People have compared the franchisee-franchisor arrangement to many different kinds of relationships, including marriages, teacher-student affiliations, or even parent-child bonds. Just like with any with partnership, it takes effort from both sides to make it work.
Both parties have specific responsibilities and rely on each other for success. They are bound by the terms of the franchise agreement, which are spelled out and agreed upon before a franchisee receives training and opens for business.
The franchise agreement is a legal binding document between the franchisor and franchisee, and is signed only after the franchisee has had a minimum of 14 days to review the franchise disclosure document (FDD). There is good reason the 14-day rule is in effect. The FDD is a flat-out tough read. A huge, intimidating document, it discloses extensive information about the franchisor, including a franchisor's obligations to the franchisee and the franchisee's obligations to the franchisor.
The information in and FDD is divided into 23 categories called "items." These items should be reviewed carefully by a prospective franchisee before signing the franchise agreement. Surprisingly, many prospective franchisees gloss over the FDD and are surprised later on when they learn they are responsible for certain things (which were clearly spelled out in the FDD), such as paying specific fees or using only approved vendors, for example. The FDD protects both parties and provides clarity when it comes to each party's responsibilities. A franchise attorney can help you fully understand the finer points of this colossal read.
With a franchise, you are investing in your own business and buying into an established brand, which typically comes with training, support, and other benefits. In return, the franchisee is expected to operate the business by following the franchisor's playbook, spelled out in an operations manual provided by the franchisor.
So what makes an ideal or undesirable franchisee or franchisor? Here, we look at a few different scenarios that can make or break the franchisee-franchisor relationship.
The No. 1 reason franchisees fail is because they aren't following the franchisor's system. Before investing in any brand, make sure franchise ownership is for you and you fully understand and align with the company's mission, business model, and fee structure.
Here are some actions franchisees should never take:
- Changing the logo/branding: The power of branding is strong, and it's one of the main reasons people invest in franchises. A McDonald's franchisee, for example, can't just change the golden arches to blue. Consistency is key for strong branding.
- Taking a half-hearted approach: This may seem obvious, but owning a business takes effort. You have to work it. Just because you’re buying into a proven system, there's no guarantee of success. In some brands, especially home-based ones, it is on the franchisee to get out and hit the pavement to generate business. Without a brick-and-mortar location, how else would potential customers know the business even exists? If the franchisor recommends calling on local business owners, advertising on billboards, or even using guerrilla marketing techniques, there is likely a very good reason. If you're buying into a proven system, you should follow it.
- Straying from the business model: It would seem crazy for one Dunkin' Donuts store to offer massage services and another to serve tacos. Franchisees can't just change the business model on a whim. It's inconsistent and takes away from the brand's integrity.
- Acting dishonestly and inappropriately: It probably should go without saying, but dishonesty or unscrupulous behavior, such as underreporting earnings, is unacceptable. Also, since a franchisee and his employees represent the brand, their behavior (good or bad) reflects on the entire system. Unprofessional actions from one location can hurt an entire franchise system.
Validation is an important step in any franchise purchase. If you are seriously looking at a brand, reach out to current franchisees and ask pointed questions. Take the time to make these calls so you can gauge their satisfaction and feel good about your investment.
Here are a few ways a franchisor can fall short:
- Understaffing the support team: Explosive growth is impressive in a franchise brand, but support is the key to happy franchisees. Make sure the size of the corporate team is in line with the number of franchisees. Ask current franchisees if their concerns and questions are being addressed and if they feel supported and properly trained.
- Selling franchises without properly vetting candidates: Vetting is crucial for finding quality candidates. Franchisors who aren't picky often pay the price with a weak system. Look for franchisors who are particular about franchisee selection. If the franchisor is selling franchises to just anyone rather than awarding territories to a chosen few, that's a red flag.
- Resting on their laurels: Franchisors should always look toward the future. Brands that embraced technology early were prepared and able to stay ahead of the pandemic. Look to invest in a franchise system that strives for constant improvement and that values innovation and cutting-edge technology.
The ideal relationship
Ideally, the franchisee-franchisor relationship is much more than a simple business agreement. With many brands, it is. Often, you'll find a family-like culture of caring and teamwork from both sides. Throughout COVID, franchisors have proven their dedication to their franchise partners by going above and beyond, and giving a sense of "we’re all in this together." Likewise, franchisees have stepped up beyond their own locations to benefit the entire system. Here are a few examples of what both parties can do to make an ideal partnership.
Qualities of a great franchisee
Following the franchisor's system is essential, but franchisees can take extra steps to make the most of his business and better the system. Here's what ideal franchises do:
- They are collaborative. Franchisees have a unique resource in each other. By calling on each other, and sharing what they have learned along the way, they create a culture of collaboration, which strengthens the brand. In many systems, franchisees hold mastermind meetings or think tank sessions for each other. Franchisees who have been in the system for a while can take on leadership or mentoring roles with newer owners.
- They are community-driven. Mission-driven franchisees can make huge impacts in their local communities by donating services to those in need. Franchisees and their employees can feel good about helping others while bringing positive press to the brand.
- They have a growth mindset. A franchisee who is engaged in his business and continues to grow will not only benefit themselves, but the entire system. Most brands seek business-minded professionals who work on the business rather than in the business.
Qualities of a great franchisor
Doing all that's promised in the franchise agreement is a given, but franchisors can do a lot more than that to help their franchise partners succeed. Here's what stellar franchisors do:
- They are supportive. A good franchisor always has an answer for franchisees and doesn't leave them hanging to figure things out for themselves. In the heat of the pandemic, franchisors assisted their franchise partners in many ways, including obtaining Paycheck Protection Program funding, creating COVID-specific marketing materials, and pivoting their business models to adhere to social distancing regulations.
- They are passionate and positive. Owning a business, even in the best of times, isn't easy. Part of being a good franchisor is coaching franchisees through doubt and fear with a positive and encouraging attitude. The franchisor should be the biggest cheerleader for the brand and for his franchise partners.
- They value input and opinions: Even though franchisees should follow a franchisor's system, they often have the best insights into the nitty-gritty of the business. Franchisors who value franchisee’s input and suggestions win with a stronger system that has a culture of collaboration.
Just like with any relationship, a franchisor-franchisee partnership takes effort and compliance from both sides. By design, the structure was built for success for both parties. With proper research and due diligence, you'll be sure to find a brand that is a perfect fit and will lead to long-term success for you and the franchisor ... sort of like the business version of a match made in heaven.