Franchisee vs Franchisor & FDD vs Franchise Agreement
Amanda: Hey, Mikes.
Mike M: Hello.
Mike P: Hey, Amanda.
Amanda: On our last episode of “Franchising with Purpose,” just to recap for our listeners, we talked…the last two, really, talked a lot about the support that we can expect as a franchisee, whether that’s from the home office franchisor, or from outside resources, or other franchisees that are in our same business. So lots of great resources. Like I said, last time, I feel like, you know, as I continue on this journey, support is definitely not lacking. There’s lots of resources that are available to me. But today I want to switch gears and talk about all these words that have been thrown around. So we talked about FDD, and franchise agreement, and royalties, and what does those things mean, for both myself and our listeners and anybody who’s pursuing this opportunity. So we talked a lot about franchising with purpose, right, and we’ve covered both sides of things from a franchisor’s prospective, franchisee’s. What’s the difference between the two?
Mike P: Franchisees…
Mike P: …are our business partners, strategic partners. They are the franchise owners out in the field. And the franchisor would be, like, for us, it would be Griswold Home Care would be the franchisor who has the other part of the relationship with the franchise owners who brings support, the business systems, and all the business acumen to assist the franchise owners in their growth process. I mean, that’s a very summarized version. We do many things.
Mike M: So I would add…can I backtrack first for a second?
Amanda: Of course.
Mike M: So, under glossary of terms, can I add “franchising with purpose” and explain what that is?
Amanda: Sure. Yeah.
Mike M: Because we hear it but what does it actually mean? So, obviously franchisee speaks for itself. We’re a franchise company. There are 4,000 plus franchise companies out there to choose from. Not every one of those 4,000 plus franchise companies have the component of purpose attached to it.
Amanda: I want to pause there. Before we get into franchising with purpose, give me a 30-second sound bite of what is franchising?
Mike M: Franchising is a delivery vehicle through a very systematic approach to delivering products and services to end users. That would be kind of the basic explanation of what franchising is.
Amanda: Okay. Now, franchising with purpose.
Mike M: Franchising with purpose is doing that same thing, accomplishing that same thing, except…and it includes obviously in that delivery model, you know, a profit structure, right, the business component of delivering goods and services to an end user has a profitability implication to and that’s franchisee. When we say “with purpose” we’re talking about adding a component of mission, of give back, of making a difference. I’ll say those three things makeup one’s purpose, in least in the way we are talking about franchising with purpose. So if you’re a person that is predisposed to wanting to make a difference in this world or in your community, to wanting to give back to others that are either elderly, ill, infirm, that I’ll say are less fortunate, then maybe you are because you have your health.
If you want to impact your community and the people that purchase goods and services in the community, if you want to build the relationships, like deep sea meaningful relationships in your community and with potentially your customers and/or staff that you’re employing and providing a job opportunity, put that all into the purpose bucket. So I have this delivery model that some company created, tested it, made sure it was right, that they’re training it into me that I purchase, that then allows me to go for that product or service to the end user but I’m doing it in that franchising model that allows me to feed my soul and maybe a little bit of a higher calling than just delivering the product or service. And there are many opportunities out there that allow you to do that.
And I can say that in some way, you can justify that purpose side in any franchise model. If I’m in automotive and people rely on their vehicle to get to work and make money and feed their families and I fix their vehicle, I’ve given back in a way that helps them, that betters their life. And so, you know, if I have that desire to do that, you can find that potentially in any product or service franchising concept, but certainly in our industry at home care, you are dealing with a disadvantage population. I don’t mean that in terms of poor. Not poor. Disadvantaged in terms of health, in terms of circumstances, that if you really have a heart or soul for that, that purpose, then you can franchise as a business model and make profit while you’re feeding your soul. That’s franchising with purpose.
