29 Jul Avoiding the Most Common Franchisee-Franchisor Issues
Franchising is a unique business model with the potential to be a win-win for both the franchisor and the franchisee under the right conditions. In the United States alone, franchising is responsible for $757.2 billion of economic output in 2019, and franchisee success is roughly 8% higher than the independent business success rate.
Unfortunately, like any other type of business endeavor, there are unique risks and issues that can arise. However, in franchising many of the most frequent issues stem from the franchisor-franchisee relationship. Whether you are thinking about franchising your business or becoming a franchisee, many issues can be avoided if careful attention is paid to the following areas.
In franchising, there are three key documents that will help the franchisee understand the opportunity and ultimately dictate the franchisee-franchisor relationship. These documents are the franchise business plan, the franchise disclosure document (FDD), and the franchise agreement. In order to have a mutually beneficial relationship, it is imperative that the franchisor presents the information about the franchise in a fair and honest manner and the franchisee thoroughly understands these documents.
Both parties should involve professional services as they relate to these key documents. On the side of the franchisor, they should use a franchise business plan writer to draft their plan before presenting it to potential franchisees. The business plan sets the tone for a potential franchisee’s understanding of the business and franchise business plan writers are skilled at effectively communicating a business concept to outside parties.
The franchisor will also likely utilize a franchise consultant when initially developing their franchise model. At a minimum, the franchisee will want to consult a franchise lawyer to advise them and review their documents, especially the franchise agreement which legally governs the relationship despite what was in the original business plan or FDD.
There are two common issues that come from the documents themselves. The first is that the franchisee does not fully understand the structure of the franchise and the obligations of both parties. The second is that the franchise agreement is not reviewed in full. Although it will contain many of the issues in the FDD, it is the legally binding document and it is just as important to understand what it does not cover as well as what it does. If both parties do their own due diligence, any future misunderstandings or hard feelings can be avoided and the relationship will start with a solid foundation.
One of the fundamental aspects of the franchise relationship that is revealed in the documents is the initial training. Training has the potential to make or break a franchisee. Inadequate training regularly leads to issues where the franchisee feels ill-prepared and franchisors feel like they aren’t getting the results they expect. It is in the best interest of the franchisor to provide a well-developed training plan, but too often this isn’t the case. Franchisors should ensure their systems are refined and easily replicable, and that their training adequately covers all processes. It will likely be necessary to work with professionals to develop effective training. Continuing to solicit honest feedback from new franchisees to continue to improve training and support can also go a long way to improving training over time.
As the franchisee, you should manage your expectations around training. You can do this by making sure you have a deep understanding of what the training process will cover. If it is not adequately covered in the business plan or FDD, ask for more information. You could ask to see samples of training documents or, if possible, talk to existing franchisees about their training experience. The approach to training may help you choose between franchises. Further, managing what is expected from a training program can eliminate issues before they have a chance to arise.
The Financial Obligation
There are few surprises that have a more immediate impact on business relationships than those relating to money. At the end of the day, the franchisor-franchisee agreement is a financial one in which both parties have the ability to thrive. As a franchisor, the long-term strategy should be to have motivated, successful franchisees. The way to do this is to offer fair but lucrative franchise fees. Constructing a financial arrangement in which the use of the brand, IP, and systems and processes are adequately covered but allow plenty of profit for the franchisee will keep them motivated.
As the franchisee, make sure you have carefully considered the numbers and understand what a regular owner’s draw from the franchise is likely to look like and when you can realistically expect to make a profit. This can take years in any business but, in franchising, this delay can be due in part to franchise fees, which add up. One-time initial franchise fees alone are $20,000 to $50,000 on average according to the SBA. That is just to “join” the franchise and doesn’t include any of the costs for building or remodeling a store and other early costs or the ongoing royalty and marketing fees. As with training, you should work to manage your expectations around the finances to avoid disappointment and issues down the line.
These are just a few of the most common areas that lead to conflict and disputes in a franchisee-franchisor relationship. Careful attention, planning, and consideration of these areas will help foster a positive relationship that will provide benefits to both parties.