Regulated by contract which usually covers:
- Initial fee
- Royalty fee/Management fee
- Capital required from franchisee
- Territory/Area of operation
- Duration of license and renewal
- The franchisee is not completely independent. It must comply with the terms and conditions of the franchise agreement.
- In addition to the initial franchise fee, franchisee must pay on-going royalties and advertising fees. This could result in a substantial up-front outlay in terms of advance payments.
- Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business.
- A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems. This could cause disruption to on-going operational support in terms of supply of goods and services.
- The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination.
Common Mistakes of Prospective Franchisees
- Not reading, understanding and/or asking questions about the franchisee agreement and other legal documents.
- Not understanding the responsibilities of a franchisee and the rights and obligations of a franchisor.
- Not seeking sound legal and financial advice.
- Not verifying oral representations of franchisor.
- Not analyzing the local market in advance.
- Not analyzing the competition.
- Not making thorough due diligence of the franchisor.
- Not choosing the right location.