The Roles and Goals of Franchisors and Franchisees - dummies

The Roles and Goals of Franchisors and Franchisees

By Michael H. Seid, Joyce Mazero

The franchisor and franchisee are in distinctly different businesses — they merely share a brand. In a franchise, the franchisor licenses to the franchisee an operating system, and the franchisee provides the products and services to consumers.

As a licensor, the business of a franchisor is to develop, license, support, and expand an indirect system of distribution of its branded products and services. As required under the law, it is the franchisor’s responsibility to establish brand standards and enforce how the franchisee meets those brand standards sufficient to protect consumers. In contrast, the business of a franchisee is to independently manage and operate their business to the brand standards established by the franchisor.

In this interdependent relationship, the franchisor generally has no contractual right to manage or supervise the day-to-day business affairs of its franchisees, and its rights to enforce its standards are limited to those agreed to in the contract between the parties. The franchise relationship effectively runs on trust, as the ability of a franchisor to enforce its brand standards is ultimately limited to its right to default and terminate noncompliant franchisees — a relatively high bar under the law.

Looking at the world through franchisor lenses

Who a franchisor is may vary. It can be a large or small company with a long history of successful operations or it can be a startup with little or no experience. Some examples include the following:

  • Roark Capital is a private equity firm with over $6.5 billion in equity capital. Some of its portfolio companies include 1-800 Radiator, Anytime Fitness, Arby’s, Auntie Anne’s, Batteries Plus Bulbs, Bosley’s, CARSTAR, Carvel, Cinnabon, CKE Restaurants, Corner Bakery Café, Econo Lube & Tune, Great Expressions Dental Centers, Home Service Stores, Il Fornalo, Jimmy John’s, Maaco, Massage Envy, McAlister’s Deli, Meineke, Merlin, Miller’s Ale House, Moe’s Southwest Grill, Naf Naf, Orangetheory Fitness, Pet Supermarket, Pet Valu, Primrose Schools, Pro Oil Change, Schlotzsky’s, Take 5 Oil Change, and Waxing the City.
  • Foumami, Dat Dog, Beverly Hills Rejuvenation Center, and Americas Escape Games are small and relatively new to offering franchises.
  • Firehouse Subs, Sport Clips, FASTSIGNS, Bright Star, and 7-Eleven are larger, well-established franchisors.

All great franchisors provide their franchisees with a uniform operating system and train and support them to independently manage and operate their business. When looking at franchising, consider that new businesses don’t usually fail because their products or services are of low quality — they fail because of unknowns and lack of resources. Established franchisors have made and survived their mistakes, and that is one of the benefits of working with established companies — you can generally avoid a lot of the minefield of blunders that startup businesses usually face.

Franchisors don’t set standards, nor do they provide assistance, out of the kindness of their hearts. It is important to them that their franchisees deliver a consistent, sustainable, and replicable quality of products and services to consumers. They need the system to grow, prosper, make profits, and achieve a solid return on investment at every level, and to achieve that they design their systems so that franchisees can easily execute to their brand standards. If they do that well, franchisees can make money, stay in business, expand, and pay fees. The franchisor’s brand value grows as more people shop at its branded units — and because of everyone’s success, additional investors will want to become franchisees.

The franchisee’s end of the bargain

When you invest in a franchise, you are not buying a franchise. You can’t because all the franchisor is providing to you is a license allowing you to use its brand name and methods to operate your business, and you only get those rights for a specified period of time.

As a franchisee, you own the physical assets of your business: the land, building, equipment, and so forth. You are not buying the franchisor’s brand or systems, and in some franchise system, the franchisor may even retain the right to purchase your assets when the franchise relationship ends.

It may not sound like much of a deal, but here’s what you get when you join a well-established franchise system:

  • Brand standards and enforcement by the franchisor
  • A proven and successful way of doing business
  • A recognized brand name
  • Training and ongoing field and headquarters support
  • Research and development into new products and services
  • Professionally designed local, regional, and national advertising and marketing programs
  • Often, a chance to invest in additional franchises
  • A shortcut around the common mistakes of startup businesses
  • Often, a buying cooperative or negotiated lower costs from suppliers for many of the things you need to run and operate the business (ingredients, advertising, insurance, supplies, and so on)
  • Your fellow franchisees as a network of peer advisors
  • Sometimes a protected market or territory in which to operate your business

Franchisors don’t always provide their franchisees with a defined area around their location in which no other company-owned or franchisee-owned business are allowed to operate. Many do, but even then the market area provided may not be an exclusive territory and may only be a protected territory. An exclusive or protected territory may be defined by the following:

  • The radius or area around the franchisee’s location
  • The number of households or businesses in an area
  • The number of people who live in an area
  • Zip codes
  • Counties
  • Metes and bounds using highways, streets, or other geographic measures

Metes and bounds is an old English term still used in real estate today. A mete defines the measurement or distance, and the bound describes the physical feature like a road or a river. You will see it frequently used to describe territories in franchising.

  • Any other method that defines the area in which no other same-branded location may be established or in which the franchisee has some protection

From the franchisor’s perspective, if the territory is too large, the total market will not contain enough locations to achieve brand recognition. From the franchisee’s perspective if it is too small or if other locations are too close, there may not be enough customers to support the business.

The goal for franchisors when granting any type of territorial protection is to ensure that they have the right to develop sufficient locations in an area to achieve brand penetration — the number of locations in an area sufficient to service the market and to ensure that consumers see the brand frequently.

Even when a franchisee is granted territorial rights, they may not be permanent and may only be provided for a limited period of time. Some franchisors may also require franchisees to reach certain levels of performance to maintain those rights. And in some systems, a protected territory may overlap with another. If you are a prospective franchisee, make sure you read the contract, and consult with a lawyer to make certain you understand the territorial rights the franchise agreement provides.