How to Understand the Relationship Between Franchisor and Franchisee

Franchising at its most effective combines the strengths of both small and large scale. The franchisee, usually being small, can offer clients a personal service, has a thorough knowledge of local market conditions and can make decisions quickly, so as to en­sure a rapid response to problems and opportunities.

The franchisor, on the other hand, has the contrasting advan­tages of size – bulk buying power, national marketing and ad­vertising and ongoing product or service development.

It might be thought that the franchisor-franchisee relation­ship is inherently fragile. The franchisor has an overriding in­terest in ensuring that business conducted in the name of his franchise conforms to certain laid-down practices and pro­cedures. The franchisee, on the other hand, is running his or her own business, which is not only self-funded but is a legally separate entity.

It is sometimes questioned whether the franchisee is, in reality, anything more than a manager firmly controlled by the franchisor, and whether talk of self-employment represents little more than a pipe-dream. However, research indicates that most franchisees feel their needs for independence and autonomy to be largely met.

These may be somewhat less than would be the case with a conventional small business but, in reality, franchisees ex­change a degree of independence for security and know-how.

Also, it should not be forgotten that conventional small busi­ness owners, in practice, tend to find their independence whittled away by various external constraints to a fraction of what it might nominally be.

Our research shows that, in order to understand the franchisor-franchisee relationship properly, it is necessary to go beyond an examination of the formal contract, which is the document binding the parties legally.

Franchise contracts are frequently long and detailed and often appear to specify in detail how almost every facet of the oper­ation should be conducted.

However, if we shift the analysis to the operational day-to-day level, an altogether different picture emerges. The contract, though central in the legal sense to franchisor-franchisee relations, does not occupy a similarly prominent position in day-to-day regality. In short, the franchisee’s scope for independent decision-making is much greater than an examination of the formal contract would imply.

In certain areas of operational day-to-day decision-making, both parties are usually agreed that decision-making is largely at the discretion of the franchisee.

This is true when considering, for instance, hours of operation, employment of staff, wage levels and bookkeeping procedures. In other areas, such as product/service mix and pricing levels, the responsibility rests largely with the franchisor.

There are other areas, however, where both parties may claim responsibility, such as local advertising and standards of customer service. But these differences seem to result not so much from confusion or disagreement as from genuine differ­ences in views. For instance, franchisors usually claim that cus­tomer service standards are fully prescribed in the contract and monitored by field supervisors, the use of ‘dummv’ customers and/or invitations on promotional literature or invoices to con­tact the franchisor direct.

Franchisees, on the other hand, often tend to feel that these arm’s-length quality control methods are only likely to identify customer dissatisfaction when it has reached crisis proportions.

For maintaining good customer relations day-to-day, franchisees usually feel they are the prime initiators.

On local advertising, the franchisor may feel he has responsi­bility since he may give guidance on content and have final powers of veto over what is published. Franchisees, on the other hand, usually pay for the advertisements, decide the media and, indeed, often decide on the sheer volume of local advertising.

Perhaps a very good indicator of the nature of the relation­ship between franchisor and franchisee is the frequency and nature of contact between them. Around one-third of franchisees in our research reported contact with the franchisor as occur­ring at least once a week. The remainder reported contact occurring about once a month.

But most of these contacts were initiated by the franchisees treating their franchisors as a resource for solving operational problems. Franchisors typically visited franchisees every one to two months, though there were wide variations. New franchisees expected to be visited much more frequently to help them be­come fully established, while some established franchisees claimed to be very rarely visited.

Only 5 per cent of franchisees in our research felt themselves to be ‘over-supervised’ while 12 per cent would have liked more supervision. The great majority – around 80 per cent – felt the existing level of supervision to be about right.

Methods of ongoing franchisor-franchisee communication include joint consultative committees, annual conferences, newsletters, bulletins, competitions and special award schemes. Joint consultative committees, as in other sectors of the economy, tend to serve as tension-management devices. Franchisees feel that they (or their representatives) have the ear of the franchisor while the franchisor has the ear of franchisee opinion-leaders.

At times, such a platform for consultations can fail to satisfy franchisees who may then form an independent franchisee as­sociation. This can have something of a trade union character about it. The formation of such associations often coincides with the franchisor seeking to impose far-reaching changes upon franchisees.

Franchising, as a business format, offers a viable alternative to conventionally operated businesses in many increasingly im­portant areas of economic activity. At the same time, it pro­duces its own distinct patterns of personal relations, calling for particular skills on the part of the franchisor.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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