Do You Want to Grow Your Company Bigger? Then Use Franchising

23 minute read

6. Am I overdoing it with the franchise?

In 2006, 10,000 current and former franchisees entered a lawsuit against the Quiznos fast food chain. They were displeased with the fact that Quiznos had sold too many franchises and forced them to buy food products at such high prices, which made it impossible for the franchisees to compete on the market. They found that Quiznos had turned franchisees into “captive customers”. The lawsuit went on for several years, cost Quiznos 200 million dollars, and also led to one company’s owner’s suicide.

Nobody starts a franchise to fight. However, disagreements and conflicts are unavoidable. Therefore, it is necessary to write down all the meetings and discussion notes from the start. It is also wise to record the meetings (in which case you need the other party’s permission). All agreements have to be put in writing – simply because the human memory is selective, and people remember verbal agreements very differently.

Franchise Agreement is very important. The agreement should definitely stipulate how the franchisee is allowed to use the following elements of the franchise:

  • Trademark
  • Know-how – confidential technical and technological information regarding how goods are produced or services provided.
  • Code of practice – detailed description about how the franchise business should be run.
  • Services that are guaranteed to the franchise buyer in the starting period, as well as during regular business.
  • Charges – amounts paid by the franchise buyer. Firstly the starting fee, and then the franchise fee. Typically, the starting fee constitutes about 10% of the franchise buyer’s costs; the yearly (monthly) fee is 2-5% of the franchise business’ net annual turnover, and the marketing fees vary 1-3% of the sales.

Additionally, Dynamic P&L Leader CFE Melissa Fichter advises to clearly think through and lay down the following points:

  • The territory that each franchisee gets
  • Duration of the Franchise Agreement
  • Confidentiality requirements
  • Where franchisee has to purchase raw material and/or equipment from
  • Your franchise’s marketing and who is paying how much for it
  • Extent and methods of training and in-service training
  • Expansion – does franchisee have the right to open new places of sale?
If the franchisee is disgruntled and feels like they cannot trust the organization, then they might develop the attitude that their interests stand separately from the organization’s interests. Image credits: Shutterstock

The termination of contract entails very important moments. Coming to a peaceful solution is easy if both parties wish to terminate the contract. However, it is important that the Franchise Agreement also includes the terms for unilateral termination of contract – after a notice period or immediately. The franchisee should have the priority right for buying the core company, if it is put on the market.

It is important to lay down the conditions in the agreement that restrict the franchisee from starting a similar business upon termination, or for a fixed period after termination of contract.

In any case, it would be beneficial to bring in a lawyer who is experienced in the field. Of course, it is important to abide by the law, but you need to think ahead a bit to protect the franchiser’s interests. It won’t be an issue with 1-2 franchisees, however, if the chain grows to a 100 in ten years, like College Hunks Hauling Junk, then 1% increase in royalty means hundreds of thousands of dollars a year.

Also, the franchisees should buy raw material and equipment from you. (Just make sure you don’t charge unreasonably much – this will result in a lawsuit.)

All this should be considered whilst drawing up the contract.