Mike P: Yeah, we give people to help they need to live in the place they love. That’s our purpose. So when we talk about franchising with purpose, that’s what we talk about. So I couldn’t agree more. I mean, you mentioned business-oriented and mission-oriented. That’s franchising with purpose. That’s what we do.
Amanda: All right.
Mike M: Now, to go back real quickly to franchisor, franchisee, so what I might add, is it on the franchisee side, I’m the one that is making the decision to buy a business. I set up my corporation, whether I do it as a sole proprietorship, highly unlikely, or in a LLC, a limited liability company, or an S corp, or a C corp, depending on how I’d fund my business. I’m setting up my corporation structure. I’m buying somebody else’s brand, their system, you know, their marks and some of the rules and regs that govern that. And I set up my business and I do business as whatever that brand is.
So the franchisee is the independent business owner because they hire and fire and they make all their profitability decisions because it’s their business, doing business as under an umbrella of the franchisor which has the system and the support pieces that we’ve talked about through this “Franchising with Purpose” podcast process. They have the system I want. They have the support that I rely on. I’m willing to sign a contract with them, or an agreement with them, to get that and I operate under that DBA, in this case Griswold Home Care, but it’s Mike’s home care company. LLC doing business as Griswold Home Care. Griswold Home Care is the franchisor side. Mike’s Home Care company is the franchisee side.
Amanda: All right. It’s a great explanation. So we’ve spent a lot of time kind of going through the journey of looking to become a business owner and do I go independent? Do I start buy a franchise? What does that look like? And we’ve used the term…I think we’ve used this quite a bit, FDD, right, as a document. What does that mean? What is an FDD?
Mike P: Well, it’s a Franchise Disclosure Document. That’s what the FDD stands for.
Amanda: That was very intense, Mike. Walk us through what that is.
Mike P: Well, you know, we talk about a partnership, it’s really a strategic partnership. And part of a franchisee franchisor, what keeps them together is that relationship that they have, right? So if you’re a little to build a relationship, who is that person you’re building a relationship with? Franchise Disclosure Document talks about that. For our company, it would be Griswold Home Care, but it begins with the leadership. What is their background? What is their business acumen? And then it transcends through the rest of the organization. It includes things that are financial stability, any potential litigation. It really is a view of who your partner is and what they do and how they do it.
And in each Franchise Disclosure Document, there’s 22 items. It’s consistent through the franchise industry. The franchisors all have the same 22 items. They vary, obviously, from their backgrounds, but it’s the same and it also includes a franchise agreement which is incorporated in the Franchise Disclosure Document. I’m sure Mike is going to expand on that a little bit more. But it is who we are. So if you were looking at Griswold Home Care, you understand who the leadership is, who the owners are, if we have litigation, what was that litigation going back to?
All the way back to when we started, our financial stability, the number of franchise outlets we have, where they’re located, a wealth of information you will learn about the franchisor which is important for you as a potential franchisee to know who’s your partner. Who’s your strategic partner? What about their background? How are they going to help me? You know, how have they’ve grown in other markets? Where are they in other markets? So you learn just about everything you can in this document. Certainly, it’s going to take your investing time to do your homework to review it, but that’s why your franchise development team will be there to do a review with you to answer those questions that you have. Would you say that’s important?
Mike M: Absolutely. Yeah. So the…
Amanda: I’m going to say it’s critical.
Mike P: I would, too.
Mike M: I would I would certainly say only four so far. So here’s my spin on the FDD. If I start highest picture, the Federal Trade Commission is what governs franchising. And what they have set for all franchisers are…Mike is right. There’s 22 that matter. The 23rd item is a receipt page. But every franchise company has to have a Franchise Disclosure Document. And the FTC portion of it is the first 23 items that you’ll find in any FDD. Now, you may find an FDD that’s 50 pages, you may find an FDD that’s 400 pages. That’s not what’s regulated. The items are regulated. So every item, as Mike said, and Mike start with the company’s background, and Mike go into the leadership team, it goes into litigation, it goes into costs, it goes into startup costs, it goes into additional costs, it goes into a lot training. You name it.
