The Basics of Franchising: The Relationship
Franchising 101
By William Slater Wincent
Although franchising’s largest and most popular brands represent the images most people hold about the industry, recent research revealed that franchising has been significantly influenced by the growing number of new concepts appearing in the past few years. One-fourth of those had 10 or fewer units. With that in mind, Franchising World offers a new editorial focus feature “Franchising 101” to aid especially those new to the industry in understanding the basic tenets of business-format franchising.
Franchising has at its core a relationship between franchisors and franchisees of mutual interdependence and reliance. For this mutual nterdependence and reliance to thrive, there must exist a cooperative relationship. Franchisors and franchisees have different personalities and different motivations. However, to be successful, they must be bound together by their common goals and mutual interests. Franchisors and franchisees recognize that a successful franchise system must maximize their common goals and minimize areas of disagreement to be effective. Getting along in a “win-win” situation is productive; whereas conflict between them is unproductive. Therefore, a sound, productive franchisor-franchisee relationship is the cornerstone of the successful franchise system. With a sound, productive relationship the franchise system will not only survive in a highly-competitive economy, but also thrive and gain marketshare at other franchise system’s expense. In the very beginning, the franchisor must communicate to the prospective franchisee what the mission, goals, and vision of the franchise system are and the route the franchise system must take to achieve them. If the prospective franchisee purchases a franchise without this knowledge, then the relationship is off to a rocky start. The franchise relationship must be mutually beneficial, productive and positive. The long-term success and continued growth of both the franchisor and the franchisee depends on this relationship. The main ingredient of the relationship is communication. Without comprehensive and effective communication between the franchisor and all of its franchisees, there cannot be a sound, productive relationship. While communication is the main ingredient in a successful franchisor-franchisee relationship, the key is real participation by the franchisees in the direction the franchise system takes. A good franchisor knows that the best ideas come from his best franchisees because they are active in the day-to-day operation of their franchised businesses.
The Four Phases
The franchisor-franchisee relationship goes through four phases.
Phase One:Recruitment The franchise relationship begins when the prospective franchisee is first recruited. During the recruitment process, the franchisor’s and franchisee’s expectations of each other are established. Both parties will put on their best faces trying to impress each other. During this phase there will be a lot of contact. Each party is trying to show the other party why they need each other. There is often mutual infatuation. It is during this stage that each party will develop trust of the other along, with a shared desire for success and profitability. Through all of this contact both parties will develop rapport, trust and confidence in each other leading to the signing of a franchise agreement. At this point, the franchisor and franchisee are very positive about each other and look forward to a very bright future together.
Phase Two: Growth From the signing of the franchise agreement through the opening of the franchise and until the end of the first three years of operation, the franchisee’s need of the franchisor’s support services is at its greatest. The “growth stage” of the franchise relationship begins once the franchise agreement is signed. At this point, everything is new to the franchisee and he is on a steep learning curve. During this period, the franchisee will go through an extensive training program that should build a strong, close relationship between the franchisor and the franchisee. After the comprehensive initial training program and the grand opening, the support services provided are just as important. The franchisor will also provide ongoing training. Additionally, the franchise relationship may be cultivated through newsletters, product updates, marketing suggestions, new advertising ideas, birthday cards, and personal telephone calls and visits from the franchisor’s representatives to see how the franchisee is doing. During this phase there will also be a lot of contact between the franchisee and the franchisor. If things have been going as planned, the franchisee will have learned a lot that has led to a successful opening and operation of his franchised business. During this period, the franchisee will have stayed in regular contact with the franchisor. On the other hand, this phase can also evoke negative traits. For example, maybe the training was not as comprehensive as the franchisee expected. Or, perhaps the franchisee has not received support materials, accounting aids, marketing suggestions, promotional and advertising support, or other items as regularly as expected. At this time the franchisee might begin to feel that he has signed on with a second-rate franchisor. During this phase any number of things can happen that lower the expectations of the relationship.
Phase Three: Maturity The third phase of the franchisor-franchisee relationship is referred to as the “maturity stage.” During this phase the franchisor and franchisee know what to expect from each other. In other words, things are predictable. If all has gone according to plan, the franchisor and the franchisee have developed a mutual understanding and friendship. The franchisee has come to expect and rely on the franchisor to provide comprehensive and ongoing training, effective marketing aids and advertisements, new products, and other support services to further enhance the relationship. In return, the franchisor has come to expect an everincreasing sales volume with the corresponding royalty increases along with the franchisee following closely the terms and conditions of the franchise agreement and operations manual. The danger of the maturity stage is that the franchisee may feel that he is no longer receiving continuing value from the franchisor. This goes back to the old question: What have you done for me lately? During the first two phases of the franchise relationship, the franchisee has a tremendous amount to learn. Now that the franchisee has been operating for several years he may feel that he is no longer receiving his money’s worth from the franchisor. If things have not gone well then the franchisee will become disenchanted with the franchisor. This could result for several reasons. For example, the franchisor might not have kept up the infrastructure to support all of the franchisees. The franchisor might have diverted some of their resources in the recruitment of new franchisees. Or, the franchisor might no longer contact either by phone or in person the franchisee as it once did because of the feeling that this franchisee no longer requires that type of contact. All of this could leave the franchisee feeling alone and disenchanted. Once a franchisee feels that he is no longer receiving his money’s worth, the relationship will start to sour.
