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Franchisor and Franchisee: The Guide to a Successful Relationship

Communication is key to running a great franchise. Here’s how you make money and stay friends.

Dec 2019

Franchisor and Franchisee: The Guide to a Successful Relationship

In the biographical comedy-drama The Founder, Michael Keaton’s Ray Croc is a travelling salesman with a grand vision of franchising brothers Mac and Dick McDonald’s popular fast-food restaurant. This is, of course, a dramatized version of the burger empire’s origin story. But the fierce conflict that unfolds is probably not entirely unfamiliar for franchisors and franchisees out there.

Michael Keaton as Ray Croc in The Founder

In this guide we’ll share some advice on how franchisors and franchisees can maintain a positive, mutually beneficial relationship through the inevitable ups and downs of running a business together. Ray Croc claimed the secret to his multi-million-dollar success was persistence. We’d like to think it’s also got something to do with respect and communication, but let’s back up a bit and start at the beginning: What actually is a franchise business?  

What does franchise mean?

A franchise business consists of franchisors and franchisees. Franchisors are the owners of a name, logo, and business model that they allow third party, local, independent investors – the franchisees – to use in exchange for a royalty fee. As part of the deal, both franchisors and franchisees have contractual obligations towards each other to help set both parties up for success.

Franchising your business is popular with entrepreneurs because it’s a low-risk way of expanding since you’re using other people’s investments to grow. Almost any kind of business can be turned into a franchise, and there are several different types of franchises:

Different types of franchise formats

Business format franchise

When people refer to franchising, they're usually talking about this (the most popular) type where the franchisee uses the franchisor’s trademark and is contractually obliged to follow a very specific business plan and processes. Business format franchises are often things like gyms, fast food restaurants, and retail outlets. Think KFC, Starbucks, Dunkin’ Donuts, Taco Bell and, of course, McDonald’s. And lucky you if this happens to be the franchise amuse bouche of your choice, because it’s the focus of this guide.

Dunkin Donuts

Product distribution franchise 

In a product distribution franchise, the franchisor only supplies the trademark and product and leaves the franchisee with a lot more freedom than in the business format franchise in terms of figuring out a system for running their business. Cars, computers, and appliances are some of the products in this type of franchise, and two famous brand examples are Coca Cola and Ford.

Coca Cola bottle

Single operator franchise

Domestic cleaning, a coffee van, or pool maintenance are examples of single operator franchises. They require fairly little investment up front and are suitable for individuals who want to run a small business under an established trademark. 

Coffee van

Photo by Nick Hillier on Unsplash

Investment franchise 

This requires a large financial investment up front and the franchisee, usually a corporate investor, tends to take an advisory role and let the franchisor or an executive team run the actual business, which can be things like a department store or a hotel, such as Hilton and Waldorf Astoria.  

What is the role of a franchisor?

A franchisor is an individual or a parent company that owns all rights and trademarks of a business and lets other people (franchisees) run businesses using the trademarks, products and processes in exchange for a fee. In return, the franchisor has certain rights, responsibilities and obligations as laid out in the franchise agreement. 

Gus Fring provides online training videos for Los Pollos Hermanos franchisees in TV hit Breaking Bad.

Responsibilities of a good franchisor

  • Establishing a clear brand mission and messaging.
  • Providing a business plan and practical rules on implementation in an operations manual. 
  • Offering an initial training program to help franchisees put the operations manual into practice.
  • Providing training manuals and other continuous training, either at HQ or locally, to keep up standards and to keep franchisees up-to-date on any new products or procedures. 
  • Offering guidance on recruitment, staff training, and HR.
  • Offering financial guidance like accounting if needed, either in-house or by putting the franchisee in touch with a professional.
  • Establishing a solid foundational marketing plan that will help promote the brand while protecting the trademark and giving franchisees access to marketing materials and advertising campaign plans
  • Sourcing suitable tools, like sales and customer management software, and providing training to help franchisees run their business more efficiently. 
  • Keeping up with and adapting to new trends, product and service development, and innovation. This includes identifying new territories suitable for franchise expansion in order to strengthen the brand as a whole.

What is the role of a franchisee?

A franchisee is a person who pays a fee in order to be able to run a business under the franchisor's trademark and operational systems. Strong leadership skills and an entrepreneurial spirit are great traits for a franchisee, as long as they’re ok with sticking to the processes put in place by the franchisor and only making changes following approval. 

Krusty Burger

The Krusty Burger franchise in The Simpsons.

