The Franchisee/Franchisor Relationship

This is the second instalment in the MegaDox.com series on Successful Franchising.

The key to fostering a mutually profitable franchise relationship is understanding the key principals of franchising. Franchising is about:

• Economic performance
• Getting and keeping customers
• Having satisfied customers
• Dominating markets
• Gaining disproportionate market share.

To accomplish this, the franchisor brings the following elements to the relationship:

• Brand
• 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 that:

1. The franchisor's brand name brought in the customer.
2. The franchisor's operating system brought the customer back again.
3. 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:

1. The user pays a license fee
2. The license expires at the end of the term.
3. The license can be revoked.
4. The user must comply with certain conditions.
5. The user must follow the manual.
6. The user cannot sell or transfer the license.
7. The user doesn't own the license.
8. The user can be in default.
   

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.

In our next instalment, we will look at the legal responsibilities of both the franchisor and the franchisee, and the efforts that the courts and governments have made in mediating and establishing rules to govern some aspects of the relationship.