Chapter 4

The Franchisor and Franchisee

Relationship
Overview:
Franchising is one of the only means available to access investment capital without
the need to give up control in the process; under the franchising agreement, the
franchisor has all the control and authority to make business decisions even though
the franchiser undertakes the business operations. By nature of the franchisor-
franchisee relationship, the franchise agreement will be imbalanced in favor of the
franchisor, as the franchisor must all the time remains in control over certain
standards critical to the on-going success of the business format. Liang (2009)
constructed a dynamic model to value the franchise The internet
contractsis the
that global
take into account
system of interconnected
the structure of guarantee profit for the franchisees. They find that guarantee profits
computer networks that use the
become more crucial in competition whenInternet the franchisor is less
protocol profitable
suite to link or the
business environment is getting volatile. The environment
billions where worldwide.
of devices the franchise is
located is an important factor to consider vis-àvis financial performance is concerned.
In the case of global franchisor and domestic franchisee, there must be a certain
degree of autonomy for the franchisee to decide on issues affecting his franchise unit
that is relevant to business profitability). Too much control from the franchisors would
curtail chances for the franchisees to exploit emerging opportunities and overcome
impending problems. The success ability of a franchise business may be impaired due
to reasons which may not be expected by the potential franchisees. Cont.
The management of a business format franchising must be given enough attention by the
franchisor and must be well-executed by the franchisee because it can be a great influence
in gaining financial success to both parties. A franchisor–franchisee relationship that is
derived from a give-and-take state of affairs can be considered as flexible and dynamic;
the capability of each party to arrange the agreement based on his/her benefits or
advantages is depending on the balance of resources of two involved parties
 Franchise Agreement
Franchising is a business arrangement
wherein a firm (the franchisor) collects up-
front and ongoing fees in exchange for
allowing other firms (franchisees) to offer
products and services under its brand name
and using its processes. Moreover, the
franchisee is supported by the enduring
commercial and technical assistance from
the part of the franchisor. This all happens
during the term of a written franchising
contract that is concluded for this purpose
between the two parties
is essentially a legal document between the
franchisor and you (the franchisee). It is a On the provision of the franchise
legal binding agreement. It explains in detail agreement, the franchisee is
what the franchisor expects from you, as a granted the privilege to sell a
franchisee, in the way you operate every product or service and undertake
facet of the business. There is no standard business as individual but is
form of franchise agreement because the required to operate the enterprise
terms, conditions, and the methods of according to the methods and
operations of various franchises vary widely terms and conditions of the
depending on the type of business. Every
franchisor (Berdnt, 2009
franchisee is required to sign the franchise
agreement, and the franchisor will also sign
the document. A word of caution, a franchise
agreement is a binding legal document and
you may want to have a franchise attorney
review it on your behalf prior to signing.
 THE FRANCHISE AGREEMENT

The success of the franchisor-franchisee relationship

might depend on the contractual arrangement of both
parties; the transaction between a franchisor and
franchisee is a lot more complex than traditional buyer-
supplier interactions, not only are there certain
responsibilities in a franchise relationship to retain the
value of the trademark, but the relationship are also
sensitive to conflicts due to power and dependence

2023
between the parties. The relationship should always be
a win-win situation and this aspect of the commercial
relationship must see by the franchisee and the
franchisor on the franchising contract.
 Contents of Franchise Agreement

Terms of Agreement – specify how long the franchise agreement will last.

Renewal – this will grant the franchisor the chance to review the franchise agreement
thus enabling him to decide whether to renew the agreement or not.

Investment amount and fees – this explains the total amount of investment costs and
its inclusions as well as the date the franchisor is to be paid including:

Franchise fees – the initial franchise fee and this may be non-refundable. It is
paid at the start of a franchise relationship thus giving the franchisee the right to
engage in a business using the franchisor’s name and the business system
 Contents of Franchise Agreement
Royalties – these are usually the percentage of the franchisee’s sales and are
typically paid weekly, bi-weekly or monthly.

Marketing contribution – this is also based on the franchisee’s sales.

Training and Support – the franchise agreement should state the training and support the
franchisor will provide.