There’s a lot of things that are in there. But all the sections are exactly the same for each franchise, and they just put their information and spin on the information based on their company. It used to be known, just in case you’re out there searching and come across a term “uniform franchise offering circular” or UFOC, is what it used to be for years and years and years. And that has somewhere along the line somebody decided to complicate things, as people do, and change the vernacular from UFOC or Uniform Franchise Offering Circular to Franchise Disclosure Document or FDD. Today it is the FDD. But same document, same requirements under the Federal Trade Commission. So the beginning section is all regulated by the FTC. After that, it’s what the company is disclosing. There are similar sections like every FDD is going to have the company’s financials.
So every new year, when you go to redo your FDD, and you have to do it every year because every year your company’s financials change. And when your company’s financials change, which is known in the industry as a material change, you had already disclosed it. So you get your new financials in there. That’s not an FTC requirement, that’s what goes into FDD, but it’s a material change, and so it’s got to be in there. And you would then update that information every year. You may not change anything else other than that, but every year you know you’re going to have to create a new FDD with your new company financials.
There are states that have specific disclosure and registration processes, or what they call registration seats. And in the FDD, you will find the states that have very specific disclosure around certain things. Those disclosures and the information around that, which may differ from what you may see in another state, are disclosed in that FDD. So that if I’m buying in, say, Wisconsin, and there’s specific language that Wisconsin wants me to have in there, then it’s in there, and I get to see that before I ever sign on the dotted line or buy a franchise.
Mike said it, there’s franchise agreements are in there. So you’ll find franchise agreements in there. You’ll find a list of all the franchisees that are in their system in there, in the back. So there’s a lot of information. Some get very detailed and some don’t. But, you know, from the highest level, it’s FTC-regulated for the first 23 items and then after that kind of goes based on company’s [inaudible 00:15:07].
Mike P: Yeah. And one of the things we covered in our one of our previous episodes, like…maybe you want to touch on this. If you’re taking this to your attorney, would any regular attorney be able to decipher an FDD franchise agreement?
Mike M: Is that rhetorical or you’re asking me?
Mike P: No. I’m asking the question.
Mike M: Just want to make sure because I know you know the answer to this. Now, well, let’s put it this way. Any attorney that is of a good legal mind can go through an FDD and they can tell you what the FDD says. So could I take it to a general counsel and have them review it? Absolutely. Is that the most effective way of operating through this process of determining whether I should buy a franchise or not? No. I would go with a franchise attorney group because franchise attorney groups will say to you as you go through the franchise agreement, “Here’s what you might be able to negotiate. And here’s what you can’t.” And they’ll save you a lot of time and a lot of money. If you give it to a general attorney and say, “Tell me what needs to be done?” Or “What I can do?” Or “What I gotta do where?”
They’ll markup that entire document and you’ll spend money for them the markup that document. Where in the end very little with the agreement will probably change. There are franchisee, franchisors out there like us that want critical terms to make sure that we’re on the same page that may negotiate or may put it again to that franchise agreement. But for the most part the agreements or the agreements and franchise attorney groups know that, and they don’t spend a lot of your money helping you focus on things that they know just aren’t going to change because of brand protection.
Amanda: So you’ve talked about FDD, and we’ve talked about a franchise agreement as part of that FDD. So the Franchise Disclosure Document is something I can expect during my process of deciding whether or not I want to purchase that franchise. And in that is the agreement that I will ultimately sign and what that all looks like but there are kind of a two separate parts in this journey, right? An FDD is something I can expect from any franchisor that I’m looking into. That’s not something specific to industry or…
Mike M: It must.
Amanda: Right. So that’s…we’re going to talk, you know, in a couple episodes about red flags, but FDD is something that you are legally required to provide as a franchisor to somebody who’s in that journey of deciding whether or not they want to purchase a franchise. So let’s talk about the franchise agreement because it’s different than the FDD, it’s part of it. But what is a franchise agreement? What can I expect to see in that? What are some commonalities?
