franchising 101 / part 1: what is franchising exactly?

(the relationship, legal stuff + the most important clause in franchising law!)

what is franchising exactly? i feel like franchising is one of those things most people know of (ie: everyone knows mcdonalds) but also that most people know almost nothing about it (ie: how does it actually work? how do you become a franchisee? what’s the cost? what’s the process?).

well i’m going to break it down for ya! in a series of posts called franchising 101. (i’ll link them all below).

first off – franchising is a business model, based off of a contractual relationship. let me break that sentence down for ya. ‘business model meaning the type of business structure – so other types of business models would be sole proprietorships (aka, your mom and pop bakery down the street), multi-level marketing models (stella and dot), big corporations (starbucks), subscription based products (dollarshave.club) or subscription based services (netflix) – there are a ton more – but… you got it. moving on.

‘contractual relationship’ means that the business model is based on a contract – in franchising, it’s called a… wait for it… franchise agreement!

the disclosure documents + franchise agreement.

the franchise agreement is the contract between a franchisor and a franchisee.

the franchisor is the company that created and/or owns the brand and all of the proprietary/intellectual information + processes that go into the concept (collectively known as ‘the system’).

the franchisee or franchise partner are the individuals or partner groups that that are granted the rights to use proprietary/intellectual information + processes of the brand/’system’ and run a location or territory.

the franchise agreement outlines the parameters of the relationship and details all of the obligations that a franchisee has to the franchisor and vice versa (basically the do’s and don’ts of the business relationship). it also lists what happens if the system or obligations aren’t followed (on both ends), steps to get back into compliance and the termination clauses. it sounds intense, and it is – but the franchisee agreement is kind of like a prenup. it’s a doc that outlines the worst case scenarios – and then you sign it and it kind of gets stuffed into a drawer and never really looked at again unless some shxt goes pear-shapped.

if you’re looking into a franchise you’ll be given copy of the franchise agreement well in advance. this copy of the current franchisee agreement is given alongside another document called the disclosure document. the disclosure document covers off everything and anything a potential franchisee would need to know before getting into bed with a brand; from what trademarks the brand owns (and that the franchisee gets to use and how / where), to what all of your initial investment costs will be to what all of the fees you can expect to pay, all the training you’ll be getting and even (if you’re lucky) historical sales data from other franchisees (so you can build out your business model), and the fee’s you can expect to pay on an ongoing or one time basis.

i’m gonna note here that all franchise agreements are heavily weighted in favour of the franchisor. annnnnnd… this is a good thing. even for the franchisees.

you want a franchisor that doesn’t put up with any shenanigans and runs a tight ship. when you invest in a franchise – your investment is tied to the other franchisees in the system. meaning if they go off and do something totally brand destroying – you’re going down with that sinking ship.

that’s the extreme version – but even little things that are ‘off brand’ can be a put off to your collective customers – one location going rouge and offering a discount and that same discount not being offered at another can piss people off. so although a tight agreement that doesn’t really allow you a ton of leiway in terms of doing your own thing, it’s ultimately a failsafe for you and your investment.

and doing your own thing isn’t why you are franchising. or at least shouldn’t be. a franchise is a proven business model that already has it’s ins and outs worked out. the success of a franchise – and i dare say the success of your location will depend upon your ability to work that proven system. to follow the ‘system’ to replicate the success of the locations before you of which the system was built on. there are for sure opportunities to help innovate (the big mac was created by a franchisee!) but in franchising all locations have to row in the same direction offering the same products, services and processes – so there are set out specific channels and approval processes for any new innovation thought up by either a franchisee or a franchisor.

here’s a pretty good article / quiz i found from franchaiseopportunities.com with some self evaluation questions to see if franchising is right for you – Is Franchising Right For Me? A Self-Survey To Help You Find Out.

ok! moving on.

franchise law and the ‘good faith + fair dealing’ provision

one thing really great to know about the wonderful world of franchising is that almost every state and province has franchise legislation. these laws set out what franchisors can and can’t do, especially regarding the ‘pre-sales period’.

where as the actual f.a. (franchise agreement) are usually in favour of the franchisor – the laws around franchising and what can be said and done are there to protect the franchisee. i imagine a time where this legislation didn’t exist and a bunch of franchisees got royal f’ed. most of the legislation is super technical – in fact it’s why most franchise agreements are boilerplate (ie: we all use the same document pretty much and just fill in info about our brands specifically), they also include provisions of protection for the potential franchisee. for example, there is a 14 day waiting period in between getting the disclosure document and copy of the franchise agreement and when you can sign it. (you know, so we can’t take you out, feed you tequila shots all night and you wake up in the morning with a full back tattoo and a signed franchise agreement that lasts for the next ten years).

one of the most important – and overriding – clauses included in franchise law – is the clause that says (i’m paraphrasing here) no matter what’s in the agreement, both parties have an obligation to act in good faith and fair dealing.

this is key.

this means that both of you need to work to very hard to try and resolve things in a fair manner and in good faith – and you both (if it went to court) would have to prove that you did your very best to reasonably work under this provision.

that’s a tall order to work under. in my almost a decade of being in the franchise world and getting to know tons of franchisors – i’ve never really seen a franchise being ‘taken away’ from a franchisee. if the relationship is so sour that you’re getting into territory like this, both parties usually will agree to sell the franchise to a new owner. the old franchisee (can) make a profit off the sale (or cover their costs) – and the franchisor gets in a new owner to run the location according to the system can / should this end up a win/win.

next up… franchising 101 / part 2: standard franchising fees – #1 the initial fee

x.kristen

if you’re interested in finding out more – join one of my webinars (link on the right) or…

x.kristen

note: all of this information was current as of today’s date, june 4th, 2021. it in no way may be valid or true beyond today’s date. i’m obviously not a lawyer and so none of this should be taken as legal advice. it’s just anecdotal info that’s i’ve gleaned from my years as a franchisor and was current info about my system at the time of writing this. stuff might be changed and so any current information about THE TEN SPOT® franchising system should be taken from our disclosure documents, franchise agreement, operational manuals and guides. amen!