The more successful a franchisee, the more likely he is to find a franchisor‘s in structions and controls frustrating. A franchisee could argue that were he to set up in business independently he would not be subject to the same type of restrictions. Whilst on the face of it this seems true, in practice independent small business owners are often restricted in other ways through commercial considerations.
Powerful customers and suppliers, strong local competition, and financial constraints all impose less obvious, but equally important, restraints. Reputation The franchisee s‘ reliance upon the power of the franchisor‘s trade name can prove to be a major disadvantage where the franchisor through mismanagement or neglect allows the brand to be called into disrepute. Any failure of the franchisor has a knock-on effect to its franchised network and whilst franchisees share in the benefits and success of the franchisor they also share in its failures. This is equally the case where some franchisees perform in a manner that calls the reputation of the franchised network into question. There is also a risk that a franchisor will sell to a third party with a different vision which has an adverse impact on the franchisor‘s reputation. The franchise agreement usually states that a franchisee has no say in whether a franchisor sells out to a third party and it is a commercial risk that a franchisee takes from the outset. This is particularly harsh as a franchisee will usually have made his decision based on the expectation of the strength and support of the franchisor and a change in ownership may erode this completely. Products Not only will a franchisee have to pay royalties, but also in some cases a mark-up on goods and services received from the franchisor or his nominated supplier. Often a franchisee is tied exclusively to the supplier of the product and is restricted from selling any similar or other products. In such cases, the franchisee is required to stock a specific range of products and to introduce new or additional products at the request of the franchisor, whether or not those subsequently sell as well. A franchisee‘s desire to expand can often be frustrated by the narrow mindedness of the franchisor.
Right to sell One of the most important considerations for a franchisee is the value that can be realized from the resale of the business in the future. Invariably, the franchisee will not have the unfettered right to sell his franchise business to a thirdparty. Such a sale will be subject to the franchisor‘s consent and usually subject to certain pre - conditions being fulfilled. This consent can never be taken for granted, but it should not be unreasonably withheld. In addition, a franchisor may impose a transfer fee on such sale and an introducer‘s fee where it has introduced the prospective purchaser. These can be significant and need to be factored into the realizable value of the business.