Most people are aware of the general concept of franchising. This setup has allowed many businesses to reach new heights and earn worldwide brand awareness through the mutual effort of the franchisor and the franchisees in their employ. However, wherever there is a partnership involved, there is also the issue of mutual benefit. If you are thinking about becoming a franchisee, you may be having concerns about whether you or your franchisor will be in a more favourable position. Here is some food for thought.
Benefits of franchising
Franchising has a number of benefits for both the franchisor and the franchisee. Being aware of these benefits (and their drawbacks at the same time) will help you better understand what you need to look out for in order to enter an agreement that won’t drive you to the ground. Here are the most important points to remember.
Why is franchising beneficial for the franchisor?
- It gives them the opportunity to expand their business at a faster rate and on a higher scale.
- Franchisee fees give them considerably higher capital for further investment and expansion.
- They get the advantage of economies of scale: higher purchasing volumes will mean better deals, which makes the functioning of the entire franchise more economic.
- Franchisors get to reap ongoing royalty fees from franchisors which provide them with a passive income.
Why is franchising beneficial for the franchisee?
- As opposed to starting a business from scratch, taking over a franchise comes with a much lower risk thanks to the already existing brand awareness.
- An already developed working system makes the process much faster and cuts out the long and tedious trial and error from the equation.
- Even franchisees with less experience can try their hand at franchising as a franchise ideally provides training and continuous support, further minimizing risks.
- Thanks to the aforementioned economies of scale, a franchisee will be able to purchase supplies at much better prices thanks to the franchisor.
How do you know there is mutual interest?
A franchise is built upon mutual interdependence, therefore, a franchise agreement should ideally be beneficial for both parties. A good, balanced relationship between the franchisor and the franchisee is what’s going to allow the franchise to truly thrive. However, how do you know that the terms are in both of your favours? Here’s what you should do.
Talk to other franchisees
Few things will give you such a good idea about the relationship you can expect to have with your prospective franchisor than talking to other franchisees in the same franchise. When you get the FDD (Franchise Disclosure Document), the identity of these people will be revealed, so you can (and should) go ahead and have a chat with them. Learn how they feel about their franchisor. Is it someone they respect and have a high opinion of? Do they see the franchisor as an investor, a partner, or a limiting power?
Read the FDD
As we just mentioned, the FDD is going to provide you with vital information. The identity of the franchisees is just one thing you will learn from it. You should also carefully check the terms of the contract, such as parts about renewal rights. Perpetual renewal rights would be the best for the franchisee. It allows for their growth and to actually reap the fruit of their labour. If the franchisor has the right to deny renewal, you may find yourself having barely made any real profit at the end of your contract term.
Assess the benefits
Not all franchisors offer the same level of benefits. We mentioned earlier that offering training and support is a trait of a good franchisor. Appropriate training is beneficial for both parties involved: the franchisor will ensure that you are ready for the job, while you get to expand your skills and gain new experience through franchising. Another benefit that speaks of a mutually beneficial work agreement is a system of incentives. Great performance should be rewarded, so such programs are signs that the franchisor truly cares about their franchisees.
Mind the communication
Finally, communication is a vital component in all kinds of business, franchises included. It is in both parties’ favour that there is an efficient communication system developed. Communication should, naturally, be a two-way street. You need to find out whether the franchisor is prone to giving out commands or is open to listening to franchisees and analyzing situations. Franchisors actively seeking out feedback is another good sign. All in all, the way franchisors communicate with their franchisees is a great indication of how the relationship will be.
Offering franchisees the appropriate benefits will show that that franchisor’s goal lies in the wholesome growth of the business rather than a quick profit. Better terms will naturally attract franchisees with a more serious attitude, which will, in turn, bring better results back to the franchisor. If one element of this chain is lacking in some respect, the whole system is threatened. This is why you should inform yourself well before deciding on your next step.