Mike P: Well, the franchise agreement outlines our business relationship from the franchisor and franchisee and it gets into specifics. I mean, from a contractual term it outlines the term of the agreement. Obviously, the start date, the franchise territory, all the use of the marks, it gets into the fees, royalty fees, how you pay them, if there’s a general marketing fund and how you fund that, it outlines the dos and don’ts of operation, the support, you know, the expectations. It’s a mutual agreement what the franchisor will provide, what the franchisee can expect, and then what guidance and compliance things that the franchisee needs to be aware of and their use of their business outlines the resources. We talked earlier about the different resources and support. So it speaks to those as well. Again, that’s a summarized version.
Mike M: I mean, that’s pretty much it. I think, if you look at it, a franchise agreement is really there to make sure each party, franchisor and franchisee, know what their working relationship is and what the responsibilities are. In the big picture it’s that, right? Because the franchisor collects royalties, and I know we’ll talk about that. The franchisor provides stuff, support services, etc. That’s all got to be defined in the franchise agreement so that each party knows what the responsibilities are.
Amanda: Eliminates the gray area.
Mike M: Absolutely.
Amanda: All right. So you mentioned financial responsibilities. Let’s talk about franchise fee versus royalties. What’s the difference between those two? As we talk, there’s a lot of financial terms thrown around.
Mike M: Well, they’re often confused with one another. Sometimes people use them interchangeably. I’ll do franchise fee. You want to do royalty?
Mike P: Yeah. Sure.
Mike M: Okay. The franchise fee is what you pay a company when you sign…After you’ve done your research whatever that journey is or however long it took, you’ve been disclosed by the company. So you got in the FDD, you’ve waited at least 14 business days in most states. That’s a general rule of thumb, some are a little bit different. But the general rule of thumb is once you get the Franchise Disclosure Document, the franchise company and the potential franchise buyer have to wait 14 business days before they can enter into an agreement on the 15th day.
That’s just so that nobody has buyer’s remorse, nobody makes a mistake or takes advantage of anybody. So the franchise fee when I sign my agreement I pay to the franchise company. And it’s for all those services that we’ve talked about in the previous version on “Franchising with Purpose.” And that’s all the launch support stuff. There’s a home office team that has to be paid to do their job. And the way a lot of that happens is through the franchise fees that are paid in the development process.
Amanda: How’s that different from royalties?
Mike P: Well, royalty fee is the ongoing contribution that the franchisees make to the franchisor for not only the continued support but for the continued innovation, the development of new programs systems, and also for the marketing, the brand awareness, the building and promoting of other franchise. And it’s something that, you know, as Mike said, it’s outlined in the franchise agreement but that differs. That’s typically paid on a monthly basis. And it’s a factor or a percentage or a fee that’s usually based on top line revenue or another factor like that. I mean, that’s what ours is based on and maybe some others that are slightly different. In addition to that, there would be general marketing fund which all the franchisees pay into or designed to give some additional support at marketing whether it’ll be digital or print media things like that to promote the brand, not only on a national level but, you know, in the local markets.
Amanda: All right. Anything? Any parting remarks on that? I mean, they’re perfect segue into our next topic which is, you know, financial opportunities or financing options for purchasing a franchise. So that’s kind of where we’re headed, but any other things you want to add to our glossary of terms here?
Mike M: No other than always as we end the broadcast. Thank you to you, Amanda, and to our loyal listeners.
Amanda: You’re welcome. And if there are terms that you want to learn more about or happy to provide them, you can reach out to us on Twitter @GriswoldFran. Thanks, Charlie. So lots of great resources here to help answer those questions. I know we just touched on a few and there’s a ton more. Thanks for both of you for being here. And we’ll look forward to doing it again.
Mike P: Thanks, Amanda.
Mike M: Thank you.