Tweet

Roles and Responsibilities of Franchisees and Franchisors

Written by: Bob Richman

Article Overview: Who does what? In the franchise system, there are two roles: franchisee and franchisor. The two work together to create and expand a successful business concept. So what role does each play in relation to the other?

Roles and Responsibilities of Franchisees and Franchisors

In the franchise system, there are two roles: franchisee and franchisor. The two work together to create and expand a successful business concept. So what role does each play in relation to the other?

The Franchisor
The Franchisor has built a successful business system and is willing to sell you the right to use that system, and all that goes with it, to begin your own business. An important distinction is that the franchisor is not selling you a business; he/she is selling you a right to operate a business using an established system.

The goal of the franchisor is the same as any other business owner; to increase the value of their business. In the franchise arena, this is accomplished by selling the right to use their business model so that there are more franchise locations doing business successfully. In this way they expand their market reach, increase the value of the franchise, and the brand as a whole grows. As the number of successful units grows, the franchisor's royalty stream (the percentage of profits they get from each unit) also grows.

It is in the franchisor's best interest to continue to support you as you exercise this right to do business. Some of the things you can expect from a franchisor are:

* Professional national marketing and advertising materials and campaigns: they are still the captain of the fleet and will manage the overall strategy of the brand.
* Management of products and services for the brand as a whole, including research and development of new products and services. A proven system of doing business.
* Protected territory from other in-brand units: in other words, they will manage how close your market area is to another unit so there are both enough stores to have good market penetration, and also enough territory for each store to generate the business they each need to operate successfully.
* Opportunities to own more than one unit.
* A network of colleagues.
* Frequently, a buying cooperative; that is, a group of people who together have more buying power and ability to negotiate prices than does a single business owner.

The Franchisee
The Franchisee is ready to start a new business, but may not have enough experience in running a business to be comfortable starting one from scratch. Most new businesses have a fairly high failure rate, sometimes due to mistakes made by inexperienced business owners, other times due to unexpected conditions in the market. What the Franchisee is looking for is a leg-up in starting a business so they have an increased chance of success. This is exactly what purchasing the right to use an existing business system and brand name provides them.

What you need to keep in mind is that this is your business, but someone else's brand. It's your responsibility to find and negotiate your lease or building, but the Franchisor will usually provide guidance. You are responsible for hiring and training all employees, but again, the Franchisor can provide helpful tips for recruiting and employee development. You manage all of the pieces of the business yourself, tapping into the expertise of those from whom you've purchased this system whenever you need advice. You can also expect the franchise to provide training in the methods of running your business according to the system they licensed to you.

What is important for you as the Franchisee to understand from the beginning is that while you are part of an entire franchise system and will work as a partnership, you are not actually a partner. This doesn't mean that you have no say in how the business is run, but it does mean that your say is limited. In more established franchises, there is usually a franchise group that represents the franchisees' interests and works with the franchisor to present ideas and resolve business issues to the benefit of the franchise as a whole.

If not quite a partner, the franchisee still can expect from the franchise those things outlined above. So what can the franchisor expect from you?

* Well money, of course. You can think of it as leasing their ideas. Each month you will report on your financials and a certain percentage of the profit you make goes to the franchisor. They use this money to fund things like advertising campaigns and research and development of new products, and to grow the value of the brand.
* You to run your business according to their standards regarding products and services. Consistency from store to store is what brings customers into franchise businesses. A customer should expect to get the same product or service from that brand name regardless of which building they walk into. If you don't, other units suffer.

It's important to note that the services listed above are somewhat standard to all franchise systems, but the extent to which they are applied varies greatly. Your Franchise Agreement will explicitly state the levels of support you will get in terms of advertising, training, and other areas. If it isn't in writing (in your Franchise Agreement) then it's not required. Keep this in mind during your conversations with any franchise organization.

Related Articles
  Aid That Franchisors Provide to Franchisees
  Negotiating the Terms of Your Franchise Agreement
  FranchisorFranchisee Relationship
  6 Attributes of Franchise Systems Worth Investing In
  Handling Explosive Growth

Article Tags: advertising materials, best interest, brand management, business concept, business model, business owner, business system, doing business, franchise locations, franchise system, franchisee, franchisor, management of products, market penetration, national marketing, overall strategy, own business, proven system, royalty stream, successful business



