A franchise is a business entity in which the owner of the enterprise, known as the franchisor, sells the right to operate individual units to entrepreneurs called franchisees. While franchisees own their units, they must compensate the franchisor, typically in the form of royalties based on unit sales. The parties enter into a franchise agreement that determines each party's obligations. Several unique characteristics epitomize the franchisor-franchisee relationship.
According to the Entrepreneur website, the nature of the relationship between a franchisor and franchisee is similar to that of a parent and child. In the early stages, the franchisor is responsible for "nurturing" the franchisee by providing the training and guidance necessary to ensure the success of the unit. As time goes by and the franchisee becomes more self-sufficient, the franchisor often allows the franchisee greater latitude, assuming the franchisee demonstrates the ability to operate efficiently.
Although franchisees are independent business owners, they must operate under the terms spelled out in the franchise agreement. The franchisor has the responsibility to ensure the franchisee is adhering to the agreement, which typically covers areas such as operating procedures, use of trademarks and logos and allowable marketing procedures. If the franchisee violates the agreement, the franchisor can take necessary actions that are spelled out in the agreement, which may include terminating the franchisee's operating rights.
Even though the franchisor-franchisee legal relationship is dictated by the franchise agreement, disputes can arise that may require intervention from higher legal authorities. The "Wall Street Journal" cites a 2009 case in which Burger King was permitted by a federal district court in Miami to authorize its franchisees to sell double cheeseburgers for $1, despite the contention of franchisees they would lose money by doing so. Other areas of litigation have included whether franchisees should be considered employees instead of independent contractors, as well as the extent of liability franchisors have for the actions of their franchisees.
According to Entrepreneur, communication is the key to developing an effective working relationship between franchisors and franchisees. Franchisors can set the tone for good communication early in the relationship by encouraging dialogue and using more personal methods such as the telephone instead of relying on emails. Frequent communication also demonstrates that franchisors are committed to the success of their franchisees, which benefits both parties in the long run. Poor or dishonest communication can set the stage for an adversarial relationship that could hinder the success of the franchise.