Phase Four: The End or a New Beginning The final phase of the franchisor-franchisee relationship will go in one of two directions. On one hand, the franchisee may be disenchanted with the franchisor. At this point the franchisee may seek to terminate his franchise agreement. The franchisee may have already decided that he will not renew his franchise because he feels there is a lack of support from the franchisor. Additionally, his business could be declining. As a result of the franchisor not maintaining the growth of his infrastructure, the franchisee may find that his business is falling further and further behind the competition. As a result, the franchisee becomes less and less concerned with adhering to its franchise agreement and operations manual. At this point the relationship’s decline could begin to quicken. On the other hand, the franchisee may have decided to renew his franchise agreement and continue with the relationship. The franchisee’s relationship with the franchisor could be stronger than ever. The reason for this is that the franchisor has not only continued to give plenty of support to the franchisee but has continually updated its support services to meet and exceed any competitive challenges. As a result the franchisee has been provided with, on a regular basis, new products and services, marketing and advertising strategies, and current research and development concepts. As a result the franchisee’s business has continued to thrive and grow. Therefore, the franchisee is very happy with his relationship with the franchisor and wants to continue with it. In other words, the situation has truly been a winning one.
Traits of a Good Relationship
A prospective franchisee should look for certain traits when inspecting a franchise system. The more of these traits the better his chances for success, if he chooses that franchisor. One of the first things the prospective franchisee should do in his investigation of the traits the prospective franchisor has is to talk to its current franchisees. The franchisees of the franchise system the prospect is investigating are a wealth of information. In-depth discussions with several of these franchisees can go a long way in helping a prospective franchisee to decide whether to purchase a franchise in that franchise system. When a prospective franchisee speaks to current franchisees, he needs to determine which positive perceptions he has of the franchisor. Franchisees who are happy with their franchisors have some or all of the following perceptions of their franchisors as:
• Partners in profit.
• People we respect.
• The critical element in our growth strategy.
• Those we want to succeed.
• Investors in our brand name, operating system, and support systems.
• People with good ideas.
• Developers of market share.
• Our primary method of distribution.
After determining which perceptions the franchisees have, the prospective franchisee then needs to investigate the franchisor. In his investigation of the franchisor he will want to find the following traits:
• Conducts a comprehensive and ongoing training program.
• Conducts national and regional meetings.
• Develops a franchisee advisory council whose input is seriously considered in decision-making.
• Supports and maintains an advertising committee that has a lot of input in decision-making concerning the types of advertising and promotional activities.
• Develops newsletters, memos, e-mails, and other means of information exchange.
• Provides a 24-hour toll-free hotline.
• Offers incentive programs for performance in sales.
• Develops an award structure for achievers.
• Creates effective promotional advertising packages and flyers.
• Provides financial and managerial reports which can be used to improve the franchised business.
The above 10 traits are important. If a franchisor possesses these traits, it should be very successful.
Talk to Me
Communication is the main ingredient in the successful franchisor-franchisee relationship. A franchisee should view a franchisor’s commitment to effective communication by asking it the following questions:
• Does the franchisor define and clarify its ideas prior to communicating with the franchisee? In other words, does the franchisor comprehend the concepts and ideas it is trying to convey to its franchisees prior to communicating?
• Does the franchisor shout orders or commands or analyze the franchisees’ situation?
• Does the franchisor say what needs to be said clearly, concisely and quickly?
• Does the franchisor listen to the franchisees, as well as speak to them?
• Does the franchisor just talk or does he seek feedback from franchisees as well?
• Does the franchisor make negative statements? For example: “We have tried that before and it didn’t work.”
• Does the franchisor express to franchisees just how important communication is?
• Does the franchisor recognize franchisees for good ideas or other advice?
• Does the franchisor contact franchisees and ask for their input if they are facing problems?
If the answers the prospective franchisee receives to the above questions are positive, then he knows that the franchisor has good communications with franchisees. The value of good communications cannot be underestimated.
Pay Attention to Me The successful franchisor uses several methods to communicate such as newsletters, memos, e-mails, phone calls, and personal visits by representatives of the franchisor. Finally, effective communication requires that, when appropriate, franchisees are recognized. A successful franchise system will make its franchisees feel appreciated and acknowledge their accomplishments. The franchisor will give awards for surpassing sales goals. If a franchisee obtains excellence in customer service they likewise will receive acknowledgment. Recognition can be something as simple as a birthday card acknowledging the franchisee’s birthday and the promising year ahead. It is also important to determine the attitude with which the franchisor views the franchise relationship. A franchisee wants a franchisor who has the attitude that says “I’m a business partnership with you.” With this type of attitude both the franchisor and the franchisee will work continuously together to develop new ways to develop better value for each other. Both parties will look continuously for ways to help each other improve the system in operating the franchise system. A prospec tive franchisee wants a franchisor who feels strongly about the franchisor/franchisee partnership. A good franchisor who values and promotes its franchisees will possess most if not all of the above traits. A good franchisor treats its franchisees fairly, is proud of them and their successes, is responsive and proactive to individual franchisees and system-wide problems, and wants both sides to make a healthy profit. Additionally, a good franchisor involves franchisees in the decision-making process. After all, the franchisees are in the best position to give feedback as to what works and what doesn’t work. Also, a successful, progressive franchisor is big on franchisee recognition, believes in strong personal rapport with each franchisee, and continually provides expertise to its franchisees not only in the nuts and bolts of the operation of the franchise, but also in the areas of finance, management, personal growth, marketing and technology. The franchisor/franchisee relationship must be a winning situation for both parties. The business relationship must be one of a business partnership (not a legal partnership) where franchisees have input on matters of concern to them. A partner relationship dictates that franchisee input be carefully considered by the franchisor in his decision-making process. However, the franchisee must always understand that there can be only one final decision-maker in the franchise system. Most decisions in a successful well-managed franchise system are frequently the product of consensus. Even though the franchisor must give serious consideration to recommendations and input of its franchisees, the franchisor is the one solely responsible for making the final decisions.
William Slater Vincent is a professor of business law and management at Life University and serves on the board of directors of Foot Solutions. He can be reached at [email protected].