The four different contractual franchisor/franchisee relationships
In this transcript, Clay Clark (US SBA Entrepreneur of the Year) and Terry Powell (“the father of franchising” and founder of Entrepreneur’s Source) talk about the four different contractual franchisor/franchisee relationships on Thrive15.com, one of the top business schools in Michigan!
Clay: I’m here today with Terry. Terry, boom! awesome and today we’re talking about the four different contractual franchisor and franchisee relationships. Before we deep dive into this, I know it’s kind of dangerous without scoober gear, but I’m going to go ahead and deep dive into this. Before you get into it, give people just a little bit of knowledge of how long you have been working with franchises in some capacity.
Terry: Yes, little over 30 years that I’ve been working in the franchise sector as a franchise coach, as a franchiser, and working with about 670 franchisers and tens of thousands of individuals exploring franchising.
Clay: Now in the franchising world, about transparency, making sure everyone knows the truth about everything. Full disclosure here, what I ask you it’s a tough question I’m sure people ask you all the time. I’m going to ask you, are you in any way related the the 65th United States secretary of state four star general of the United States army, general Colin Powell.
Clay: Okay, all right, that’s good. I wanted to get that out of the way, I know that people watching this have been worried about that through out the different episodes.
Terry: I get asked frequently.
Clay: All right, Terry as you get into this franchise world, you’re going to discover or people if you’re watching this as you get into the franchise world, you’re going to discover there are four different types of franchise agreements. The first one is the direct franchise. The second is the area development, the third is the master franchiser, and the fourth is the sub franchisee. Terry, for this training, what we are going to do, is were are going to be kind of going into each one of these items, but we’re going to be using the truth canon, so when I ask you or I bring up the point, you’re going to fire off a massive canon, so that this very memorable light and I could be life changing. So here we go.
The fire form the truth canon, number one here. This is the direct franchises, this is the direct franchise type of franchise agreement. Terry, can you share with me what this direct franchise agreement is all about?
Terry: That actually is the most common form of relationship between a franchiser and a franchisee. That’s what we refer to as a single unit licence agreement between a franchisee and a franchiser to operate their intellectual property franchise licence system.
Clay: This is the most common.
Terry: This is the most common. Most individuals start of with one unit, although about 23 percent do something on a larger scale than starting with one.
Clay: I’m going to through out some jotting here that’s often said as it relates to this and to see if you can describe for me what it means exactly. It says here that a lot of people call this a two tier relationship between kind of a franchiser and a franchisee. What does that mean the two tiered?
Terry: Well they mean tiers, they mean there’s two key element of that.
Terry: It’s a interdependent relationship between the franchiser and the franchisee. It’s a win win, one on one, two tier kind of relationship.
Clay: This relationship, the franchisee agrees to assume the operational responsibilities when they sign the contract, with the franchiser, it’s their obligation to provide a system model training and support. Is that accurate?
Terry: Absolutely accurate. Except they typically won’t see it as a contract. In franchising everything is a licensed agreement.
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Terry: Rght, so it’s not a contractual agreement its’ actually a licensed agreement.
Clay: Okay. Now, juts so I fully understand this, why is this most common, why is this the one that most people go with?
Terry: Well think about it, most individuals are making a big step in their lives to go from say employment to empowerment of being self sufficient. Most people won’t want to start of at the foundation of just getting their feet wet with one unit, even though they have a vision they may want to grow beyond that, and many do. Majority will start with just one.
Clay: Okay. Now were going to go ahead and fire another shot from the truth cannon. So here we go. This is agreement number two called the area development agreement. Terry, walk me through how this is different from the first one we’ve referenced here. What’s this area agreement, what’s this all about?
Terry: In the example of the most common one, this is the next step, and someone gets to the point where they see the opportunity as being very exciting to them and they want to control their career and growth path. They’ll likely negotiate something for an area development, it basically means multiple unit growth.
Terry: I’m going to commit to five, I’m going to open one right away, which the same as the first example. They’re only going to open one now, but they’re going to have a development schedule to open additional units on a time frame, and there’s benefits from doing that as far as economies are scale and so forth.
Clay: I once met some guys from Chicago who had … They signed an agreement to buy; I think it was five or six of a particular franchise at one time, and then I thought one time? And they said no, every six months we’ll open up another one. It seems like you’d had to have an unbelievable amount of management experience and skill or at least have the confidence in your management skill and ability, and maybe financial ware with all to do this. Is that pretty common that people have a little more experience when they start of doing an area agreement, is it?
Terry: Well, not necessarily more experience, more of a visionary from a stand point of confidence in their past winning formulas and how they can leverage that mind set into career path, and create some economies of scale. It is more expensive to commit to five, but if you were to do them one at a time, as you decided it will be extremely more expensive.