making.
Is the owner of a replicable business model and sells the rights to use it
Benefits from a licensed brand and business model
Receives franchise fees and royalties
Pays franchise fees and royalties
Sets the rules to abide by through the franchise agreement and is free to make decisions
Has to adhere to guidelines and does not have complete decision-making freedom
Manages the whole franchise
Covers the costs of setting up the franchise
Provides ungoing support to the franchisee
Is in charge of the independent franchise business
Provides the guidelines for marketing materials and promotes the global image of the franchise
Receives ungoing support
Allocates resources to sustain the franchising model
Follows marketing material guidelines and promotes itself locally
Chick-fil-a is a great example of franchising. This company was founded in 1960, and up to date, it has more than 2,400 restaurants in the United States. The owners of Chick-fil-a are the franchisors, for they created an scalable business model and they offer others the opportunity to build a business.
Those who are interested on buying the franchise need to apply and show evidence of their business experience. The selected candidate will be the franchisee.
Franchisees are required an initial payment of 10,000 USD. In this instance, the franchisor will pay for land, construction and equipment of the restaurant, In exchange, the franchisee will rent it for 15% of sales plus 50% of pretax profit remaining.
Although franchising sounds like a promising business venture, there are some considerations that both franchisees and franchisors need to gauge before engaging in this model.
Easily scale your business: A franchise business is more capable of expanding its operations because the costs and time of opening a unit are shared with the franchisees. This way, the owner of a business is capable of establishing its brand in multiple locations and expanding its area of distribution more easily and quickly.
Minimal supervision: Hiring and managing employees is one of the tedious processes that most business owners would like to delegate. In the case of franchises, the franchisee will handle the daily business operations, while the franchisor only focuses on the overall performance of the business.
Increased brand awareness: Since the franchising model makes it easier to open new locations, both the franchisor and the franchisee are going to benefit from more exposure and brand recognition.
Reduced risks: The expenses and liabilities of opening a new location are inherited to the franchisee, for the franchisor can expand without risking so much.
Get external insights: As a business owner, you may miss out on some areas of improvement that can boost your company. Franchisees can contribute to the growth of the business through their valuable observations and ideas.
Reduced risk: With a proven business model, a franchisee does not have to worry about finding the keys to success through trial and error. By buying a franchise, the probability of failure decreases, since the franchisee will only have to replicate the provided business model.
Brand recognition: An advantage of opting for a franchise rather than a startup is that the entrepreneur will profit from an immediate brand awareness and a built-in customer base. When you open a franchise, people will automatically know what services and products you offer and what to expect.
Ongoing assistance: A franchisee will have access to the support of an entrepreneur with broad experience in the industry. The franchisee will receive guidance with marketing, inventory, the daily operations, and other key activities that will make it easier to run the business.
Broader buying power: Being a franchisee allows you to have access to a network of beneficial business relationships. As a franchisee, you can benefit from existing contracts between the franchise and vendors, and acquire goods at a lower price, since they will be ordered in bulk.
More opportunities for success: When you buy a franchise, you are more likely to see a higher return on investment at a short period than you would if you had started your business from scracth. Besides, lenders are more willing to provide loans for franchisees, as they see this kind of business as an investment with lower risk.
Pros for franchisors
Pros for franchisees
It's easier to scale a business
Benefit from built-in customer base and brand awareness
Management and administration responsibilities are delegated
Benefit from a proven business model and ongoing assistance
Increased exposure and brand awareness
Greater buying power and access to business relationships with suppliers
Cons for franchisors
Cons for franchisees
It requires time and money to build a build a business model that is apt for franchisin
High franchising upfront costs and fees are high
It's difficult to comply with federal and state regulations
The franchisee needs to strictly abide by the rules
Overall franchise image depends on the performance of all the franchisees
Lack of financial privacy
1. Prepare your business for franchising: The first step is to ensure your business has a successful performance. If so, you also need to verify your business model is scalable and can be replicated. Check if you can afford the expansion costs and if your business would be equally successful at other locations.
2. Protect your business’s IP: Your business model, brand, and trademarks, are one of your most valuable assets. This is why you need to keep it from being stolen. The intervention of a franchise lawyer is required from the beginning, for the attorney will take care of this process and assess you all along the way.
3. Prepare franchise legal documents: The FDD, or franchise disclosure document, is a legal document required by the franchise laws that must contain 23 specific sections with sustancial information about the franchisor, the franchise business and the franchisee’s legal obligations. The FDD will include the financial information of the business and all its key operating procedures. It is mandatory that the franchisor gives this document to the prospective franchisees, for it provides the information that will help them determine whether buying the franchise is a good investment. Besides this document, a franchisor will have to provide a franchise agreement, which will establish the fees, terms, and rights, and obligations of both parties.
4. Create an operations manual: An operations manual will detail the daily procedures and key information to run the franchise business. This includes the philosophy of the business, the product and service requirements, SOPs, and marketing and administration requirements.
5. File your FDD: A franchisor is required to update their FDD annually, for it needs to be stored in a secure place where it can be easily updated.
6. Create a sales strategy: Set a budget destined to attract the right franchisees so you can grow your business. Also, determine the amount of money you can afford to build your brand history, training, and supporting franchisees. Establish your sales goals and how many branches you want to open at a certain period.
1. Verify whether franchising is for you: Besides having the required capital and business experience, assess if you feel comfortable entering a business model where you will not abide by rigorous outlines.
2. Find the right franchise for you: The popularity of a franchise is not a synonym for your success. Verify if the franchise is a good option for you in terms of profitability, competition, social responsibility and opportunities of growth.
3. Begin the application process: Send your application to your desired franchise. Franchisors are likely to look at your business history, finances and why are you interested in buying their franchise.
4. Review the franchise documents: The sooner you involve a franchise lawyer, the better. To ensure your protection, the attorney will verify the terms and conditions are fair.
5. Buy or rent a location: According to the territory that was determined by the franchisor, the franchisee needs to find and rent a location to settle in.
6. Get training and support: Learn the essential aspects of running the business, such as the operating procedures, the product placement, and products and services.
For both franchisees and franchisors, taking a franchising opportunity is a risky investment. However, with the help of a franchise lawyer, you can leave your worries behind and increase your possibility of success.
What is a contract review? A contract review is the process of thoroughly examining the key provisions of an agreement. The objective of a contract
What is a commercial contract? Commercial contracts are legally binding agreements that govern business transactions between two or more parties. Commercial agreements, also called “B2B”
What is transactional law? Transactional law refers to the legal practices that guide commercial dealings between businesses and other companies, individuals, or organizations. This area