So, you think you may like to franchise your business but are not sure if this is the right way to go or if your business is even suited to franchising.
At Franchise 4 U we see many concepts that struggle to expand or find franchisees once they are established, as they did not use a franchise consultant that understands franchisee recruitment. They may have just created a great set of franchising documents (or perhaps not so great) as there are franchise consultants and there are great franchise consultants.
Secondly, the consultant should also ensure it is something that people will ultimately want to own and will leave their jobs for. We find the best franchisees are ultimately still employed but looking for that opportunity to start again, perhaps in an area that they have no experience of or formal training for, which is why they will be attracted to a franchise in the first place. The business also needs to have a sense of appeal, the best test for this is what we call the simplicity test. If the business is simple to explain and simple to run, then you will normally find franchisees will be attracted to the model. This is important when considering franchising your business as there is no point building something you can’t sell; the other alternative may be just to expand your company operations yourself.
Just because a business can be franchised does not mean it should be franchised. Any business owner who is considering expansion would be well advised to assess whether franchising or company owned expansion is a better alternative for growth before embarking on either strategy.
But what kinds of factors need to be considered? And how do you go about making the decision? Perhaps the best way to start is by understanding the relative advantages of each path, and the myths that surround them.
The Advantages of Franchising
Franchising, as a growth vehicle, has several distinct advantages over the alternative of company-owned expansion. In a nutshell, people turn to franchising for four reasons: capital, motivated management, speed of growth and reduced risk.
First, since the franchisee provides all the capital required to open and operate a unit, it allows you to grow using the resources of others. By growing using other people’s money, you’re virtually unfettered by capital when it comes to your ability to grow.
Moreover, since franchisees are highly motivated by the investment of their own money, combined with the fact that you’re usually compensated based on the top line (with royalties) instead of bottom line performance, you’ll probably have far fewer problems managing your growth. And since the addition of each new franchisee brings another ‘body’ into the organisation, you can also leverage off the efforts of these franchisees when it comes to site selection, lease negotiations and other start up functions – allowing you to grow with fewer internal resources as well.
The combination of these factors provides you with another significant benefit: reduced risk. You can grow to hundreds or even thousands of units with a limited investment and without spending any of your own capital on unit expansion.
Debunking the Myths
Franchising also harbors its share of misconceptions. The first and foremost among these misconceptions is that franchising is a legal minefield simply waiting to explode on some unsuspecting franchisor.
The fact of the matter is that franchising need not be any more litigious than any other endeavour and, in fact, may be considerably less so.
But let’s face it we are becoming a more and more litigious nation and anyone can sue anyone else for seemingly anything – including the coffee spilled on one’s lap – so there is no absolute proof against litigation but it is interesting to note that less than 4 per cent of the nation’s franchisors were involved in any kind of litigation with franchisees last year.
That said, it is important to understand a few reasons why franchising is less prone to litigation.
First, the typical franchise agreement is a very one-sided document. And, if written by a lawyer who specialises in franchise law, it is likely to afford you a great deal of protection.
Over the years, the litigation in franchising seems to have come in waves. Some years ago, there were several cases involving the proper use of advertising funds. As decisions were reached and case law established, we saw fewer and fewer such lawsuits. Later, we saw several lawsuits on the issue of territorial encroachment. And again, as decisions were reached and case law established, fewer such lawsuits occurred. Why have these lawsuits subsided? Because the lawyers who specialise in franchising have followed these cases closely and have learned how to write clauses in their contracts that allow franchisors to avoid such litigation. The fact is, the franchise agreements that are written today afford you even more protection than those written a decade ago – if the right lawyer is drafting the agreement.
The two issues that always remain ripe for litigation, of course, are violations of the franchise code and fraud in the inducement of selling a franchise. But even these issues can be largely inoculated against. First and foremost, train all your people on franchise law and, of course, hire a good franchise lawyer. Be sure everyone on your staff is scrupulous in their honesty. Mystery shop your recruitment team and, of course, ask each franchisee in their closing interview about the recruitment process and any representations that were made. Many franchisors will use a written ‘representations checklist’, and some have gone as far as recording those interviews. And, lastly, institute a no tolerance policy if you do find any infractions.
On the upside, franchising affords you a significant ‘liability trade-off’. In other words, when deciding about franchising versus company-operations, you need to consider the litigation exposure you are avoiding as a part of this same equation. Yes, as a franchisor, you gain some potential contractual liability with each franchise agreement you sign. Every time you sign any contract, of course, you’re obligated to live up to the letter of that document. And while these documents are one-sided, there is no denying the potential liability.
But consider the alternative of company owned operations. With company-owned operations, you have the liability for every lease you execute – whether it’s for equipment, a vehicle or a building. In franchising, that liability is the franchisees. With company-owned operations, you have the liability for every employee you hire – personal injury, sexual harassment, discrimination, employment law, crime in the workplace, the list goes on and on. Again, with franchising, that employment liability is largely that of the franchisee. The same holds true for customer liability – everything from breach of contract to personal injury. To be clear, franchising may not stop someone from suing you, but if you have a well-written contract and a well-written
operations manual (allowing you to avoid claims of negligence and inadvertent agency), the liability will likely be limited to the franchisee. Add to that other protections (such as the requirement of the franchisee to obtain insurance coverage and name the franchisor as the co-insured), and it becomes clear that significantly more liability is associated with the growth of an equal number of company operations.
The second big myth in franchising involves control and the improved unit-level performance that some argue comes with it. Control advocates believe the ability to terminate employees at will is a big advantage, and, of course, with company operations, you can hire and fire at your own discretion. While you have a great deal of control over unit operations in a franchise, terminating a franchisee is certainly more difficult.
We would argue, however, that the ability to terminate does not equal improved unit operations or brand performance. Both independent studies and our own observations of franchisors have repeatedly shown that similarly-situated franchisee operated sites typically outperform their company-owned counterparts in almost every imaginable category – from revenue to perceived cleanliness to customer satisfaction.
Two reasons: First, franchisees are highly motivated and take a pride of ownership that is difficult to instil in someone with nothing on the line. Their franchise is their business, and thus they usually keep it cleaner and run a tighter ship than their non-franchisee counterparts. Instead of constantly training and re-training and hoping for the best, franchisees develop a depth of knowledge and experience that is virtually impossible to replicate in a company-owned operation at the unit level.
But while franchisees not performing up to your standards can always be terminated, of course, the process can be slow. And if you have a franchisee living up to the letter of the agreement and operations manual, termination will not be an option.
Therefore, the process of franchisee selection is so important to franchisors. If you choose the right franchisee, these issues likely never arise. Choose the wrong franchisee, and you may need to live with your mistake for years.
Kevin Bugeja, Managing Director
Franchise 4 U