Franchise Encroachment, Part 2

Encroachment Formulas

Would building encroachment formulas into relationship laws improve the lot of franchisees?

Kaufmann: In the short term, encroachment formulas built into franchise relationship laws could marginally improve the lot of existing franchisees by keeping intrabrand competitors away. If I owned the first McDonald's franchise in Manhattan, it might appear logical that I, too, would want to limit McDonald's ability to franchise others on the island. But this would be a grave error on my part.

The secret to franchising's success is, and has always been, marketplace saturation sufficient to outstrip and preempt the competition, foster broad brand-name recognition, yield significant collective purchasing power and, most critically, garner optimal advertising penetration within any given market. If a market is underserved by too few franchisees as a result of encroachment formulas built into franchise relationship laws, franchisees in that market will quickly find themselves at a significant competitive disadvantage with little potential for brand growth.

Zarco: Encroachment formulas built into relationship laws will improve the lot of franchisees, because the profile of the franchisee today is very different from in the past. Today's franchisees are much more sophisticated and aware of their legal rights. As such, any assurance that they'll be fairly compensated in the event of encroachment will raise the franchisor's credibility within the system and naturally attract a greater number of applicants. Once the word gets out that a franchisee who has suffered will receive fair compensation, then more franchisees of a higher caliber will flock to that system.

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