By Andrew Seid, Senior Consultant, MSA Worldwide
Buying into a franchise system can be an incredibly fruitful proposition; it is a chance to own your own business while having access to the brand name, operating procedures, and goodwill of an already-established company. However, becoming a franchise carries with it a few specific challenges that it is important to be aware of before investing what is often a person’s life’s savings into a new business venture.
Many new or potential franchisees often come into the process with a few common misconceptions about what being a part of a franchise system really means. These misconceptions can lead to unmet expectations and feelings of being taken advantage of, or even of being intentionally deceived. Below are three important but too-often overlooked realities that anyone interested in becoming a franchisee needs to know BEFORE engaging in the process.
1. You Are Not Actually “Buying” A Franchise
Too often the franchise investment is couched in language that is misleading and outright incorrect. A franchise is not “buying” a franchise. They are agreeing to be a licensee of the franchisor’s brand and system. At the end of the franchise agreement – either by termination or by the term of the agreement running its course without a subsequent renewal – the franchise doesn’t “own” anything other than its own profits (and potentially any real estate or other equipment or assets, if the agreement allowed for it).
This can be a hard truth for franchisees to understand and accept, and it is often a major point of contention for those seeking to introduce more “franchisee-friendly” regulations. However, it is the bedrock upon which the franchise model is built, and without it, the concept of franchising would ultimately cease to exist.
Were a franchise, by entering into a franchise agreement, given any actual ownership over the brand or system – be it by a perpetual or permanent right to remain in the system, the ability to stray from the franchisor’s prescribed operating specifications, or any other proposed “franchise protection” measure – the entire concept of a franchise-as-a-license would dissolve. If a franchisor is no longer able to determine how its brand standards are met and upheld, the franchisor is no longer the sole owner of that intellectual property.
If that were the case, and a franchise relationship, in essence, became an actual sale of a portion of a franchisor’s intellectual property rights to each franchisee, then the “sale price” would appropriately reflect that.
- For example, rather than an initial franchise fee of $45,000, McDonald’s would charge each of its almost 30,000 franchise locations about $2.7 million simply for the right to be a McDonald’s (based on an estimated brand value of over $81 billion).
- This wouldn’t include any of the other costs associated with running a McDonald’s, from advertising to real estate to inventory to operational support. For a franchise to truly “buy” and “own” a franchise, the price would have to be right, as the franchisor would be giving up control of their own intellectual property. In essence, this would be the sale of a percentage of ownership, not a license of use to a licensee.
The concept of “Franchisee Equity” has increasingly become a hotly debated issue within franchising. Basically, it is purported that a franchise has built up a certain value – whether in their own business or in the overall brand – over the term of the franchise agreement that they deserve to be compensated for in some way. Particularly the idea that, after 10, 20, or even 50 years of running a business, a franchise at the end of his or her term can no longer engage in that business and therefore needs to find a new livelihood all of a sudden, does not sit well with many. There is certainly room to find an equitable resolution to such issues – it may involve a need to loosen post-termination non-compete clauses or some requirement to buy back any still-useful equipment or inventory (which many franchise agreements already include) – but fundamentally changing the nature of franchising so that it better fits into the false narrative that a franchise “buys” and “owns” a franchise location would simply destroy the franchise model.
2. You Are Not An Entrepreneur
This is not meant as a put-down. Franchisees are often some of the smartest and most successful businesspeople in the world. However, the most effective franchisees understand that they have paid to be a part of an established brand – a system that has proven it works and, most importantly, must remain consistent from location to location. Being a franchisee is usually not the environment to develop and implement your own impressive and potentially groundbreaking business concepts. Following the established franchise system and maintaining brand standards is of utmost importance to the success of your location, the brand itself, and all other franchised locations.
There can certainly be room for franchise innovation, and in fact, most franchise systems even encourage it. Every good franchisor listens and learns from its franchisees, and it would be foolish to completely shut out potential good ideas from the people who oftentimes can be more aware of how the day-to-day businesses are operating, as well how customer demands and tastes are changing. The Egg McMuffin was developed by a franchisee, after all (actually the franchisee’s spouse, but the franchisee still got the credit). Open communication and collaboration between franchisor and franchisee should always be encouraged, and that can often include franchisees suggesting potential improvements to the system that the franchisor may adopt. However, it is important to understand the dynamics of that franchisor/franchisee relationship and appreciate the importance of uniformity across the system.
3. You Are Not A Franchise Attorney (Unless You Are)
Assuming you are not a practicing franchise attorney, it is extremely wise to hire one before entering into any agreements to become a franchisee. More accurately put, it is extremely unwise not to. Even if you yourself are an attorney experienced in negotiating contracts and general business law, franchising is a unique business model with many requirements and standard operating procedures that on their face can seem confusing or even counterintuitive. Many franchisees find themselves in situations they did not expect or predict, that would have been made clear to them had they spent the money to hire a qualified franchise attorney.
By the nature of franchising and its emphasis on consistency and standardization, it is often very difficult for a franchisee to negotiate any changes or concessions into the franchise agreement. Having an experienced franchise attorney to help guide you through the many franchise-specific provisions that may not seem intuitive to a novice (termination provisions, the scope of franchisor support obligations, etc.) can also help indicate whether or not franchising is appropriate for you. General business attorneys may be able to help in certain aspects of becoming a franchisee (setting up a new corporation, purchasing real estate, interpreting a franchisor’s FPR, etc.), but a franchise-specific attorney is crucial to going into a franchise relationship with your eyes wide open.