Franchising: your model for business growth?

Franchising has been lauded as a tried and tested way of growing one’s business by using the entrepreneurial skills and capital (without incurring debt or interest charges) of others. It has also sometimes misguidedly been promoted as a panacea for ailing businesses. By Manzoor Ishani, Sherrards solicitors.

So, what are the advantages?
Franchising is one of the most effective ways of enabling a company (the franchisor) to penetrate markets more deeply and more quickly, than if it chose to go it alone, with the minimum capital investment and with few of the sort of management problems it would otherwise encounter. In a franchise it is the franchisees who provide the capital and the management at the sharp end of the business.

As the franchisee owns his own business, he will be keen to ensure the success of his business. By contrast, the manager of a company-owned outlet is more likely to be concerned with maximising his comfort. He will close the outlet at the appointed hour rather than wait until the last customer has departed. When not well, he will telephone head office for a relief manager and will himself stay at home and nurse his cold. An owner manager, on the other hand, will drag himself into town and open the outlet.

In a retail operation, a large, well-run franchised network often gives the franchisor a captive market into which it can sell its goods.

In a well-structured franchise the projection of a uniform marketing image helps to generate brand awareness, which in turn, increases the value of the franchisor’s brand and thus the franchisor’s goodwill. Franchisees within a franchised network are constantly promoting the goodwill of their franchisors in the course of promoting their own businesses.

The disadvantages?
Company-owned outlets tend to be more profitable for a franchisor than franchised outlets. Whilst franchising may enable a franchisor to open outlets quickly and with a low capital outlay, the return to the franchisor from such outlets is, of necessity, smaller.

This is particularly true of franchises where the franchisor derives its revenue by means of a royalty type fee, which is expressed as a percentage of the franchisee’s gross turnover. These fees range from 7 to 15 per cent, considerably lower than what a franchisor would earn if the outlet was owned by the franchisor and managed by an employee.

Franchisors have to develop different management skills when dealing with franchisees. This means devoting financial and human resources (to managing the franchised network) which is significantly different from those required to manage employees.

Franchisees are, after all, owners of their own businesses and need to be treated as such. Franchisors who bark orders at franchisees or give instructions will seldom succeed in the long run. Employees who do not obey the instructions of their employers can always be dismissed. This is not necessarily true of franchisees. Although ultimately, the franchisor has the sanction of terminating the franchise agreement, this is a drastic remedy and will more often than not involve the franchisor in a loss.

It takes time and money to set a franchisee up in business and terminating a franchise agreement is usually an action of last resort and reluctantly taken by the franchisor. Franchisors have to develop the skills of motivating, encouraging and enthusing independent business people into doing things the franchisor’s way. This is not always easy.

Thus, it is more difficult for a franchisor to control franchised outlets than it is for it to control managed outlets.

Franchisors need to develop sophisticated accounting and monitoring systems to ensure accurate accounting and reporting by franchisees.

Franchisors lose a degree of flexibility in their commercial operations, as franchised outlets can be slower to react to changes in the market. It can take longer to introduce a new range of products to exploit market potential within a franchised network, than it can in a chain of company-owned outlets.

The need for franchisors to maintain a balance between company-owned outlets and franchised outlets is critical. When things are going well, franchisors may be tempted to cut back on the number of company-owned operations or indeed to sell most of its company-owned operations to prospective franchisees as going concerns. One of the consequences of such an action is that the franchisor is then dependent almost entirely on its franchisees for information about various aspects of running the business generally and about life at the sharp end of selling in particular. This in turn makes it difficult for franchisors to introduce change, if the need for such change, is not based upon the personal experience of the franchisor.

So what are the matters an aspiring franchisor should look out for?

Here are 10 Top Tips:

1. Competition – Find out who is likely to be competing with you for franchisees. This means researching to see who is franchising not only a business which is similar to yours, but also what other franchises are available for sale at the sort of price you are proposing to charge for your franchise. Not all prospective franchises are wedded to the idea of only selling goods or services of the type being provided by your franchise.

Many are concerned with starting their own business and approach franchising with an open mind, but with a good idea of what they can afford. They will, therefore, be looking at franchises within their price range.

2. Franchisee selection – Establish and stick to your criteria for those whom you consider to be suited to operate your franchise. Do not lower your standards in a moment of weakness. The temptation is very great to lower standards when recruiting the first few franchisees or when the growth in your network is not keeping pace with your expectations. If you are forced to do so for sound commercial reasons, do so in the full knowledge that it is highly likely that these franchisees will become troublesome in the future.

3. The future – Ask yourself what are you doing now that will make your franchisees want to renew their franchise agreements when they expire. Franchising is a long-term proposition and franchisors who do not look to the future will find that their franchise network will diminish in the longer term.

4. Two businesses – As a franchisor you have two businesses. The first consists of supplying goods or services to your customers via your company-owned units. The second is that of franchising. Do not forget that your franchisees are your customers and that your obligations as franchisor to your franchisees are different and a good deal more onerous than those to your customers. Remember also that the customers of your franchisees are your customers too, albeit indirectly.

5. Management skills – Improve your management skills and those of your staff. The management of a franchise network is an art, not a science. The big challenge your staff (who will be employed) will face is managing franchisees who are not your employees, but independent business people in their own right. Managing them as managers of a branch business, will not bring the best out of your franchisees and will lead to confrontation.

6. Support – One of the key obligations of a franchisor is to support its franchisees to the extent that it is necessary to sustain them in their business. To avoid disappointment and accusations that you fail to keep your promises, always under-promise and over-deliver. In this way you will gain a reputation for doing what you promise and more often than not, more than what you promise. Whatever you do, do not fail to deliver what you promise.

7. Exclusive territories – If you are granting exclusive territories, ensure that you have the necessary protocols and mechanisms in place for dealing with turf wars, which can break out amongst franchisees. If you grant exclusive territories, impose minimum performance targets on your franchisees.

8. Performance targets – If you impose minimum performance targets you must be able to justify their imposition and the basis upon which they are calculated. Make sure that they are reasonably achievable and be prepared to impose such sanctions as you may have reserved in the event that they are not reached, otherwise you will lose credibility and have problems in enforcing targets when others fail to reach them.

9. Standards – Do not tolerate sub-standard franchisees, they affect the whole network and certainly their neighbouring franchisees. Failure by a franchisee to comply with your system is a mortal sin. Uniformity is the key. The key to your success and that of your franchisees is uniformity of business practices, uniformity of marketing image and uniformity of the quality and manner in which products and services are delivered to customers.

10. Bad may be good – Remember that it does not necessarily follow that the most demanding franchisees are the worst franchisees. Often, it is the most demanding franchisees who are also the best in your network. That may be a coincidence or it may be that it is precisely because they are demanding of themselves and good at what they do, that they are demanding. Better to have a very demanding franchisee who is firing on all cylinders and growing his or her business like topsy, than to have a quiet, compliant franchisee who merely chugs along with a tendency to use you as a crutch.

Manzoor Ishani is a senior consultant solicitor with Sherrards, a commercial practice advising franchisors and franchisees in the UK and internationally. He has specialised in franchising for more than 30 years and is a former member of the Legal Committee of the British Franchise Association and is co-author of ‘Franchising in the UK’, ‘Franchising in Europe’ and ‘Franchising in Canada’.