Related Forum Posts
Think like an Association - Hey Sebastian, Maybe you could try thinking like an Association... I would study the structure or formats used by other Associations. What are they doing to add value for their members? The BBB plays a monitoring role for consumers by gathering data about business' that are behaving badly. And they're pretty successful at it too. Maybe you can offer a 'Platinum Program' that franchisors buy into. Accredited members only. Criteria could be strict: 1. Age (stability): 10+ years 2. Satisfied franchisees: 85% + satisfaction 3. Size (stability again): 250 units 4. Strong profits 5. Great management -Maybe a 'Gold Program' for those Franchisors that aren't quite at that level, but can strive to reach it... -Top 100, 500, 1000 Listing for qualified members... maybe a slap at Entrepreneur.com and their biased top 10 lists... -Maybe act as a monitor like BBB? -Maybe team up with FranSurvey OR do something similar for each member (not sure about Fransurvey's rep, but I like the concept) There's so much discontent within the franchising arena that I think if you were part of the solution, then you could create a win/win with your Association. The only downside is that this power can get abused if there aren't good checks and balances within the association.
Re: Kevin's Case Study #6 - Marketing an information resource? - [quote="Evan":3ndb7usp]Hi Sebastien, I'm wondering about two things: 1) What is your current revenue model? 2) Why would franchise owners choose to sign up with you over the lead generation companies? Is there some kind of quality control certification that you could award them to say that they are a World Franchising certified franchise? I'm not clear on what benefits a company seeking to franchise would really get from your site beyond the lead generation component.[/quote:3ndb7usp] Hello Evan, 1. We currently make money from what you may call lead generation. Franchisors pay us a fee to be on our websites and in our top seller franchise guides. We also generate money from other avenue; mostly by selling hard-to-get information about franchising (UFOCs, etc...) 2. That's exactly what I'm trying to answer.... I want to get away from the lead generation perception. I want to be seen as a good information resource, which we are. I have started to take the association angle and I am now looking to provide great benefits to our Members (used to be called clients). I think I'm on the right way. I made a lot of progress the last couple days.
Information about doing franchise business in China - CHINA’S FRANCHISE LEGAL SYSTEM Introduction Franchises has a history of more than one hundred years in foreign countries, now it has developed to be a mature business mode, and it is widely used in many countries, especially the developed ones. Recently, franchises has been developing fast in China, covering more than sixty industries and trades such as catering, retailing, clothes-washing, indoor decorations and gym. However, the market order of franchises is chaotic in some industries and areas. There are also some illegal and criminal activities under the guise of franchises. Under such circumstances, several important laws have been promulgated to regulate the commercial franchising activities. Applicable Legislation The main legislative provisions governing the commercial franchising in the PRC are: the Measures on Administration of Commercial Franchises; and the Measures on Administration of Archival Filing of Commercial Franchises; and the Measures on Administration of Information Disclosure of Commercial Franchises Qualification for Franchisors According to the laws, the franchisors as those enterprises who own such business sources as registered trademarks, enterprise logos, patents and proprietary technology, and license these business sources to franchisees. Firstly, the franchisors shall be enterprises, excluding other economic organizations and individuals. Secondly, the trademarks which can be licensed to franchisees shall be registered trademarks. According to the Trademark Law, the trademarks, whether registered or not, are protected under the laws, though there is difference in the vigor and extents of protection. It seems that the Ministry of Commerce has restrictions in recognizing trademarks, since it only provides “own trademarks to be licensed to others” at large, which causes chaos in practice. In the cases relevant to franchising disputes which we provided legal service to, all of them involve the situation that the franchisors granted licenses of non-registered trademarks or the trademarks which were in application to others, and when there was infringement on trademarks, the franchisors were unable to prevent infringement on trademarks. Then the interests of the franchisees could not be realized. What’s more, franchising activities with non-registered trademarks also, to some extent, encourage commercial frauds. Thirdly, the logos, patents and proprietary technology of enterprises are included in the business sources to be licensed to others for the first time, which enlarges the application scope of franchises and will improve the development of franchises. Requirements to be Met in Carrying on Franchising Activities In addition to the condition that only the enterprises will be allowed to carry on franchising activities referred to above, the franchisors shall also have mature business modes, and are able to provide business guidance, technology support and training. The enterprises which copy the manuals, websites and enlisting documents of others, and have no service abilities for providing business guidance, technology support and training shall be excluded. What needs pointing out is that even these enterprises that are allowed to carry on business may face with the suits claiming them for unfair competition and infringements on intellectual properties. In addition, the Measures clearly request that the franchisors shall operate at least two directly operated shops, and the period of operation shall be more than 1 year, which aims to prevent frauds by the way of franchising. Information Disclosure Requirements and Regulation on Franchisors Information disclosure system is the core system of franchising. The laws provides that the franchisors shall establish and implement a perfect information disclosure system, and provide the relevant information and franchising contracts in written form, at least thirty days before execution of franchising contracts. It also sets out the specific provisions on the information which shall be provided by franchisors, including the basic conditions and commercial reputation records of the