Becoming a franchisee: the questions to ask

What's that?

Franchise is a contract by which a company (franchisor) grants to independent traders (franchisees) the right to exploit its mark and business methods which have been successful, in exchange for financial consideration.

The franchise agreement is compatible with numerous sectors of activity : fast food, food distribution, real estate, personal service, hairdressing and aesthetics, etc.

Thus, the franchise allows, on the one hand, the franchisorto make financial use of a body of knowledge, without committing equity. On the other hand, this system allows merchants without the necessary experience to take advantage of a brand's reputation andaccess methods which they could only have acquired after lengthy research efforts.

What's the difference with wages?

The franchisee is a self-employed trader, he exploits his goodwill at its own risk and profit. As such, the franchisee has its autonomy to search for his clients and sign with them contracts whose terms he himself negotiated.

The franchisee is also free to determine its prices. Nevertheless, the franchisor may impose sales prices on him from time to time, for example in the context of a short low-price campaign (usually lasting 2 to 6 weeks).

On the other hand, a franchise agreement which would grant the franchisee only one illusory autonomy could be reclassified as an employment contract. In this case, the franchisee would have to prove the existence of a subordinate relationship that is, a power of direction, control and sanction exercised by the franchisor.

In order to determine the existence of a relationship of subordination, the court may take into account multiple cues, for example:

• Resale price fixing by the franchisor
• Setting the opening hours of the franchised outlet by the franchisor
• The franchisor's intervention for the hiring of employees of the franchisee or more broadly the exercise of the management power of the employees.

In the event of the franchisee's contract being reclassified as an employment contract, he may to claim the remuneration due to him as an employee (e.g. salary arrears up to 5 years, overtime payments and paid leave, etc.). The franchisee may also obtain a refund of the admission fee.

Benefits of the franchise

By integrating a franchise network, the franchisee benefits from following benefits :

• Proven model : The franchisee benefits from a proven and established company model, which reduces risk compared to creating a new mark.
• Brand awareness : the franchisee benefits from the brand's reputation and reputation, which facilitates the acquisition of customers as soon as the establishment opens.
• Assistance and training : the franchisee receives continuous training and assistance from the franchisor. The franchisee's experience allows the franchisee to avoid common mistakes and helps them manage their company more effectively.
• Access to resources — By integrating the network, franchisees gain access to resources such as a list of approved suppliers, management systems, marketing tools, operational manuals, etc. These resources save time and focus on operating their goodwill.
• Bargaining power : As a member of the network, the franchisee has increased bargaining power with suppliers, which can result in economies of scale and better supply conditions.

Disadvantages of Franchise

The franchise also presents certain disadvantages for the franchisee:

• Initial costs : becoming a franchisee often entails significant upfront costs such as admission fees, training fees, accommodation and, in some cases, security deposit. These investments can be a financial barrier for some entrepreneurs.
• Periodic Fees : the franchisee must pay regular royalties to the franchisor, usually as a percentage of turnover, which may reduce the franchisee's profit margin and affect the franchisee's long-term profitability.
• Loss of autonomy : the franchisee must follow the franchisor's directives and policies, which may limit his freedom of operation and decision-making.
• Dependence on franchisor : the success of the franchisee depends in part on the performance of the franchisor. If the franchisor encounters financial or reputational difficulties, the franchisee's company may be directly affected.
• Internal competition : in some franchises, franchisees may be located close to each other, which may lead to internal competition that may impact their individual performance.

Start-up costs

At the start of the franchise, the franchisee has many costs:

• Right of entry : a lump sum to be paid to the franchisor to integrate the network. Its amount varies considerably from one network to another (from €5,000 to more than €50,000) according to the sector of activity, the development of know-how, the size of the network, brand awareness, etc.
• Room layout and equipment : depending on the type of activity, the franchisee may have to buy or rent specific equipment and carry out fit-up work in his commercial premises.
• Security deposit : some franchisors ask for a security deposit when they make equipment available to the franchisee.
• Initial training : Some franchisors charge an initial training fee to prepare the franchisee to manage the company. This can include training on products, operational procedures, financial management, etc.
• Legal and accounting costs : It is common practice to hire a lawyer and/or a chartered accountant specialized in franchising to review the franchise agreement.
• Initial Working Capital : it is important that the franchisee has sufficient funds to cover the company's ongoing expenses during the first months of operation, including rent, salaries, inventory, marketing expenses, etc.

In-service costs

The franchisee must also take into account the costs during operation:

• Periodic Fees : these are lump sums or calculated as a percentage of the turnover achieved. These fees may be monthly, quarterly or annual and generally cover the services and support provided by the franchisor, such as continuing assistance, training, development of new products, etc.
• Advertising Fees : Some franchisors require franchisees to contribute to a common advertising fund to promote the brand and the network as a whole. The amount of the advertising fee may be fixed or calculated as a percentage of turnover. The amount of advertising fees may be included in the periodic fees.
• Local Ads : in addition to advertising fees, the franchisee is responsible for local promotion and marketing expenses.
• Supply : the franchisee may be required to purchase its products or services from suppliers approved by the franchisor. Procurement costs may vary depending on the specific requirements of the franchisor and the nature of the business.