The relationship between a franchisor (the person or company that owns the trademark and business model) and franchisee (the person who owns and operates the specific business location) should be symbiotic and mutually beneficial. However, it is important to note that these two entities do come from different perspectives and can have goals that do not quite align with one another. The franchisor will be more interested in keeping risks low and ensuring maximum profit for the brand, not necessarily any one franchise location.
If you are looking to become a franchisee, you need to keep a few things in mind before you sign the franchise agreement.
What is a disclosure document?
Franchisors have to provide disclosure documents noting important information about the potential franchise at least 14 business days before signing the franchise agreement and before any money changes hands. Take advantage of this period to conduct due diligence and read the disclosure document carefully. Any laws about this franchise, in particular, require disclosure, although laws that apply to all businesses (such as child abuse reporting laws or health code laws) do not require inclusion. While each state requires specific information in the disclosure document, federal law requires the inclusion of at least three years of financial information and the outlining of the franchisor’s commitment to control and assistance.
What constitutes significant control and assistance?
The Federal Trade Commission Franchise Rule notes that a legitimate franchise agreement must include significant control or assistance on the franchisor’s part. This can include things like inventory controls, specific accounting processes, personnel policies or training programs. As a franchisee, it is important to be aware of what aspects of the business the franchisor controls and which elements are open for your leadership and creativity. You do not want to get stuck in a constrictive agreement that limits your success in your particular location.
As a franchisee, you have negotiating power to ensure that your franchise’s success. A little preparation can go a long way.