By Kevin Bugeja, Managing Director, Franchise 4 U
In the franchise system, there are two roles: franchisee and franchisor. The two work together to create and expand a successful business concept. So, what role does each play in relation to the other?
The role of the franchisor
The franchisor has built a successful business system and is willing to sell a franchisee the right to use that system, and all that goes with it, to begin their own business. An important distinction is that the franchisor is not selling a business; the franchisor is selling a right to operate a business using an established system.
The goal of the franchisor is the same as any other business owner: to increase the value of their business. In the franchise arena, this is accomplished by selling the right to use a business model, so that there are more franchise locations doing business successfully. In this way, they expand their market reach and increase the value of the franchise, and the brand grows. As the number of successful units grows, the franchisor’s royalty stream (the percentage of profits they get from each unit) also grows.
It is in the franchisor’s best interests to continue to support each franchisee as they exercise their rights to conduct business. One of the things a franchisee can expect from a franchisor is professional national marketing, advertising materials and campaigns. Franchisors are still the captain of their fleet and will manage the overall strategy of the brand, including management of products and services, as well as research and development of new products and services.
The role of the franchisee
The franchisee is ready to start a new business, but may not have enough experience in running a business to be comfortable establishing one from scratch. Most new businesses have a high failure rate, sometimes due to mistakes made by inexperienced business owners; other times due to unexpected conditions in the market. What the franchisee is looking for is a leg-up in starting a business so they have an increased chance of success. This is exactly what purchasing the right to use an existing business system and brand name provides them.
What franchisees need to keep in mind is that this is their business, but someone else’s brand. The franchisee is responsible for hiring and training all employees, but again, the franchisor can provide helpful tips for recruiting and employee development. Franchisees manage all the pieces of the business themselves, tapping into the expertise of those from whom they have purchased this system, whenever they need advice. Franchisees can also expect the franchisor to provide training in the methods of running the business per the system.
Franchisees need to run their business per their standards regarding products and services. Consistency from store to store is what brings customers into franchised businesses. A customer should expect to get the same product or service from that brand name, regardless of which building they walk into. If they don’t, other franchised units suffer.
It’s important to note that the services listed above are somewhat standard to all franchise systems, but the extent to which they are applied varies greatly. Each Franchise Agreement will explicitly state the levels of support a franchisee will receive in terms of advertising, training and other areas. If it isn’t in writing (in the Franchise Agreement) then it’s not required. Franchisees should keep this in mind during their conversations with any franchise organisation.
What is important for you as the franchisee to understand from the beginning, is that while you are part of an entire franchise system and will work as a partnership, you are not actually a partner. This doesn’t mean that you have no say in how the business is run, but it does mean that your say is limited.
In more established franchises, there is usually a franchise advisory council (FAC) that represents the franchisees’ interests and works with the franchisor to present ideas and resolve business issues, to the benefit of the franchise system.
The relationship between franchisor and franchisee
Often a parent-child analogy is used to describe the relationship between a franchisor and franchisee. Yes, the franchisor teaches the franchisee how to operate per the system and yes, the franchisor assists the franchisee in growing their business and yes, the franchisor establishes many of the rules and boundaries for operating the business. But, franchisees are not children. They have made a business decision to purchase the franchise and have voluntarily agreed to operate the business per the rules and boundaries set forth by the franchisor. Each franchisee is responsible for the activities of their business; its failure or success is typically their responsibility.
Potential franchisees are provided information about the franchise prior to their making the decision to become a franchisee. They have ample opportunity to review the documents and to seek professional (legal, accounting, etc.) opinions regarding both the viability of the business concept and the terms of the franchise agreement. If their investigation of the opportunity leads them to believe that it is not “right” for them, they are free to look at other franchises – or to start their own business. If they choose to become a franchisee and later decide that it was the wrong decision, most franchise agreements allow them to sell their business.
By and large, franchisors want their franchisees to succeed and most work hard to provide their franchisees with the tools and coaching they need to be successful. However, franchisees are independent business people and they make many business decisions that can ultimately determine the success or failure of their business.
At least in families the parents for many years have responsibilities to guide their children daily on almost every step of their lives. The child is protected from their mistakes and Mum and Dad make things right when things go wrong. That’s not franchising.
Franchisees are independent business people and are in significant control over their destiny from day one. Depending on circumstances, sometimes they fail. In most families, when a child is failing, parents do everything they can – often putting everything they own at risk – to save their child. That is not the case in franchising. While a franchisor can be, supportive and provide guidance, they do not have the right to risk everything they own to save the franchisee. They do not manage the franchisee’s business and cannot put the system at risk as a parent would for their children.
So no, a franchisor is not the franchisee’s parent and the franchisee is not the franchisor’s child. They are business people in a contractual relationship – and that is the reality.
A franchisee/franchisor relationship requires an ongoing commitment, with each party expected to uphold its end of the bargain through active communication, common goals and mutual respect. Some people think that prenuptial agreements mean you are planning for the worst but just as in business arrangements, sometimes agreements are a necessary evil.
