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Understanding the Franchisor-Franchisee Relationship

Upon graduating from college, many recent graduates venture into business ownership, eager for the opportunity to put their hard-earned knowledge and enthusiasm to work. But, in order to successfully navigate the wild and often overwhelming world of business, they must first understand the intricate relationship between benefits and responsibilities between the franchisor and franchisee. To that end, the International Franchise Professionals Group (IFPG) has developed this comprehensive guide to tackling the most commonly asked questions related to the franchisor and franchisee relationship.

Once the decision to invest in a franchise business has been made, a distinction must be carefully considered– that of the franchisor and the franchisee. In essence, the franchisor is the creator of a business concept, the owner of the brand, and the business model that controls all aspects of the business. The franchisee, on the other hand, is an investor in the franchise and pays the franchisor for the right to use the brand and the business model to specifically operate their business.

For the eager new business owner just starting out, there’s a lot of creative potential, but also a responsibility to adhere to the standards that have been set by the franchisor. To understand the franchisor-franchisee relationship better, let’s explore the five categories of support, restrictions, territory, royalty payments, and legal issues.

1. Support

The most significant benefit of the franchisor-franchisee relationship is the franchisor’s commitment to ongoing support through marketing materials, use of their brand, and training. As part of the franchise agreement, franchisors typically provide business advice and training, as well as operational assistance and access to corporate resources. By helping the franchisee launch and maintain their business, the franchisor assists the franchisee in achieving their goals while upholding the standards of the franchise brand.

2. Restrictions

The successful operation of a franchise also relies on an equal exchange of rights and responsibilities between franchisor and franchisee. While the franchisor provides access to exclusive resources and training, the franchisee is obligated to operate their business in accordance with the franchisor’s established standards. This means adhering to operational restrictions, such as the franchisee’s geographic area of operation, products and services that are offered, and participation in certain events.

3. Territory

The franchisor will usually assign a specific territory to the franchisee where they will operate. This can come in the form of a physical location, including an exclusive area of operation within a specific city or state, or through a virtual online presence. The franchisee may also be responsible for scouting for new opportunities, such as identifying potential customers and coordinating promotions.

4. Royalty Payments

As an entrepreneur, the franchisor is entitled to royalty payments from the franchisee based on the trading performance of the business. Generally, franchisors receive a set rate for each sale generated through the franchisee’s operations. Such payments should be detailed in the franchise agreement and are usually paid either on a monthly or quarterly basis.

5. Legal Issues

Finally, the relationship is subject to a number of legal issues that must be addressed. Generally speaking, franchise agreements contain specific provisions that obligate both parties to abide by a set of terms and conditions. Matters such as mandatory dispute resolution, any franchise resales, the right for franchisor to enforce patent and trademark rights, termination, and other legal matters are all likely addressed in the agreement.

The franchisor-franchisee relationship is a two-way exchange of rights and responsibilities that is founded on mutual trust and understanding. Respect and communication are the keys to a successful business partnership, and for any new business owner, understanding the franchisor-franchisee relationship is the first step to ensure success.

Topics:

Franchisor vs Franchisee,

Franchise Agreement,

Franchisor Support

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