Responsibilities of a good franchisee

  • Being able to cover all initial costs of setting up a franchise, including the initial franchising fee, lease, equipment cost and so on. 
  • Being able to cover all ongoing franchising fees like royalty fees, advertising fund fees.
  • Protecting the brand by operating by the rules set out in the franchisor’s operations manual and training.
  • Following any necessary training offered by the franchisor.
  • Building a loyal customer base by offering superior and consistent customer service. 
  • Hiring staff, setting up an employee pay structure, training staff properly and keeping them motivated.
  • Setting pricing based on recommendations from HQ.
  • Providing regular and accurate sales and expenses reports to the franchisor.
  • Taking part in and paying for marketing campaigns, locally or nationally, as advised by the franchisor. 
  • Keeping the franchisor informed of any concerns or problems in order to work out a solution together.
  • Being able to wear many hats as a franchisee is likely to have to get involved in everything from daily operations to payroll management.

The different stages of the franchisee-franchisor relationship

The dynamics in the relationship between a franchisor and franchisee is sometimes compared to that between a parent and child or a mentor and mentee. Sure, the franchisor teaches the franchisee the rules for operating the system they’ve established. But this suggests an imbalance that is misleading since franchisees are already independent business people. A franchisor can give advice and guidance, but it’s the franchisee who is ultimately responsible for making decisions and executing them, to the success or detriment of their franchise.  

A successful franchisor-franchisee relationship is therefore much more like a business version of a marriage – an interdependent relationship that requires mutual respect and effort from both parties. This means as many good communication skills as business sense if it’s going to work. And just like in a marriage, the franchisor-franchisee relationship is likely to go through some ups and downs…

Stage 1: The honeymoon period

Franchisors and franchisees will have done a lot of research in order to find each other, so signing that franchise agreement will feel like a big achievement in itself and the beginning of a beautiful friendship. There’s an energy and excitement at the start that it’s going to be a win-win for all.

standup comedian explaining Tinder

There’s a reason why someone buys a franchise instead of starting from scratch so, early days, the franchisee will enjoy the benefit of skipping a bunch of common obstacles in setting up a business and instead taking advantage of the franchise template and the tried-and-tested plan. They’ve picked this particular franchisor because they believe in the brand and know that by following the standards and quality control in the system, they can protect that brand.

This is also a time when the franchisor is likely to be offering the most attention, support and encouragement to get their bright-eyed and bushy-tailed franchisee up and running and profitable as quickly as possible.    

Stage 2: Discontent and the self-serving bias

Once the franchisee’s business takes off and the money is rolling in, the franchisee might start to question that pesky franchise fee eating into their profit every month. They may feel it’s unfair to pay the fee since their success is purely down to their own efforts, skills, and personality. Self-serving bias is a well-known cognitive bias in social psychology that means people tend to credit themselves for positive events but blame negative ones on external factors or other people. It’s a way for people to protect their self-esteem, and it’s easy to see how a franchisor-franchisee relationship is particularly vulnerable to this type of dynamic.  

man saying 'this is your fault'

The only way to resolve any discontent or conflict is through open and honest discussion. It’s likely that previous mistakes, misunderstandings and underlying resentment will come to the surface, but it’s important to clear the air in order to move forward.   

When a franchisee is in a self-serving bias frame of mind, they’re likely to feel like the franchisor is interfering and stifling their entrepreneurial and innovative spirit. The truth is, most franchise innovation in product, services and marketing comes from franchisees. But the ideas only see the light of day in franchises that foster a culture of solid communication between the franchisor and franchisees. Even better, a great franchisor will proactively encourage collaboration and innovation by making sure that good internal communication channels are in place as part of the company culture.    

Stage 3: From independence to interdependence 

To avoid spelling d-i-v-o-r-c-e faster than Tammy Wynette, a franchisor can strengthen their relationship with the franchisees by being fair, consistent and transparent, involving them in future planning, but also being understanding of the specific needs of individual franchisees and being ready to assist with training and any other support necessary.

Woman from Avatar movie

A franchisee who feels heard and able to contribute creatively will soon put their desire for independence aside and see that the standards and regulations are there to help everyone, and by following the franchisor’s lead, the brand will grow stronger. Everyone makes a profit and everyone is happy.

Stage 4: Nurturing the franchise family

A satisfied franchisee is not just a brand ambassador for customers but also for future franchisees. Someone who enjoys their job, makes a good profit, and feels positive about the franchise, its culture and the future of the business is highly likely to refer people. 

