Franchise Relations…on the Move!
The history of franchising is based in large part on the unique relationship between the franchisor (i.e. the owner of the franchise concept) and the franchisee (i.e. the individual or entity that acquires the franchise rights). However, this component of the franchise story is changing rapidly due to significant socio-economic and global forces that are fundamentally altering the marketplace. For decades, the franchise relationship was based on developing trust between individuals, as most franchise companies were started and owned by an entrepreneur, and the typical franchisee was an individual or couple. The personalities of those involved had much to do with whether a deal was made. Many
long-term personal relationships developed over the years between franchisors and franchisees. It was a simple approach that served franchising well through decades of strong growth. And, while the relationships in franchising have become more distant and complex, trust remains an important factor in making a good franchise decision. There were three shifts in the marketplace that have changed franchise relations for good.
Multi-Unit / Multi-Concept Franchising
During the 1990’s franchising began to undergo fundamental changes as successful single-unit franchisees increasingly began acquiring additional locations, and soon discovered that leveraging their assets into multiple units changed their role and their returns. Moving from “behind the counter to behind a desk” multiunit operators developed more influence within the franchise systems and with the franchisor. As franchise systems continued to mature, multi-unit franchises soon found availability of existing units within
their brands diminishing. This led to multi-concept franchising, where multi-unit franchisees began acquiring franchises from other systems. Due to restrictions in many franchise agreements, the concepts could not be competitive which led to the acquisition of complementary, or in some cases, very different concepts. For example, a multiunit Quiznos franchisee might then become a Dairy Queen franchisee, or in some cases an H & R Block tax services franchisee. This new dynamic introduced a new era in franchise relations as franchisors now had to deal with “joint custody” of franchisees. Which franchise convention would they attend if there was a conflict? Would the franchisees interests be divided? It caused franchisors for the first time to take stock in the relationships with their multi-concept franchisees to consider their loyalty to the concepts and just how to deal with them going forward. It was clear that the fundamental relationship was going through significant change.
Awakening Wall Street
As dramatic shifts were taking place with franchisees, franchisors began to undergo some changes as well as Wall Street awakened to the financial realities of franchising. As they saw it, the longterm contracts, steady cash flows and brand equity that developed through the years was an attractive combination. This lead many financial firms to begin identifying potential franchise companies for investments and in an increasing number of cases to actually acquire the company from the founder(s). Over the past several years there have been numerous financial firms that have developed a franchise portfolio. This typically resulted in the original entrepreneurs leaving the brands and being replaced by professional managers, many of whom had never worked in franchising before. Now, the familial type relationship between the franchisor and the franchisees was suddenly much more distant and corporate. One financial firm that acquired several franchise companies contacted me regarding one of them to ask for input on why their relationship with the franchisees was not doing well. They had purchased a foodservice concept that was predominantly single-unit operators where the founder had developed strong personal relationships with virtually every franchise owner. The new CEO was an accountant by trade and his approach was “by the numbers”. The franchisees could not relate to this approach or the new CEO which led to numerous issues of distrust and reduced participation in marketing programs and other initiatives.
Broker Networks
Another shift in franchise relations over the past decade has been the rapid advancement of broker networks. The traditional method for purchasing a franchise was by working directly with the franchisor and their staff. You would request information from them, and if it was compelling enough you would complete their application. Once approved, they would send you a hard copy of the Franchise Disclosure Document (FDD) to begin your review and investigation process in earnest. This might lead to a visit to the franchisors home office to meet the team and learn more about how they operated and what they offered. This face-to-face meeting was a critical component of the relationship building process whereby both parties could determine if they were comfortable joining forces. Increasingly, as franchise systems grew so did the number of franchise concepts entering the marketplace. There are almost 3,000 unique franchise concepts available today in over 100 categories according to Fran Data. This led many franchisors to begin enlisting the efforts of professional brokers to identify qualified candidates and guide them through the sales process. For their efforts, the franchisor would give them a percentage of the franchise fee ranging from 25% to the entire amount. As brokers became proficient at finding candidates and bringing them to the franchisor, the number of franchise systems using this approach expanded rapidly.
These three fundamental shifts in franchising have dramatically altered the relationship between franchisees and franchisors and only history will determine if it is for better. If you are looking to enter or expand in the franchise sector, here are some things to keep in mind regarding the relationship side of the business:
Know your long-term goals…
If you are going to be satisfied with just one franchise unit / business and you feel it can meet your financial goals, you may want to focus on a small or emerging franchise concept that is still under the control of the founder. The majority of franchise concepts available in the marketplace today still fit this description. Over half of the franchise companies on the market have less than 200 units. A singleunit operator of a modest franchise concept that has a direct relationship with the franchisor can experience an enjoyable and rewarding environment. When I entered the franchise arena in 1990 I was only interested in selling franchises to people I wanted to be in business with which made for a very pleasant experience, and I am pleased to say that I still have relationships with franchisees from that system.
Know who controls the brand…
If you are going to be expanding your franchise holdings to multiunit and/or multi-concept operations you might want to consider companies that are professionally managed. The focus on brand development is the core calling of franchisors and when they fall into the hands of financial firms, they can take emerging brands to scale. And when they do, the proverbial tide rises for all boats in the harbor. Dealing with a franchisor home office that has the resources and expertise to effectively develop brands in today’s convoluted marketplace can provide strong unit growth and potentially create a better environment for franchisees to sell their units down the road. Just don’t expect a lot of hugging
at the annual convention.
Know yourself…
Buying a franchise is a complex undertaking that should be done based on sound business practices, not just an emotional attachment to the concept or brand. A franchise broker that has a deliberate process for helping you understand the financial commitment and your financial capabilities is worth a lot. Many also offer some sort of assessment tool to determine what type of franchise business you might be best suited for based on your personality, your interests and your skill sets. This can help narrow the field of potential concepts. It is important to keep in mind that franchise brokers don’t all represent the same concepts. For example, if your best “fit” is automotive and your interest is in Jiffy Lube, but your broker doesn’t represent Jiffy Lube, then they may not be able to provide you with the information you need.
Today, the marketplace for franchising has evolved into a true melting-pot of opportunity and there have been significant changes in the relationship between franchisees and the franchisor. Understanding the shifts in the marketplace that have led to these changes is a good first step to determining the type of relationship you might want as a franchisee. The good news is that franchising has enough companies and concepts to fit just about any decision you may come to, so be deliberate and make sure you choose wisely. Your relationship depends on it.
Ben is founder and principal of Franchise Well, a specialized franchise consulting firm that focuses on projects for the betterment of society. He also teaches the Franchise Management Certificate program at Georgetown University and is the 2011 Karp Research Foundation Award winner for his research on “Social Franchise”. He can be reached at ben@franchisewell.com or you can visit his website at www.franchisewell.com.