You have franchised your business, your FDD is prepared and you are ready to start selling franchises. Now you are a “franchisor” but what does it really mean to become a franchisor? There are couple of answers to this question one answer is a technical legal answer and one answer is a more entrepreneurial answer. Let’s explore both.
Technical Legal Answer
Becoming a franchisor means that you have satisfied federal and state specific franchise laws through a compliant Franchise Disclosure Document that contains audited financial statements and updated information about your franchise system and franchise offering. As a franchisor you are offering and selling to others (your prospective franchisees) the license and right to establish a franchised location that will be operated in accordance with the systems and standards that you have specified. Some legal characteristics of your franchisor status, include:
- You maintain a current and updated FDD.
- Your FDD is registered in those franchise registration states where you are offering and selling franchises.
- You have prepared, maintain and are updating an operations manual for your future franchisees. The operations manual includes detailed information instructing and educating franchisees about the business and the operational requirements that you have established.
- No later than 14 days prior to signing any franchise agreements or accepting any initial franchise fees from a franchisee, you disclose prospective franchisees with your FDD and maintain a record documenting your timely disclosure.
- When you enter into a franchise agreement with a franchisee, as Franchisor you receive an initial upfront franchise fee and depending on the structure of your franchise agreement you obtain the right to receive continuing royalties and other fees. As a franchisor you also undertake obligations to train your franchisees and provide continuing support.
From an entrepreneurial standpoint becoming a franchisor is all about creating and building relationships with your franchisee partners and, together, expand and grow your brand in ways that you could not achieve by yourself. As a franchisor you are accepting a leadership role and a role of responsibility where your franchisee partners put their trust and faith in you and, likewise you put your trust in faith in them. Becoming a successful franchisor means creating a win-win relationship with your franchisee partners and by firmly leading in a direction that insists on operational consistency and brand integrity. Some entrepreneurial characteristics of your franchisor status, include:
- You are focused on brand and unit expansion and you understand that expansion requires a focus on attracting qualified and well capitalized franchisees who will be focused on executing your operational plan.
- You understand your relationship with your franchisee partners needs to be firm and uncompromising in terms of operational performance and maintenance of system and brand integrity but also flexible in terms of providing your franchisees with additional training, support, leadership and operational assistance.
- You understand that franchise systems don’t and shouldn’t grow overnight and so you are focused on a 1 year, 2 year, 4 year and 5 year growth strategy and you understand that as your base of franchisees grow so will your resources for supporting your franchisees.
- You understand that critical to your franchise system will be maintaining active metrics and information about your franchisee performance to identify weaknesses and share system wide financial performance metrics that may motivate your franchisees.
- You are focused on building a franchise system where your franchisees achieve a worthwhile return on investment, your brand grows favorably among consumers and your franchise system builds a stable but growing base of revenues that you receive from initial franchise fees and continuing royalties.
Rights You Will Receive as a Franchisor
As a franchisor the rights and obligations between you and your franchisees will be governed by your franchise agreement. Your franchise agreement will be prepared by your franchise lawyer as part of the overall development of your Franchise Disclosure Document (“FDD”). The rights that will be granted to you, among others, will include:
- Payment of an Upfront Franchise Fee. As a franchisor and as a condition for granting “franchise rights”, franchisees will pay you an upfront franchise fee. In the franchise industry these fees vary – depending on the franchise – anywhere from $10,000 to $50,000 dollars with the average being in the $20,000 range. This upfront fee, essentially is the access or license fee that franchisees pay to join the franchise system. Keep in mind that this fee is also intended to cover your costs and expenses associated with administrative activities and initial training which is a critical obligation of franchisors.
- Payment of On-Going Royalties. As a franchisor, one benefit you should be receiving from franchisees will be in the form of on-going royalty payments. That is, on a weekly or monthly basis franchisee will pay a royalty fee to you. The amount of the royalty fee is determined by the terms of your franchise agreement and commonly is based upon a fixed percentage of the franchisee’s gross sales. However there are other royalty structures that you should discuss with your franchise lawyer, including fixed royalty fees and hybrid royalties that are based on either a minimum fixed fee or a percentage based fee – which ever is higher.
Obligations that You Will Undertake as a Franchisor
So, when you become a franchisor it is not all about just receiving fees. You will possess an obligation to support your franchisees, protect your trademarks and provide advertising and administrative guidance. That is, you must set the pace for your franchise system by monitoring franchisee performance, ensuring that franchisees have a reliable and fairly priced chain of supply, development and refine your business systems, improve product and/or service standards, review franchisee advertising programs and development advertising programs that may be implemented by franchisees.
Is That It?
No, there is much more to franchising. As a start-up or emerging franchisor, it is critical to understand that franchising your business is very much a process where you will work toward the continued improvement of your business and business systems and the continued expansion of your brand.