Understanding the Franchisee – Franchisor Relationship

September 24, 2010 | By

The Franchisee - Franchisor RelationshipThe franchise industry has come a long way since the 1800’s, when the Singer Sewing Machine Company effectively introduced the first “franchise” to America. Singer established “dealers”, taught the dealers how to use their machines, gave them instructions on how to sell the sewing machines to the public, and supplied them with replacement parts. The dealers made profits, and the Singer company prospered from this relationship.

Prospective “dealers” bought into the “Singer dream” by the scores… they could own their own business, and the Singer Sewing Machine Company gave ongoing help to its network through training, support, and advice. (And in this case, it even supplied them with the product). This example is the essence of a true “franchise” relationship.

A successful business concept that is expanded through the efforts and finances of others not connected to the “parent” company is generally termed a “franchise”. If, as a part of the relationship between the “originator” and the “operator” of the concept there is the (1) licensing of any trademarks, (2) payment of any up-front fees, and (3) continuing obligations of the operator to the originator, the business must be regarded as a franchise. A “franchisee” (franchise owner) purchases the right to duplicate a business format franchise for a specified length of time, under the terms and conditions set forth by the franchise company, and at a specific location. A product franchise, on the other hand, may involve distribution of a specialty item (like ice cream) whereby the dealer (the supermarket) may not be identified with the manufacturer of supplier.

The relationship that exists between the franchise company and the franchise owner is somewhat of an arms length alliance. The franchise company is not the “parent company”, and the franchise owner is not a subsidiary. They are separate legal entities. Franchise companies provide a system of doing business, require new franchisees to attend initial training, and provide on-going support services. Oftentimes, the franchise company develops group buying advantages with suppliers to save money for the franchise owners. Franchise owners band together and form regional councils to network ideas, solve problems, and to provide the franchise company with feedback on the “business”.

Franchise buyers pay an initial franchise fee to access the use of the trade name and trademarks, and “buy” into the system. In addition, they pay on-going fees termed royalties (based on a percentage of their gross sales or income) to the franchise company to pay for the support they receive, and to fund further research and development of the business. Some franchise owners also contribute to an advertising fund which pays for various forms of marketing and advertising to benefit the franchise owners. Franchise fees, royalties, and advertising fees vary widely from company to company.

As a whole, franchising exists and succeeds because it is a relationship founded on mutual trust, respect, and the premise that “together, we are smarter than we are alone”. perhaps the most important benefit that accrues to new franchise owners is the learning curve that has been established by the franchise company. There is no need to re-invent the wheel with franchising, as most of the work in setting up the business has been done, and most of the mistakes have already been made.

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