Franchising | September 2010 | By Roy T. Bergold Jr.

License to Serve

Potential and existing quick-serve franchisees should know a thing or two when making deals with a franchisor.

Every day I get several cool e-mails from you readers. Most of them are compliments—and a few question the marital status of my parents. Every once in a while I get a request from a graduate student who wants me to write his thesis, or the prospective licensee who believes that QSR is paying me a pile for this column and would like me to answer a 15-page questionnaire on the fast food business for free. 

I recently opened an e-mail from a gentleman who described his small chain and asked me if I would be interested in giving him an opinion on its viability. I was intrigued by his request and contacted him. After assessing his business, I thought that what I saw and learned might be of some value to all of you out there who are prospective licensees or licensors. The following might help you decide whether to join the franchise business, or help you sharpen the agreements you already have.

Let’s pretend you have a really interesting restaurant concept and people are coming to you and asking how they can be a part of it. First, everyone involved must understand what is expected of the licensee and, in return, what the licensee gets. Is there marketing help, site selection, construction assistance, purchasing, training? It’s amazing how some of this gets swept under the rug and assumed it takes place. 

A contentious area of any negotiation is what the licensee owes the licensor, not counting the initial licensing fee. The two most common are a monthly fee and a percentage of sales. The monthly fee, of course, locks in what is owed, but certainly doesn’t have a lot of sales incentive. The percent of sales has lots of incentives for the licensor to help the licensee, but should probably be on some sort of sliding scale to allow the licensee that same incentive. The higher the sales, the smaller the percentage owed.  

There should be a core menu, but there should be room to add regional tastes. And the core menu should have specific recipes that are not varied. Surprising how this one goes by the wayside. 

Quality, service, and cleanliness standards; usually these are linked to the expandability of the licensee or the reason to yank the license, so clarity is an issue. It’s not easy to take away someone’s livelihood, nor should it be. But, since every store affects the reputation of the chain, standards are necessary. The positive side is expandability.

Then there’s the trading area of the store. What is exclusive to the licensee? And what is the procedure when a sale of the store is considered? Does the company have first right of refusal and approval of the new buyer?  

The licensor should provide several approved suppliers to allow for competitive pricing, and they should be open to investigating new suppliers, especially those suggested by licensees.

Then there’s marketing. Obviously, the licensor should have a marketing recommendation for each store based on its location. But there are other points I have seen overlooked in the agreement. How many secret shopper visits is the store entitled to over what period of time? What percentage of sales is required to be spent on marketing and what qualifies as marketing? There should be a provision for a required grand opening with a set base plan of activities and room for additions. When is a marketing co-op viable and how is it set up? For a time each store will market itself, but at some point a co-op can get better media deals and more clout. 

By the way, same goes for a purchasing co-op. What are the rules for using the trademarks, assuming there are some? I have seen situations where branding is almost nonexistent as there are no logos, typestyles, or colors that identify the company. If a licensee wants to produce his own marketing materials, what is the approval process? And what are the specific requirements for staying in the company image?

I am a firm believer that there are no investors. Everyone works in the stores, especially the licensee. And any company employees or partners must attend the same training sessions that the licensees do. That should be in the agreement.  

“Many times in our hurry to get a concept going or get a store open,
we don’t get absolute clarity on many of these licensing points like
we should.”

To round it all out, there should be a clear understanding of legal responsibility. Who owes for what, what happens in a suit, and what happens in the case of an honest disagreement between the licensor and licensee on some provision?

What about qualifying licensees? Besides the usual, he should be “our kind of person.” If we’re irreverent, so should he. I think the licensee should be required to have the money to run his business and live profit-free for one year. No surprises. And I think the company owes the licensee regularly scheduled meetings to share ideas, problems, and gripes.

Something I have seen work is a provision for family members to take over the license, so-called “second generation owners.” Usually relatives who work in the restaurant and take an interest in it make excellent licensees. I have seen family members who want their own stores get a discounted license fee to encourage them. That’s a nice idea. 

As I said at the beginning, a lot of the above is common sense, but many times in our hurry to get a concept going or get a store open, we don’t get absolute clarity on many of these points like we should. I would hope it could be done in less than a 30-page document, in clear English. Not one “whereas” allowed.  

The gentleman I mentioned has all of this from me and is considering it for his company. I hope some of it will help you. A hearty welcome to our great industry.

Have a Peaceful Life and Happy Trails.