How the Franchisor-Franchisee Relationship Works
Franchisor=The owner of the brand
Franchisee=The seller of the brands products or services
Have you been bitten by the entrepreneurial bug? Starting your own business can be exciting, especially once you have moved from dreaming about it to putting your plans into action. Once you have decided on the what, then comes the where, when and how. When you start to make your dreams into reality starting a business from the ground up can be daunting. Paperwork needs to be filed, zoning boards need to be contacted, before long one can find themselves overwhelmed by everything that it takes just to get a name registered, a tax-ID secured and all the other pertinent agencies contacted.
And then the real work begins, actually navigating the world of distributors, manufacturers, marketing firms, utility companies, insurance, accounting and all the legal matters that come with owning your own business. Not to mention the competition.
This is the reason many people turn to the world of franchising. Starting a business is daunting enough, not knowing if what you’re doing will work is enough to make the average person quit before they ever get started.
In the world of franchising, the fact is the franchisor, whoever they may be, is operating stores successfully and has been for a period of time. They have already ridden the roller coaster ride to success, navigated the down-turns, fettered out less desirable products and services and achieved a well-balanced business model that has grown enough to allow franchise locations to be born.
The Franchisor basically worked up a business model that has already proven to be a success.
Franchisees are very much like a business partner, an employee and a customer all wrapped into one.
Franchisees need to be looked upon as a business partner. After all, the Franchisor will be entrusting the franchisee with their trade secrets, intellectual property and more. No Franchisor-Franchisee partnership should be rushed into. In many cases you are entering into a ten year contract, like a marriage, and the relationship will be governed by that contract.
Franchisees become like employees because they will need to follow Standard Operating Procedures or SOP’s , to operate their own locations to the specifications laid out by the Franchisor. As a franchisee at times the Franchisor becomes your boss and you need to do as they ask.
Franchisees should also be valued as customers by their Franchisor. It is through upstanding-outstanding Franchisees that Franchisors grow bigger. It is in the best interest of the Franchisor to appreciate each and every franchisee like they would their very best customer.
Now that you have a basic understanding of the relationship, this is what to expect:
All Franchisors generally ask for a franchising fee, we at Cottage Inn offer our franchises for a fee of $15,000.
Some Franchisors will offer Area Development Agreements, for some Franchisees this is of interest when an individual wants to open 3 or more stores in a dedicated area and wants to protect that territory so no other franchise locations will open in that market. At Cottage Inn if you are seeking an area to open up to five stores in three years we offer this at a fee of $45,000 for a savings of $30,000.
For those with even bigger ambitions, entire states are sold for development. These types of agreements are negotiated on a case by case basis at Cottage Inn.
Franchising Fees are only the beginning. There will be build out costs to get your stores up and running. Some Franchisors offer turn-key operations. At Cottage Inn we will offer this type of operation for additional fees. Build out for locations depend on the concepts and requirements for the individual Franchisor. For most concepts this can run up to a quarter million or more. Cottage Inn works with franchisees to keep this initial investment manageable to their budgets.
Once the franchise location opens, the Franchisor then starts assessing Royalties and Advertising. Royalties range from 5%-10% and higher. We at Cottage Inn currently charge 5% royalties on sales. Franchisees are required to report their sales weekly and pay royalties weekly at Cottage Inn.
Marketing is an interesting game in the Franchise world. The Franchisor oversees a marketing fund which Franchisees pay into, at Cottage Inn that is 3%. The majority of the funds are actually spent by the franchise location, the reason it is pooled together obviously is better discounts for print and media buys when you buy in bulk. Even though Cottage Inn Franchisees are only billed 3% for the ad fund, they are encouraged to spend up to an additional 3% on their own for local marketing and promotions.
I hope this helped you to understand more about the Franchisor-Franchisee relationship. In the end you will be in something very much like a marriage, so make sure you know what you are in for before you say “I Do!”