Thursday, April 16, 2015

What are the in-depth Responsibilities of Franchise Ownership


In business, franchising is a strategy to get and keep more customers. It’s a system to create an image in the customer’s mind on how the product or service can be of help to them. It is more than a method of product or service distribution that will satisfy customer’s needs. Through franchising, it allows the brand to be easily identified, allows franchisees to be successful in doing the same method of business, and hence it keeps and gets more customers as the marketing system is proven to dominate the market.

The success of franchising lies in understanding the business, its whole system, and the legal consequences of the franchiser-franchisee relationship. You as a franchisee will focus on working with the company managers and other franchisees to leverage the brand. Which means the entire focus is to attract more customers and keep the existing one.

Investing into franchise can be a reducing investment risk. However, aside from the fact that is more costly, you may be required to surrender the entire control of the business while taking care of your contractual obligations in franchise ownership. All throughout this article explains your responsibility of franchise ownership and what to expect in franchising.

Franchisee fee and other operating expenses 

You’ll pay the initial franchise in exchange for procuring the right to use the brand name and operational assistance. The initial fee is non-refundable. Other fees are rent, building an outlet, initial inventory, operating licenses, insurance, and grand opening fee for promoting the new outlet. Aside from that, there is monthly royalties that you have to pay the franchiser a percentage (30% - 40%) of your monthly gross income. It is a payment for the right in using the franchiser’s name, and you have to pay all throughout the duration of the franchise agreement. Whether or not you receive the operational support, you still have to pay the royalties. At times, you’ll pay an advertising fee not for your own outlet. Whether advertising for a new product or national advertising to attract new franchisees, you still have portions to pay the advertising for the brand.

Overall controls 

Franchisers normally control franchisees on how businesses will be conducted. This is to ensure uniformity of the system. You as a franchisee cannot exercise your ability in business judgment right away. You have to let the corporate know of your plans especially in management. You can’t just decide for your own outlet as all decision making will be done by the franchiser. Even the site and the building for your own outlet, the franchiser may not approve the site and other things you want.  In addition, there is a specific territorial that limits you to open other outlets. That even you want to move to a different location that is more profitable, you can’t just simply shut the current operation off and open another outlet.

Franchisers may enforce the design or appearance of the goods to standardize, so that the customer receives the same quality service, the same goods in every outlet. Some requirements are design changes or periodic renovations that you have to comply with those standards and you know that operational cost will increase. 

There are more restrictions than you imagine: method of operations, services or those goods offered for sale, sales area. A good example for this is franchising a restaurant. You can’t just simply add your own menu and omit the unpopular. Franchisers will never allow you to do this since you are using their name. One mistake that affects customer from one outlet will shake the entire brand. Of course, franchisers will take all the necessary actions to protect the brand. Moreover, hours of operation will be decided by the franchiser, not you. Often you have to agree the pre-approve plans, advertisements, employee uniform, and accounting procedures. Even purchasing supplies, you are required to purchase from the approved suppliers. You can’t just buy elsewhere even you can get it at lower costs.

Contract termination/ renewal 

The franchiser will have the right to terminate the contract should you breach any obligations. In fact, the contract in franchising is limited, and no guarantee for renewal. Failure to pay royalties, or failure to abide standard performance or sales restrictions often will cause the termination of contract, and it’s a pain to lose the investment. The franchiser may raise royalty payments and you can’t just bargain to lower the price. Whether you like it or not, you have to agree the number of years that your outlet will have to run. If they will say the contract will end 5 years but then you want to renew it for another 5 years just to make up the total investment, you still need to end it in 5 years. If they will say renewal is not allowed, there’s nothing you can do but kill them (just kidding).

Now you know that the risky part is when you couldn’t get the total investment. Here’s the secret. Franchising is a marketing strategy to gain more customers upon expanding outlets in different locations. The franchiser is the owner, and you as franchisee is only the investor. Don’t be stupid enough to think that the gross income of your outlet will be entirely yours. Even if you have million dollars of gross income a month, 40% of that (depends on the royalty fee stipulated in the contract) will go directly to the franchiser. The remaining 60% will still not be yours. You will have to pay your liabilities: employees, purchaser (where you owed your materials), and other operational expenses. You will realize in the end that only 0.50% is left for you. Sounds bad? Yes, that will happen if you jumped directly into franchising without reviewing the possibilities.

In order to avoid failures in investing franchise, following are the checklists which will help you decide:

  1. Are you ready to lose as much as you have invested? If you aren’t a risk-taker, it doesn’t lead you anywhere.
  2. Do you have enough financial capacity to finance the future costs in franchising?
  3. Do you have additional savings to live on while opening a franchise?
  4. Do you have knowledge, relevant education or experience in the business?
  5. Are you a type of going along with the flow (whatever your franchiser wants, you’ll provide?)
  6. Are you ready the consequences of the obligation you have signed up?
  7. Do you think you can survive with the type of business (franchising)?
  8. Do you think you can stay long with your franchiser?
  9. Are you ready to work with your franchiser?
  10. Do you understand all your obligations in the contract including the termination of the contract anytime?

If your answers to all of those questions are positive then you’re good to go. You just need to shop a franchise that will suit to your interest and public demand. You may attend a franchise exposition that will allow you to compare and view a variety of possibilities in franchising. It would be better to choose a franchise that suits your experience, goals, and investment limitations. Always take time to study on what the franchiser is offering to you. Make sure all your doubts and questions are cleared before investing a franchise.