Franchise Success

Franchise success means different things to a franchisor than it does to a franchisee. However, it is safe to say that, in any given franchise system, franchisees must be thriving and successful in order for franchisors to experience long-term franchise success.

The explanation for this is simple: franchisors get ‘paid’ when their franchisees are able to afford the various fees associated with running their franchises. The franchise fee is a one-time fee associated with the signing of the franchise agreement. So, in the long-term, it is not as huge a consideration as the other recurring fees. Royalty fees, which recur for the length of the franchise relationship, provide a constant stream of income to the franchisor. In order for the franchisor to get paid, the franchisees have to be able to afford these fees. In order for the franchisees to afford these fees, their franchises have to be doing extremely well in terms of sales. In order for the franchisees to have good sales figures, the franchise system must be set up just right, and the franchisees must have the traits and practices that are conducive to franchise success. Clearly, then, many factors go into running a successful franchise company.

 

Aligning Yourself towards Franchise Success

 

As a franchisor, you cannot afford to simply charge your franchisees unjustifiably high fees. These may grant you high revenues in the short term, but they will sour your relationships with your franchisees in the long term. If they feel exploited, and if they are not getting as much from their franchises as they are putting into them, it is only a matter of time before they exit the franchise system. This is not good for you. Stability and continuity are the hallmarks of any successful business endeavor, including franchising efforts. So you want to be sure that you not only recruit from the best possible pool of franchisees, but that you also do your utmost to maintain strong, respectful, mutually beneficial relationships with them.

Maintaining good relationships with your franchisees begins even before you recruit them and have them sign the franchise agreement. It begins when you are first assessing your business to determine its suitability for the franchising model. The research you do on your business, the consequent decision to turn it into a franchise company, and the processes you undertake to transform it into one must all be done with the franchisor-franchisee relationship in mind. From the get-go, you must be aware of the features that will attract good franchisees to your franchise company and keep them there. At the same time, you must balance them with your own need to make a profit as a franchisor. After all, you are running a business, not a charity. Franchise success must be an achievable goal for you and for your franchisees.

Understanding the Franchise Relationship

A mutually beneficial franchise relationship in which the franchisor’s and franchisees’ roles are clearly defined is the basis for a functional franchise system. Franchisors who do not invest much effort into determining the parameters for this relationship and making it work will be filled with regrets later. The most important thing to remember about your franchise relationship is that it is a business relationship. It is not a friendship between equals. The reason why you and your franchisees have contracts detailing your respective responsibilities within the franchise system is to ensure that you all live up to those responsibilities. This makes for the effective operation of your franchise system.

 

The Hierarchies in the Franchise Relationship

 

Because the franchise system is built on your original business ideas, and because, in the process of franchising your business, your role shifts into an executive one, it is important for your relationship with your franchisees to reflect this hierarchy. It is your role to set the direction for the franchise company’s development. By the time your franchisees sign on for their positions, the terms are set in stone for the most part. They may suggest minor adjustments, but you are not under any obligation to keep on negotiating the details of the contract until they feel pleased with them. Most of the accommodation has to come from their side. If they sign the franchise agreement, they have to be willing to live with the terms of that agreement. This underlines the importance of the franchisor and franchisee hashing out the details of the documents governing the franchise relationship before they sign them. That’s the only way to determine that they are, in fact, a good fit for each other.

A good franchisor will clearly lay out his or her expectations and give the franchisees detailed guidelines to follow as they operate their franchises. At the same time, the franchisor or his or her representative should be accessible to the franchisees. They should be able to express their concerns if they have any. Furthermore, if their concerns turn out to be legitimate, it is important to address them. Ignoring one’s franchisees’ reasonable requests is out of the question. The franchisees could have ideas that improve the efficiency of the system, and any improvements to the system benefit everybody, including the franchisor, at the end of the day. Additionally, it is important for all the parties in a franchise relationship to feel that their contributions matter and that their opinions are valued.

Franchise Fee

Strictly speaking, a franchise fee is the money that a franchisee pays to a franchisor in order to join a franchise system and to gain the rights to operate a franchise at the beginning of their franchise relationship. It tends to be paid at the signing of the franchise agreement. Because it is a flat fee and allows entrance into the franchise system, it is typically a large amount. The fee may grant franchisees an operating manual, franchise advice from the franchisor, and initial training. However, the specifics vary from franchise system to franchise system. To determine what you should grant your franchisees in exchange for the franchise fee, you need to pay attention to standard franchising practice in your industry. Additionally, you should look at the specifics of your business to see what would work best for you.

