Obligations of Franchisees and Franchisors

Both franchisees and franchisors obligate themselves to certain responsibilities when they sign the franchise agreement.

Franchisees, in exchange for the franchisor's name and experience, typically agree to certain payment and performance terms:

Franchise Fee

You will pay an upfront franchise fee for the "limited" right to open and operate the business and to learn the franchisor's trade secrets. Such fees range from $1,000 to $150,000 or more.

Royalties

Ongoing royalty payments are collected by the franchisor on either a weekly, bi-weekly or monthly basis. These payments are generally based on a percentage of gross revenues of the franchisees' business or much less frequently, a set fee per month or per transaction.

In exchange, the effective and concerned franchisors provide regular and ongoing training to their franchisees via newsletters, videotapes, seminars, in-field meetings, and telephone hot lines. They will work closely with their franchisees to overcome simple and complex business challenges.

Follow the System

When franchisees pay their fees they sign a legal document which commits them to operate their businesses according to the specifications of the franchisor.

These specifications are pre-set and disciplined and in many cases can be stringent. They include not only the name of the business but could also include the color of the trucks, facilities or signs a franchisee uses, the style of uniforms employees must wear, operational guidelines for the preparation of a product, and the accounting system used to track and report revenue just to name a few.

Franchisors want franchisees to operate their business in a systematic and consistent fashion for two reasons. They know what works and what doesn't work and they know that their other franchisees are already operating according to these standards. If a franchisee deviates or modifies something, anything, their chances of success could be greatly reduced. Inconsistent activities on a franchisees' part could also potentially damage or weaken other franchisees in the system.

As the founder of one franchise systems tells it, "The best way to ensure your success as a franchisee is to follow the systems established by the franchisor. If you're a tinkerer and you like to make changes, you may not be the right personality profile for franchising."

What You Receive

In exchange for your money and conformity, the franchisor typically agrees to provide an extensive array of support services designed to increase your revenues and potential profitability. You should be able to make up royalty fees either through increased revenue or the ability to create and maintain a long-term business venture that appreciates in value.

The best franchisors all have certain similar characteristics and formulas for the provision of support services.

Here's what to look for:

1. Advertising programs and public relations programs managed by the Franchisor;
   
2. National accounts and lead generation programs provided to the franchisees;
   
3. Research and development programs, funded by the Franchisor, for new products, services, and systems;
   
4. Initial and refresher training programs for franchisees and their employees;
   
5. Profitability reviews, financial evaluations, industry updates and competitive reviews provided by the Franchisor.