Franchise contracts

Franchising, generally speaking, is a business model in which different owners share a single brand name. A “franchisor” or parent company, allows entrepreneurs to use the company’s strategies, merchandise, tools, services and others including trademarks, in exchange and in consideration for this usage, the “franchisee” pays an initial fee and royalties.

The “franchisor”, provides the “franchisee” with all necessary support including, but not limited to, proper advertising and training, as part & parcel of the franchising agreement.

Worldwide there are many industries using franchising, and according to the International Franchising Association the sector earns trillions in revenues each year. This business is most popular in fast food, hotels, coffee shops, beverages, car rentals and other services.

Legally speaking, the franchising business model consists of two operating partners, the franchisor, or parent company, and the franchisee, the proprietor that operates one or multiple store locations. Franchising agreements usually require the franchisee to pay an initial fee plus royalties equal to a certain percentage of the store’s monthly or yearly sales. Initial fees vary significantly across each industry and royalty fees are also variable.

The franchisee also covers the costs of actually starting and operating the store, including legal fees, occupancy or construction costs, inventory costs, and labor. Most franchise agreements usually have a tenure term between 10 and 20 years, depending on the policy and strategy of the franchisor company. The parent company authorizes the franchisee’s use of the company’s trademarks as part of the franchising agreement. This should be part of the deal and aroma that attracts the franchisee. Additionally, as special incentive, the franchisor provides training and support as well as regional and / or national advertising.

As lucrative advantages of the franchising model, we could say:

-It requires less initial capital than independently starting a company and can use proven successful strategies and trademarks. Moreover, the franchisee depends to a great extent on the value of the “goodwill” and reputation of the franchisor.

-Franchisees are provided with significant amounts of training and know-how, that is normally not common to most entrepreneurs & business people.

-The franchisor benefits because its business and goodwill can expand rapidly without having to increase its labor force and operating costs, using much less capital.

-Franchised stores have a higher margin for the parent company than company-owned stores because of minimal operating expenses in maintaining franchised stores. Whereas the drawbacks of franchising model, if any, could include:

- Franchising stores reduce the amount of control that the parent company has over its products and services, which may lead the store-quality to vary greatly from store to store.

- Franchisees must pay a percentage of their revenues to the parent company, thus reducing their overall earnings.

- Franchising becomes a much less desirable business model during tough economic times because, franchisees must pay royalty fees based upon their revenue, regardless of whether or not they are earning profits, which adds to the franchisee’s financial struggles in an economic downturn.

-Furthermore, slower sales cause parent companies to reduce expansion plans….

Whether buying a franchise or looking to franchise an existing business there are numerous issues to consider. One important area affecting prospective business is deciding on which type of franchising that is suitable to their individual circumstances. This is a complex process as there are several methods of franchising. With the terms of franchise agreements typically spanning years, the final decision carries long-term consequences. Most franchise systems are drawn from five common methods of franchising.

The different types are known as, the single-unit franchising or the sequential franchising or area development franchising or sub-franchising or area representation. It is very important to mention that, each one of the five options got its own characteristics and differences from others and this opens the opportunity for the concerned parties to choose the best type.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Daily Tribune)