Purchase of products – supplies, and products are used in the franchise system
should maintain consistency, hence a detailed list of suppliers accredited by the
franchisor is provided in the Operations Manual.

Territory – this determines the geographical boundaries a franchise may operate or

within which no other unit of the franchisor’s businesses may compete.

Termination – this explains the grounds for termination of the contract. In some cases, violations
of such conditions may be remedied over time; such may lead to termination of the franchise
contract.
 THE FOUR PHASES OF FRANCHISEE-FRANCHISOR
RELATIONSHIP

Phase 1. RECRUITMENT
Phase 2. GROWTH
Phase 3. MATURITY
Phase 4. THE END OR A NEW
BEGINNING–
 Benefits of Franchise Relationship
The franchise organization needs to promote
a healthy two-way way relationship between
the franchisor and the franchisee; in the
case of the franchising relationship, the
franchisee would determine whether the
franchise had met (or exceeded) his/her
expectations and what emotions accompany
this situation. Franchisees tend to benefit
more intensely from the franchisor’s service
assistance and knowledge at the beginning
of the franchise agreement than later on.
According to Hisrich et al. (2010), what you may
buy in a franchise as a franchisor includes a
product or service with established market,
favorable market, patented formula or design,
trade name or trademarks, financial
management system for controlling the financial
revenue, managerial advice from experts in the
field, economies of scale for advertising and
purchasing, head office services and a tested
business concept. A franchise business can be
conceived as beneficial to the franchisor and
franchisee; the franchisor achieves a greater
financial success with just a limited or small
capital outlay while the buyer of the franchise
has all the privileges to own and operate the
enterprise with proven business methods and
procedures and assisted by an expert. These
only prove that this kind of business relationship
can bring dyadic benefits to both parties.
Keeping the relationship of the
franchisor-franchisee harmonious
usually seems to fall on the
franchisor. Some franchisees
crave constant communication,
regular updates, new and
innovative ideas, and as much
support as they can get. Working
for a franchisor can sometimes be
a result of a broken relationship
that can lead to the untimely
demise of a once-successful
franchise store
Benefits of Franchise Relationship

Norman Scarborough (2011) mentioned that a

franchisee gets the opportunity to own a small
business relatively quickly, and because of the
identification with an established product and the
brand name, a franchise often reaches the break-
even point faster than an independent business this
is probably because the franchise system has
already gain recognition not only in the domestic
market but globally with its very impressive record of
success of operations
 ECONOMIC AND FINANCIAL RELATIONSHIPS OF FRANCHISORS AND FRANCHISEES

A. The Franchisor as a Supplier of Intangibles and Services – a franchisor supplies a variety of

. intangibles and services to its franchisees. The franchisor is a supplier of intellectual property,
granting to its franchisees the right to use trademarks, trade dress, confidential information, a
business format and a management system.

B. The Franchisor as a Supplier of Tangible Products – a franchisor may be a supplier or

designate a limited number of approved suppliers entirely for quality control or trade secret
protection purposes, or to establish a convenient, reliable and low-cost supply source for its
franchisees and franchisor owned outlets (charging only small mark-ups on goods sold to
franchisees and relying on fees as its principal source of revenue). A franchisor also may
structure its supply program as a significant profit center (in lieu of or in addition to fee revenue).
 ECONOMIC AND FINANCIAL RELATIONSHIPS OF FRANCHISORS AND FRANCHISEES

3. The Franchisor as a Source of Capital – though probably only a minority of franchisors offer
financing, or make arrangements for third-party financing, to their franchisees, it has become
more common in recent years for franchisors to be a direct or indirect source of capital for their
franchisees. Financing may be provided directly, indirectly through general or limited guarantees
or buy-back or resale arrangements with third-party lenders or suppliers, by leasing a business
facility to the franchisee, or by other means.

4. The Franchisor as Landlord – in some franchise networks, the franchisor may be the
franchisee's landlord, either leasing to the franchisee a site owned by the franchisor or subleasing
to the franchisee a site to which the franchisor holds the prime lease. Generally, only mature and
well-capitalized franchisors are able to act as landlords to their franchisees and this relationship is
most common in food service and in franchise networks that lease sites in regional malls (where
the franchisor will usually be a more acceptable tenant)
Thank you for Listening