franchisors and their legal representatives, business sources owned by franchisors, abilities of franchisors to provide service to franchisees and management and supervision on business of franchisees, franchisee fees and the payments, and budgets for investment in franchising shops. To the franchisors that violate these provisions, the authorities in charge of commerce will order them to rectify, charge penalties and make public statements. Archival Filing and Public Announcement Systems To protect the franchisees’ lawful rights and interests, considering the asymmetric information between franchisors and franchisees, in addition to intensifying information disclosure requirements and regulating the activities of franchisors, the Measures also bring in the archival filing and public announcement systems. The Measures provides that the franchisors shall make a filing with the commerce administrative department within 15 days after the execution of franchising contracts for the first time. Anyone who intends to engage in any commercial franchise activities within a province, autonomous region, or municipality directly under the Central Government shall go through the archival filing formalities in the commerce administrative department of the people’s government of the province, autonomous region, or municipality directly under the Central Government where the franchisors are located. Anyone who intends to engage in any commercial franchise activities beyond a province, autonomous region, or municipality directly under the Central Government shall go through archival filing formalities in the commerce administrative department of the State Council. Any franchisor having been engaging in franchise activities before May 1, 2007 shall apply for archival filing at the commercial administrative department. The Ministry of Commerce has established the national network for archival filing work relating to commercial franchise. Any franchisor shall go through the archival formalities through the government website. The general public may obtain the following information through the government website of the Ministry of Commerce: (1)The registered trademark(s), enterprise mark(s), patent(s), know-how and other business resources of the franchisor; (2)The franchisor’s archival filing date; (3)The location of the legal business place, contact information and name of the legal representative of the franchisor; and (4)The location of the business place of the franchisee(s) within China. The authorities in charge of filing will cancel the archival filing if there is any following activities of franchisors, and make public announcement on the government website: (1) the business licenses of the franchisors have been withdrawn by the registration administrative authorities for illegal business; (2) the authorities in charge of filing receive judicial suggestion letter on cancellation of archival filing from the judiciary for illegal business by franchisors; (3) the franchisors conceal the relevant information or provide false information, which has been proved; (4) the franchisors carry on cancellation by themselves. In addition, the illegal activities of the franchisors will be announced to the public. By Erex Chen, a Chinese lawyer based in Shanghai.
Franchise Success Factors - Evan, I know it's been a while but maybe this will help: A great piece of information (academic research) that is important to all franchisors and franchisees is that of Scott Shane and Chester Spell who demonstrate that ¾ of all franchise systems fail within the first 12 years, and less than 1 in 4 survives until the end of the contract. Originally published in the Sloane Management review in 1998 the article is one of the more common sense pieces of writing covering the franchise industry. They identified a number of important franchise success factors that should be used to assess the likely success of a franchise system. They are: •Rapid growth (or planned rapid growth) of the franchise means that they can begin to reach a level to compete with existing players in the marketplace. •Local management support of the franchise aids rapid growth •Demonstrable trustworthiness and high quality systems They studied 157 companies in 27 industries and identified that one third of systems stop franchising in their first four years. They say “The high death rate of new systems suggests that franchising is not an easy business”. They developed a model called NewFran which points to the contributing factors of success: •A recognised successful history before franchising. This resulted in a recognised ‘brand name’ that could not be easily copied. Systems, marketing, premises e.t.c could be easily copied by competitors – a brand could not •Economies of scale i.e cheaper costs because they are larger, in marketing. This was achieved through being a bigger brand. •Rapid growth of the franchise allowed the brand name to develop quickly and stop competitors from copying or replicating the business idea. •Using local franchisees to use their local knowledge to determine local business decisions and operate with fewer ‘local field operations’. This means the franchise resources can be concentrated on branding, marketing and growth. The entrepreneurial ‘drive’ of the franchise owner is concentrated on building the business. The opposite of this is by keeping close control on local franchisees by appointing Master Franchisees. This was shown to develop ‘passive ownership’ which undermines the entrepreneurial incentives of outlet ownership. The said “therefore growing quickly, through master franchising, increases the probability of system failure” The article recommends some things off the back of this that seem to go against some of the ‘industry norms’ of franchising: •Franchisees should seek franchisors that are expanding rapidly. •Franchisees should not seek a franchise that promises a lot of field support •A lean operation at headquarters is a success predictor •Franchisees should seek franchisors with strong brands or at least a plan as to how they will develop a strong brand •Franchisees should be a member of a regulatory body •Franchisees should be wary of franchises that offer master franchising. Whilst this speeds growth it also increases the likelihood of failure. I would agree with all of the points raised and would like to just clarify that they suggest that in depth field support is bad – not in depth sales and marketing support. cheers


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Bootstrapping Your Start Up Business.

Leading with Discernment

Why Use an Advertising Agency

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.