A smart franchisor will not only nurture this fresh talent but also ensure that long-serving franchisees aren’t getting bored. One way of doing this is to offer experienced franchisees the opportunity to manage several outlets, creating a win-win situation by working with established partners familiar with the brand while giving seasoned franchisees a fresh challenge, which also means they’re likely to stick around for longer. 

woman saying 'when one of us shines all of us shine'

The importance of franchisor-franchisee communication

We’ve already mentioned the importance of communication between franchisors and franchisees, especially during times of conflict. But ideally, regular communication creates a culture of transparency where neither party should ever have to get to the point of any serious conflict. A successful franchisor-franchisee relationship is built on trust that comes from honest, two-way communication that allows for discussion, ideally in person. More often than not though, the franchisor and franchisee manage a long-distance relationship, which means less facetime. So it’s even more important to keep in touch regularly via various channels. 

Different communication channels for franchises

People have different preferences when it comes to learning and communicating, so opening up several types of communication channels will help franchisors and franchisees keep their relationship strong. Examples of these are:

In person

  • Regular visits from a field support consultant or other representative - a great way for franchisees to share feedback and discuss ideas with HQ. 
  • Annual conference - an opportunity for all franchisees to get together, network, share ideas and get inspiration from speakers.
  • Regional meetings and seminars - a chance to focus on more locally relevant learning. 

Written

  • Webinars - for when it’s not possible to meet face to face.
  • Email newsletter - a regular opportunity to share everything from high level strategy thinking and metrics to general news, business tips and inspiring case studies. 
  • Intranet  - easy to set up and manage and an invaluable learning resource for franchisees where they can find training materials and operating manuals anytime they need it. The information is simple to amend so it's always up-to-date.

Verbal

  • Phone call - sometimes picking up the phone and speaking to someone directly is better than trying to convey something in writing. 
  • Video call - The closest substitute to a face-to-face meeting with the convenience of saving time on travel.

For more information, here's a post on how to improve communication with your franchisees.

cartoon animal saying 'call me'

The importance of consistency in franchise marketing

Marketing is probably one of the biggest challenges when trying to establish a new business, and franchisees rely on the franchisor’s experience to get them through that tricky first phase of establishing their business. In fact, it’s common for franchisors to offer a complete brand marketing strategy, covering activities for the first few months, including timing, promotional material and costs. This not only helps the franchisee get established faster by following a plan that’s been tried and tested by numerous others, but it also gives the franchisor peace of mind that the brand is represented according to the set standards that define the brand to the public. The greatest strength of the franchise model is standardization because you want customers to be able to walk into any franchise outlet and have the same brand experience.

woman talking about colors, fonts and logo

It’s vital that the franchisor has a clear longer-term national marketing strategy in place and continues to provide guidance, not just in the form of brand guidelines but also with practical tools like branded templates and other assets that will help keep the marketing looking consistent.  

But as a new franchisee grows their business, and likely also their confidence, they’ll start having strong opinions about what will work in their area and will want to try out their own local marketing initiatives, and so they should! After all, they know their local area and customers best and will be able to bring fresh ideas to the table. It’s important to give franchisees this creative freedom, as long as there’s a system in place for reviewing and approving local marketing initiatives and promotions before they go live. Here's a guide on developing best practices for your franchise marketing.

Digital signage for consistent franchise marketing

There are so many ways to market a franchise through everything from printed flyers and newspaper ads to online advertising and social media campaigns. And there are lots of different tools to help streamline the work and sometimes even automate it.

South Park character flyering

One way we (obviously) would suggest is through franchise digital signage. Our tool, ScreenCloud, makes it simple and cost-effective to create nicely designed promotions, menu boards, notices and more. 

Our digital signage is particularly useful for franchises because of our built-in central management system. This means that someone like Rik Nicholson, Director of Creative Services at YMCA Silicon Valley, who’s in charge of digital signage at 10 different gyms, can manage his screens remotely, making sure the content is consistently on brand, always fresh and hyper-relevant to each branch. 

reception at YMCA Silicon Valley

With ScreenCloud, the franchisor can either create branded content that’s ready to use or, for the more creative franchisees, provide branded templates that can be adapted for local marketing initiatives. And thanks to the centralized system, the franchisee can submit marketing assets and quickly get central approval before anything goes live. Here's the full guide to setting up digital signage for your franchise.

Want to deliver consistent marketing materials to your franchisees and create a better experience for your customers? Try ScreenCloud digital signage.

Hero photo by Vaishnav Chogale on Unsplash –  we love your work!

franchisebusiness format franchisefranchise agreementtrademarkbrand consistencycommunicationleadershipfranchise marketing managementdigital signage