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TO BE OR NOT TO BE?
Becoming a franchisee comes with drawbacks as well as benefits

Becoming a foodservice franchisee should be and in most cases is, an excellent opportunity to be involved in the restaurant industry. However, occasions have occurred whereby a franchisee bought a bill of goods that never materialized. This article will outline the basic premise of the franchisor/franchisee relationship, aspects and details that the franchisee should be aware of and, describe the benefits and pitfalls of becoming a franchisee.

It is the Trademark/Trade Name system which directly relates to the restaurant industry Under this system the franchisor is usually neither a wholesaler nor manufacturer of a particular product, nor in many cases, is the franchisor a retailer of the product.

Commonly, the franchisor sells a trade name, trademark and a standardized system of conducting business. Typically, restaurants which operate under this style of franchise arrangement purchase the opportunity to sell a product which is easily recognized by consumers by virtue of the name of the restaurant and the standard product which they are serving. For example, a hamburger franchise does not sell just any hamburger. The system sells a company's particular hamburger under a certain name and in a specific and uniform styled restaurant.

The concept's success is based on the comfort of the patron who knows exactly what to expect in terms of decor, cleanliness, style, service, price and product.
For the independent entrepreneur, there are several positive factors and opportunities in becoming involved with a franchise organization.

Initially, the franchisor will assist the franchisee in picking a suitable location and negotiate a reasonable lease for the operation. Additionally, the franchisor will provide construction plans and assist in hiring a contractor to build the location as well as oversee the construction.

The franchisee has the opportunity, as mentioned above, to buy into a system which is recognizable by the public. This recognition is developed by the franchisee by advertising a product through television, radio, print, discounting policies. the development of in-house promotions and the restaurant's presence in the marketplace. For example, McDonald's Restaurants provide support to the franchisees, not only through advertising, but also by virtue of their numbers. The proliferation of locations within a market area is one of the strongest and most significant forms of advertising.

The franchisor should also be providing training and operational assistance to the franchisee. No longer does an entrepreneur need to have tremendous knowledge in the industry in order to become successful. While the bankruptcy rate in the restaurant business is approximately 80 per cent in Canada, the success rate of franchised restaurants is more than 90 per cent. This is due to the expertise of development and operation provided by the franchisor. The franchisor should provide the entrepreneur with the opportunity of working in an operation prior to purchasing the franchise in order to decide if he truly enjoys the business. After the purchase, the franchisee should be trained by experts in the organization on every aspect of running the operation, including but not limited to, hiring, firing, cooking, cleaning, ordering, payroll, accounting, hours of operation, et cetera.

The franchisee is likely to receive pre-opening and startup support. The franchisor typically sends in an "opening team" to assist the franchisee in training and the operation of the restaurant. Opening teams could be in place front two or three days to two weeks depending on the level of support the franchisor is willing to provide.

The franchisor will also provide the franchisee with ongoing support. This ongoing support usually comes in the form of quality and efficiency For example, if labor or food costs are too high, the franchisor should have the expertise to come into the operation with the aim of trouble shooting the problem, discovering the cause, providing recommendations and teaching the franchisee how to avoid those problems in the future.

Another significant benefit that the franchisor brings to the franchisee is the ability to obtain quick credit and financing from both financial institutions and suppliers. The franchisor usually brings a strong record of success to the bank and guarantees, implicitly that the operation will be a success based upon its previous record as a restaurant developer.

The banks look favorably at the franchisor's record and realize the lesser risk associated with franchising. Additionally, due to the proliferation of franchise operations in recent history, many financial institutions have developed agreements, with franchisors and their franchisees, to tend up to 65 per cent of the required funding. Banks are more prone to lend to a franchisee because the franchisor will inevitably guarantee the loan. If for some reason the operation fails, it is likely that the franchisor will attempt to take over the operation and salvage it, even at a loss, rather than carry a bankruptcy on his record. The financial institutions enjoy a strong level of comfort in this situation.

Suppliers, who have generally conducted business with the franchisor or other franchisees, believe that the organization provides the same level of comfort which the banks feel will readily provide credit on supplies.

While the positive aspects of franchising include faster credit, loans, operational assistance and quick brand recognition, there are also drawbacks within a franchise system.

The first and foremost disadvantage in operating a franchise system is that even though you are your own boss, you do have an organization to answer to.

You must abide by the standards of the franchisor in terms of cleanliness, service standards, pricing policies and products offered. You and your staff must wear the appropriate uniforms and serve in the prescribed manner, even if these standards are below yours. The opportunity to capitalize on certain market aspects are eliminated. For example, if your franchisor doesn't serve breakfast, you can't serve it either, even if there is market demand. If the franchisor doesn't retail his product, neither can you, even if customers demand it. If you find that there is an opportunity for home delivery, it can't be conducted without the franchisor's permission. If the franchisor wants to be open on Sundays, even if no market exists in your area, you will be open on Sundays. If you believe that your market will be served best if you add muffins or a certain salad to your menu, you can't do so without the franchisor's permission.

Several franchisors will insist you buy their products, which they can make a profit from. For example, if your franchisor makes a special sauce or has a certain mix or salad dressing, you will be required to purchase it from him. While a franchisor cannot dictate that you buy standard products which may be available anywhere (eggs), he can require a franchisee to buy any specially-created ingredient which is necessary for the operation and which identifies the franchise organization's uniqueness. These items are a hidden way to increase the franchisor's gross revenue.

The franchisor usually requires a franchise fee, royalty payment and advertising fee. These fees could total from $10,000 to $50,000 for a franchise fee which is an initial up front payment for the right to use a trade name, trademarks and style of operation. A royalty payment of four to 10 per cent for the right to continue to operate and for the corporate support which may be required from time to time and an advertising fee of .5 per cent to three per cent for promotion of the national firm and local advertisements. These fees go toward the development of new products and promotional literature as well as pay for the staff which make up the support team.

The ambiguous question is whether or not the trade name is important to the ongoing success of the operation and whether the associated fees of maintaining that name are fair. If, for example, a restaurant is developed in a certain area, people may patronize it initially because of the franchisor's name. Repeat business, however, may be the result of effective operations and friendly service supplied as a result of the entrepreneur. Several restaurateurs have opened under the franchise name and, because of a lack of support and need for the franchisor, have dropped the corporate image and have continued to operate independently.

Finally, franchisors tend to be the head lessee on lease agreements. This certainly protects the interest of the landlord. If the restaurant should fail, they have a level of comfort that the franchisor will step in and resell the operation or run it as a corporately-owned store. However, the other advantage to the franchisor is that if the franchisee does not maintain the standards as developed by the franchisor, the franchisor can take back the lease and throw the franchisee out. While this is difficult to do, it has happened.

While there are tremendous advantages in owning a franchise operation in terms of support and reduced financial risk, there are drawbacks as well. Before purchasing a franchise operation, speak with existing franchisees with the organization. It is always best to talk with those who the franchisor does not recommend in order to find out the real problems or lack thereof. Many franchisors service a few locations very well and send the potential franchisees to that location in order to receive a good review.

Additionally, the franchise contract is one that the franchisee must live with for a long time. It is therefore essential that it is carefully reviewed by a lawyer and that the franchisee knows exactly what he is getting into on both a financial and business basis. Usually, franchise agreements have an outline of the methodologies used to settle disputes and the franchisee should ensure that these arbitration methods meet with their needs.

Even with its drawbacks, franchising is a great opportunity. If the franchisor is checked out carefully and the contracts are clear and precise, a future of economic benefit should be achieved by both parties.

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