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The Fundamental Aspects of the Franchise Agreement: Part 8

Written by : Joseph Adler
If you're interested in starting a franchise, you have a lot of company. FranData reported that a record 500-plus new companies began offering franchises in 2006 alone--bringing the total, at least by some counts, to over 4,500 active franchisors in the U.S.

With that many franchisors for franchisees to choose from, how do you stand out from the crowd? How do you create a Unique Selling Proposition (USP) that will allow you to compete against your more established brethren?

Finding Your Small Pond

When facing the task of creating this USP, you should start by understanding that every buyer's universe is different. No frachise buyer would ever attempt to analyze all 4,500 franchisors in the marketplace.

Some will start by choosing a specific industry segment in which they are interested. Perhaps they have always wanted to own a restaurant. Maybe they want to buy a franchise that capitalizes on their particular set of skills or experience. They may narrow the list based on how they examine the marketplace--whether through the use of brokers, trade shows or franchise directories. Or perhaps they'll use the more encompassing--and more readily searchable--internet to help them to narrow their search.

Some will be interested only in established franchisors, while others will be looking to get in on the "ground floor" of a franchise poised for explosive growth. Many will eliminate franchisors quickly based on size of investment and their available capital. In short, every buyer's process--and his or her franchise universe--will be both different and smaller than the universe of all available franchise concepts.

For you, as a new franchisor, this is good news. Although most franchise buyers are not fishing in your pond, the buyers that are will be fishing in a much smaller body of water. That means an understanding of your specific pond, and what fish are in it, should be the first order of business.
Armed with this knowledge, you must then narrow your buyer profile as much as possible.

A part of this process can be intuitive--a chiropractic practice will certainly want to focus on chiropractors--but even that knowledge will not get to buyer motivation. More often, the only way to really obtain this understanding is research--talking to either your own franchisees or the franchisees of your closest competitors. (And if direct competitors are not readily identifiable, even a good understanding of "comparable" franchises will be better than no research at all.) This data will provide insight as to buyer motivation, media, "hot buttons" and the specific message that will sell to your audience.

The Many Sales of Franchising

The savvy franchisor also instinctively understands that there is not simply one sale to make, but rather four separate sales that each franchise salesperson must undertake. Prospects are likely asking themselves four basic questions:

  1. Should I go into business for myself?
  2. Should I go into the widget business?
  3. Should I go it alone or buy a franchise?
  4. Should I buy your widget franchise?

Training and Operating Assistance

Another key element in the success of any franchise system is the training and operating
assistance offered by franchisors to their franchisees. A franchisor will require its franchisees to attend its initial training sessions to provide the franchisees with the necessary training and support to successfully launch and operate a franchise. A ranchisor may require that all staff training at the franchisee level be made under their guidance and control and that the franchisees and their personnel successfully complete the necessary training before such franchisees are accepted as franchisees into the system.

In addition to the initial training, a franchisor will often offer ongoing operating assistance in such areas as the selection and purchasing of products, assistance in advertising campaigns, hiring and training employees, bookkeeping services, improvements to the system and general advice to the franchisees. Further, a franchisor may offer refresher-training courses from time to time to bring the franchisees up-to-date on new procedures and developments. Finally, a franchisor should reserve the right to require under-performing franchisees to undergo additional training. In each case, the franchisees should then, in turn, be required by their franchise agreements to train their employees in a manner consistent with the franchisor’s requirements.

The franchise agreement should identify who should bear the initial and ongoing training costs of the franchisees and their personnel. A franchisor will often require that its franchisees assume the cost of travel to and from training sites (no matter where the training site might be) and that the franchisees train their own employees at their own expense.


The typical franchise agreement will require the franchisee to purchase and maintain at all times during the term of the agreement such policies of insurance and in such amounts as the franchisor may reasonably require. Alternatively, the franchisor may establish a group insurance program and require franchisees to contribute to same.

In many cases the franchisor may require that it be named as an additional insured party to get the benefit of the insurance and typically will require the franchisee to provide proof of insurance upon request. Examples of the types of insurance a franchisor may require are comprehensive general liability, property damage, business interruption, employee honesty and liability, inventory and fire insurance. Such insurance is intended to protect both the franchisee and the franchisor.
In the event that the franchisee does not maintain the required insurance, the agreement may provide that the franchisor can obtain such insurance from an insurer selected by the franchisor and keep the same in full force and effect at the sole expense of the franchisee.

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Franchise class actions on the rise Drafting an effective franchise agreement - Part 3 Drafting an effective franchise agreement - Part 2