What Rules Do Franchisees Have To Follow?

Posted in Franchise by Paul Hightower

If you want to become a franchisee, your options can be overwhelming. And each one has different rules…right? Yes and no. The ground rules that apply to all franchises are pretty similar. The Federal Trade Commission (FTC) regulates franchises, specifically the FTC Franchise Rule of 1979. That says not only does the franchisor have to give you a franchise disclosure document (FDD) with 23 specific items of information, but you as the franchisee also must follow some rules. Here’s what most franchisee rules boil down to:

  1. Fees – Yep, you have to pay to use a franchisor’s brand. Fee structures vary widely but typically include an initial franchisee fee (about $30,000 on average), a percentage of sales (anywhere from 4% to 10% and up) and, with larger franchises, a marketing fee (think national fast food commercials).
  2. Operations – This boils down to a franchise telling you how to run your business. This isn’t a bad thing, though, because you’re getting a proven business model with time-tested operational practices. This can cover site selection, use of brand, employee management and training, and standard operating procedures.

After these two, not every rule will apply to every business, but a few typical ones might include:

  1. Approved supplier lists – Just imagine if every Popeye’s location had to negotiate terms with a local supplier, or if every Smoothie King owner had to source their fruits from eight different places. Wouldn’t you rather be managing your team and getting more customers? By setting strict guidelines for which suppliers you can use, the franchise can have better negotiating terms with suppliers, which translates to lower costs of goods and better profits for you.
  2. Employment obligations – Every good business owner tries to maintain appropriate working conditions. As a franchisee, you have even more reason to do so: your franchisor requires you to. Whether it’s no overtime, maximum shift length, number of vacation days, or another requirement, the franchisor wants to make sure workers are treated right—and that their brand doesn’t suffer. Plus, franchises only succeed when the folks on the front line are doing good work and being taken care of, right?
  3. Territory provisions – Franchises put an enormous amount of effort (read: time and money) into figuring out where a new location is most likely to succeed. One thing that often comes as a surprise to a prospective franchisee is the lack of control they have over where they can actually set up shop. If you take a longer view, however, you’ll see that this is quite important. The last thing that a franchise wants is for two units to be competing against one another and cannibalizing business! As each individual unit performs better, there is a rising tide phenomenon that ripples out through the entire system, making prospects better for all franchisees. Better all units compete against other brands than against each other!
  4. Renewal provisions – In a perfect world, every franchisee would outperform the terms of their agreement and keep a franchise as long as they want. Unfortunately, franchisors can choose to revoke (or not renew) a franchise agreement. This can be thought of as the “final word” rule, wherein the franchise can deem you worthy or unworthy of continuing to be a flag bearer for the brand. This also comes into play when a franchisee is interested in selling a franchise. The franchisor has a deeply vested interest in making sure that the new franchisee will live up the standards that corporate maintains.
  5. Adherence to local or state laws and ordinances – This one is simple. If you can’t abide by the rules and regulations at the local or state level, then you’re only going to be a drag on the franchise as a whole. Be prepared to work with rules outside of the franchise as well as with those within.

You may be shaking your head and thinking, “That’s a lot of rules to worry about!” Fear not! These rules protect you (and your franchisor) and help level the playing field for everyone. Though sometimes onerous, these rules are vital to maintaining a predictable and viable foundation for the franchise business model—which continues to evolve to this day.

Further reading: FTC, Entrepreneur, Franchise Business, Chron, Forbes


Paul Hightower is Masterplans' VP of Business Development.

Tagged: franchises
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