For decades the term “selling a franchise” has been incorrectly used to describe the transaction of granting a franchise license to a franchisee. Why is the term “selling” incorrect when used to describe something that has nothing to do with sale of a service or product? Just like a drivers license a franchise agreement has:
- An Expiration Date
- Rules and Regulations That Require Adherence
- Costs To Renew
- The Ability Of The Licensor To Revoke The License
For over 25 years, Management 2000 has taught that the franchise agreement is not a sale of any sort. However, if the term “selling” is used in the negotiations or in conversations, the franchisee will think they bought something from the franchisor. The franchisee will be encouraged to believe that they own their franchise. Franchisees could choose to ignore the franchise process (and often did) if they thought that it was in their own interest. Lawyers however, have always understood that in the legal agreements that bind the franchisee to the franchisor, the agreement must clearly state that the franchisor has granted the person the opportunity to operate a business with the brands systems and processes, the inference being that should the franchisee deviate from the process, the franchisor can revoke the license. This wording has saved many franchisors in their process of brand building and recognition.
What were the implications of using the incorrect terminology when finding new franchisees? Once people decided that a franchise could be sold, mistaken perceptions were created:
- Franchisees were called owners
- Since the franchisee had to own something (since it was sold to them) the franchisee decided they owned the brand and the operating system
- Since there is now a product “the franchise”, there is a new industry. To date franchising has never been recognized as an industry, there is no S.I.C. code (Standard Industrial Classification) for franchising. Neither Forbes nor Fortune magazine for example, recognize franchising as an industry, although they list brands that franchise
- The royalty fee was presumed to be payment for support from the franchisor
- Since the franchisor was the factory, the franchisor is now the franchisee’s vendor
- These owners (franchisees) got together and formed owners councils to negotiate their agendas with their vendor (franchisor)
It is essential that the franchisors to take the time to explain the agreement with potential franchisees and make sure that they understand:
- The concept of granting a franchise
- What the royalty is for
- What the initial franchise fee is for
- The role of the franchisor
Educating the franchisee on the exact relationship between franchisee and franchisor will lead to a more positive working relationship. Understanding that the franchisor and the franchisee are in the franchise process together, working as a team, will create more profit for everyone. The franchisor has spent time and investment perfecting the system for the brand. Using the system correctly will produce the greatest success for the franchisor, the franchisee and the brand.
We hope you enjoyed this segment on “Selling a Franchise”. Please visit us again soon for more insight.
“Granting a Franchise: The Term of the Future
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