By Steve Murphy, president of Franchising at Winmark Corporation
Many people looking into franchising think of a franchise as an entity they can buy. Or they think of franchising as an industry unto itself. In fact, it is neither an entity nor an industry. A franchise is simply a business format and a means by which a brand can distribute its goods and/or services to consumers. Just as brands distribute products and services through e-commerce models, corporate store models, dealerships and distributorships, and many other means, franchisors choose to distribute their goods and services through a franchise model.
It is important for franchise candidates to have an understanding of exactly what a franchise is before taking the entrepreneurial leap into franchise business ownership. The franchise agreement you will sign will bind you for a number of years with the franchisor, so be sure you know what you are getting into before putting ink to paper.
A franchise agreement is in essence a licensing relationship. You are signing a document that gives you as a franchisee the rights to use the brand name above your door, use their business system, and get the franchisor’s support, over a certain period of years. In return for those rights, you as a franchisee will pay to the franchisor what is known as a continuing fee, or commonly referred to as a royalty, typically based on your sales revenue each week or month. The agreement contains a great deal of legalese as well, but it boils down to that arrangement, with each side committing that they will honor their end of that agreement, with the franchisor agreeing to provide adequate support to the franchisee, and the franchisee committing to own and operate the franchise, and implement and execute the model as best they can by following franchise best practices.
At the end of the initial franchise period outlined in that agreement, each party will have a choice to decide to continue that relationship. If they are both interested, they will sign the then-current agreement (which may have terms or conditions that differ from the initial agreement, so be sure to read through the new agreement carefully or have your attorney review it and highlight any changes to you) and continue their relationship for a second period of time. If either party chooses not to renew that relationship, then each will be bound by the post-term conditions in the original franchise agreement. If both have done what they promised during the first term, then the renewal process should be a breeze.
As a franchise candidate, be sure to ask a franchisor what their franchise renewal rates are for the brand over the years. The higher the renewal rates, the more attractive the franchise opportunity should be to you as a candidate, as that is telling you that most of the system is doing well enough to continue in that relationship for another extended period of time. At Winmark, we are proud that over the last decade well over 95 percent of our franchisees decided to renew for another 10-year period and we get the chance to continue our successful partnership with some great people!