The Franchise Partnership: Avoiding Disillusion

The modern franchising model can be traced back to Isaac Singer, founder of the I.M. Singer and Company, manufacturer of sewing machines. Singer and his business partners sold rights to businesspeople who were interested in selling his sewing machines within specific geographical areas.

This system served as a win-win for both the company and the businesspeople that chose to invest. The company generated revenue to fund its business endeavors and the businesspeople had a business of their own, selling a product much in demand.

Because of Singer’s modern day franchising model many businesspeople have found a great opportunity to not only bring an idea to life through franchise and licensing agreements, but also give entrepreneurs like themselves an opportunity to own a piece of the pie.

While franchising is a great opportunity for an entrepreneur to own their own business, not all franchise opportunities are the same. A potential franchisee would be wise to evaluate franchise opportunities against the following key components.

• Vetting – From inquiry to ownership a franchisee should experience a rigorous vetting process. It is through this process that a strong relationship begins to develop. It is also through this process that the franchisor and the franchisee learn a lot about each other. While it may be the desire of the franchisee to fly through the process, a thorough process is best for everyone in the long run. After all, it is better to know up front if the fit is right then to find out after thousands of dollars and hundreds of hours have been invested. A weak vetting process can be an indication of the strength of other processes and the leadership team. A strong franchisor is after a solid entrepreneur and a long-term relationship. A weak franchisor is after the franchisee’s money.

• Training – Many times a franchisee’s success can be attributed to their level of preparedness from the start. Part of that preparation takes place long before the doors open for business. Strong training on operational systems and processes is critical to the implementation of the franchisor’s business model. The same holds true for strong business practices. A franchisor that is worth its weight will make sure a franchisee has all the tools necessary to succeed. The franchisor’s primary goal should be setting the franchisee up for long-term growth and an expanded relationship.

• Multi-Unit Offering – The ability to engage in multi-units is beneficial for both the franchisee and the franchisor. The franchisee has the option to compound wealth growth, while the franchisor can engage with fewer franchisees as they work to reach their unit goals and grow the brand. A prospective franchisee should be aware of a franchisor who adds many single-unit franchisees. This may be an indication that the franchisor is more concerned about the money than the shared interest of exponential business growth. Area Representative Agreements are another form of multi-unit growth that gives the franchisee the opportunity to grow and develop a market and serve in a role as a quasi-franchisor.

• Territorial Protection – A franchise agreement should clearly describe the territory covered by the agreement. Vague and uncertain language does not help the franchisee. A strong franchisor wants clarity and understanding in all business dealings. Vague language in a Franchise Disclosure Document (FDD) or Franchise Agreement (FA) should be considered intentional and a red flag.

• Rebate Sharing – Almost every franchisor has some form of a rebate deal with distributors and suppliers. A reputable franchisor will not only disclose these, but many will share a portion of those rebates back to the franchisee as they acquire multiple units. Again, a quality franchisor has a shared success and wealth building mindset.

• Renewal Terms – Clear and fair renewal terms protect both the franchisor and the franchisee. 180-day notification of intent to renew is the ideal. Stated increases in royalty fees upon renewal of the agreement are not an ideal situation for the franchisee. While it sounds great to know what your increase will be, there is usually no value added with the increase. An increase in royalty fee at renewal typically puts more money in the franchisor’s pocket and less in the franchisees. In most cases the increase will not result in an increase in service. A franchisor with a well-run business will grow revenue through the growth of the franchisee. Very simply put, increased revenue by the franchisee increases revenue for the franchisor.

• Franchise Agreement Renewal – The franchise agreement should state whether the franchisee has the option of rolling over the current agreement. Otherwise it should state that the current agreement will be replaced by a new agreement. Either way, the franchisee needs to know which it is going to be prior to signing the initial agreement.

• Alternate Channels of Distribution – While territories may be mapped out and clearly stated, it is important to know whether the franchisor has the right to enter alternative channels of distribution within their territory. Alternative channels could be concert venues, amusement parks, shopping malls, airports, etc. While these venues may not directly impact the franchisee’s target market, they could take away opportunities for expansion within their existing territory. A strong franchisor will make sure that this is clearly known up front.

• Gift Cards – While gift cards don’t seem like a big deal, they can be a revenue boost or drain. Gift cards purchased in one location and redeemed in another can be a boon for one location and a drain for another. Clarifying the redemption system upfront may help to avoid future issues. Outside of the gross revenue they generate, a franchisor should not be taking a cut from the sale of gift cards.

• Advertising Fund – Almost all franchisors require the franchisee to contribute to an advertising fund. This fund is different than the local advertising requirements placed upon the franchisee. The advertising fund is used by the franchisor to fund marketing related activities for the franchise group. This may mean that some markets see more advertising dollars reinvested into their market than others. As should be expected, marketing dollars tend to follow market penetration. A reputable franchisor will provide audited financials of the advertising fund for the franchisees to review.

• Curable Versus Non-Curable Events – Every franchisee needs to understand what makes up a curable and non-curable violation of the Franchise Agreement. Curable violations are usually minor and immediately fixable. Non-Curable offenses should be clearly stated in the Franchise Agreement. A quality franchisor is not Franchise Agreement termination happy. Again, a franchisor should be interested in franchisee success and the mutual benefit of growing together. The franchisor should work to rectify situations and not allow situations to ruin the relationship. However, they will terminate franchise agreements for failures that jeopardize the brand and put the franchisor and other franchisees at risk. This level of leadership is important. Doing business with a franchisor that actively protects the brand is crucial to the long-term success of the franchisor and their franchisee partners.

• Accountability – Accountability is where many franchisors struggle. A strong franchisor will hold franchisees accountable for operating their business within the established standards. A franchisor that does not hold franchisees accountable is indicating that they are not concerned about brand or product integrity at the level they should be. This is a major red flag. The best franchisors are sticklers for adherence to the systems and processes they have developed. They know what it takes to succeed. They also know that franchisee failure is usually connected to the franchisee’s failure to operate their business within the brand’s operational standards. While a franchisee may not like accountability, they need it. It is neither good nor acceptable to have failing franchisees. Bad and failing franchisees harm the brand and place all franchisees at risk.

• Avoid Dissolution - Selecting the right franchisor is not an easy task for the potential franchisee. It’s also not an easy task for the franchisor. If it is easy for either party, then neither is doing their due diligence. A franchisee and franchisor relationship are long-term commitments. It should be treated in much the same way as selecting a partner for life. There are some behaviors that can be tolerated and lived with. However, there are others that cannot. It is the responsibility of each party to identify behaviors and determine which are acceptable and which are not. Like a marriage, franchisees and franchisors that don’t go through the due diligence process usually end up with a dissolution of the relationship. That situation is neither good nor healthy for anyone.

Randy Stepp is a Principal with Renaissance Leadership Group. RLG is a full-service business and franchise development company whose purpose is to help business owners realize their dreams of independence and freedom.

Learn more about Renaissance Leadership Group at www.renaissanceleadershipgroup.com