The idea is that if you must refer to the franchise agreement, the relationship has gone off track. To prevent either party from pulling out the franchise agreement, both the franchisee and the franchisor need to understand and carry out their respective roles under the agreement. The ability to do this revolves around sharing a vision, maintaining professionalism, support, training and open communication.
Most franchisee/franchisor relationships that do not work out, result from a franchisee misunderstanding the franchising model, the franchisor failing to set expectations and/or the franchisee not understanding them at the outset.
These pitfalls can be avoided from the beginning by the franchisee and the franchisor asking the right questions of each other. Franchisors should enquire about a prospective franchisee’s desire and ability to conform to the franchisor’s business model and operating systems, and the franchisee should thoroughly review the franchise agreement and operations manual, as well as talk to existing franchisees about their level of satisfaction with the franchisor.
What inspires people into franchising?
Do you look forward to Friday afternoon or Monday morning? Perhaps that’s the true litmus test of happiness. If you’re thinking about the fact that there’s only one day to go before the weekend when you just got back from lunch on Thursday, it may be time for a change. Maybe your day-to-day activities simply aren’t all that fulfilling. Maybe you’re in a rut and you need a challenge.
In your analysis of a franchise opportunity, determine if it will provide the challenges that you wish were already in your life. If not, then don’t do it. Compare your current situation to the situation you can create for yourself. Some of the related questions include:
- Do you have a general feeling of self-satisfaction?
- Are you happy when you go home at night?
- Are you able to progress up the ladder?
- Are you increasing your knowledge and skills each day?
- Are you growing or static?
- Is there challenge in your life?
- Are you respected for what you do?
- Are you mapping a course to reach your goals, dreams, and desires?
Each question should be answered systematically from the perspective of the job you’re in, the job you could be in, and the business opportunity you are evaluating, to determine which is most likely to get you towards the place you want to be.
Am I a suitable candidate for franchising?
It is important to assess your suitability to become a franchisee, prior to making any decision regarding purchasing a franchise. Candidates should consider that franchisee failure is rarely reported in the media and is often the cause of their own downfall.
The franchise system is by no means a guarantee for a franchisee’s success. The characteristics for failure generally include the following:
- The franchisee was in business for himself/herself in a similar type of business;
- Complacency;
- Not following the system;
- Interference by family and friends;
- Loss of nerve;
- Expecting too much from the franchisor.
The failure rate for a new business within a five-year period is approximately 90%, whilst a franchise is less than 10%. This demonstrates that franchising is indeed safer than starting your own business, but the potential franchisee must understand that they are in fact going into business on their own and they must follow the franchisor’s system to be successful.
Just because it’s a franchise and it’s safer than other forms of business, that doesn’t mean that franchising comes with any guarantees. Franchising requires an active, thinking person who can make decisions and who has the ability (with the franchisor’s training, support and guidance) to build and operate a business. It is not an auto pilot business. So before buying a franchise, ask yourself the following questions:
Am I willing and able to take on the responsibilities of managing my own business?
Some very careful self-analysis is important before buying a franchise. Indeed, your personal house should be in good order. One of the myths that has been perpetuated is that franchise ownership is easy. While the franchise system will give the start-up training and offer ongoing support, you, the franchisee, must be prepared to manage the business.
While some franchises may lend themselves to absentee ownership, most are best run by hands-on management. You must be willing to work harder than you have perhaps ever worked before.
Forty hour weeks are also a myth, particularly in the start-up phase of the business. They are more like 60 to 70 hour weeks. You must also be willing to mop floors, empty the rubbish, fire as well as hire employees, and deal with upset customers.
Will I enjoy the franchise?
Sometimes people buy a franchise because they think it will make them a lot of money, only to discover later they do not enjoy the business. The adage, “know thyself,” certainly applies here.
You should buy a franchise that centres around an area that you will enjoy for at least ten years, which is the typical length of a franchise agreement.
Do I have a history of success in dealing and interacting with people?
Many franchised businesses are based on human relations. Your ability to interact well with your franchisor, other franchisees, your employees and your customers cannot be emphasised enough. A negative, critical franchise owner can be a detriment to the entire franchise system. You should have a track record of good relationships with employers, supervisors and fellow employees.
Can I afford the franchise?
One of the major causes of business failure is lack of capital. While the franchisor will be able to give you a good idea of the start-up costs, sometimes these will vary due to leasehold improvement needs and other valuables.
You will need enough money to not only open your franchise, but to run it until such a time as it is profitable. For some franchises, that may take a year. Remember, it is better to start out with more money than you think you will need, rather than less.
Do I have my family’s support?
Managing a franchise is a full-time job and then some. It requires great sacrifices of personal and family time. For this reason, your family should understand that you will have tremendous demands on your time. They should be supportive of your decision to buy a franchise.
Conclusion
Buying a franchise is not a guarantee of success, but by carefully evaluating yourself and the franchise you desire to purchase, the chances of success become substantially greater.
Kevin Bugeja can be emailed at kevin@franchise4u.com.au or telephoned on 0412 511 630