 

The Franchise Fee, Other Fees and Their Importance to the Franchisor

 

When some people speak of a franchise fee, they usually mean it as a generic term. Rather than a one-time fee, they have in mind all the fees that franchisees pay to their franchisors through the course of their franchising relationships. These fees include the initial fee paid at the signing of the franchise agreement, as described above. They also include the royalty fees, which are paid on a regular basis (perhaps monthly, quarterly or annually) for as long as there is a franchise relationship. This royalty fee can be thought of as paying for exactly what is implied: the use of the copyrighted concepts or materials associated with the franchise company in the process of conducting the franchise. It is directly proportional to the amount made by the franchisee in sales. This is because royalty fees are calculated as a percentage of the sales. The more money the franchisee makes, the higher the royalty fees he or she pays to the franchisor.

As a franchisor, fees of this form will constitute your income from the franchise system. Hence it is important for you to set your franchise fee and other fees at a level that is commensurate with the opportunities and rights you are granting your franchisees. If you set your franchise fee too low, you may end up regretting this decision. At the beginning of the franchising process, the number of franchisees you will get is still not definite. Furthermore, you do not know for a fact what profits your franchisees will be bringing in. Setting your fee too low to attract potential franchisees could add up to the loss of hundreds of thousands of dollars in potential revenue if you succeed tremendously.

Should Your Business Be a Franchise Business?

How do you go about determining whether your business has a future as a franchise business? This is the ultimate question that you have to consider as a potential franchisor. You may have a successful business and may see franchising as a sure route to success, but it is possible for franchising to be the wrong route for your business. Like other major business decisions, this is something that you will have to do research on and to think about long and hard.

 

Determining Your Business’s Suitability to be a Franchise Business

 

One of the first issues you need to consider is the type of business you would like yours to grow into. If you want to expand your business by a few regional branches or offices, then franchising is not likely to be the way for you. Franchising involves so much legal red tape and expense that you do not want to venture in that direction for a relatively small expansion. If, on the other hand, your long-term plan is to expand nationwide and to do so dramatically, then you are probably right to consider turning it into a franchise business. Franchising is ideal for large-scale, accelerated growths of this kind because they are more financially manageable this way. Rather than having to shoulder all the associated financial burdens, you can rely on your franchisees to share the load. Furthermore, because they are investing their own capital into the process, your franchisees are bound to be more invested in making things work than would an employee you hired to run a branch of your business.

Something else you have to think about is whether your business will work well as a franchise business. Not every business can work under this model. Some businesses work best as mom-and-pop stores. They owe much of their success to the unique styles and personalities of their operators and to other contextual factors. If someone tries to replicate these businesses at other locations, he or she will quickly realize that they do not translate successfully in the new contexts. A business of this kind does not make a good franchise business. For businesses to be franchised successfully, the formulae on which they are based have to be replicable in other contexts with equal or greater success.

In addition to being replicable, your business should sell a distinct, innovative idea that makes it stand out in the market in order to survive post-franchising. It is not enough to simply copy another franchise business’s ideas and hope for success. You will be competing with that business, and the only way to do so effectively is to offer customers something that your competitor doesn’t.

Franchise Advice

Because starting a franchise can be like entering into uncharted waters, it is an endeavor that one shouldn’t go into without preparation. The potential franchisor should seek franchise advice before committing his or her time, effort and money to the endeavor. Afterwards, if he or she decides to go ahead with the process and become a bona fide franchisor, it will be important to continue seeking franchise advice. In business, as in all other important endeavors, it is better to be excessively cautious than it is to walk into complex financial situations unprepared.

Franchise advice can take numerous forms. It could be informal advice gathered from talking to franchisors of businesses similar to your own. It could also be gathered from conversations with franchisees. Talking to both franchisors and franchisees about their franchising experiences can help give you a three-dimensional picture of the franchising process and of its pros and cons. The conversations can help you to anticipate the types of problems and misunderstandings that could easily bog you down once you become a franchisor. They can also give you insight into what is realistic, given the current state of the market. It is always better to know what a particular endeavor entails on the ‘grassroots level’ than it is to imagine what it is about in abstract terms. This kind of information can help a potential franchisor figure out how to sweeten the deal so that quality franchisees feel motivated to buy franchise rights from him or her.

 

Getting Franchise Advice from Experts

 

Franchise advice can also come from professionals who specialize in franchising. They may be lawyers, accountants, franchising consultants or others. Because they have prior experience facilitating franchising, they make good sources of knowledge about the process. Of course this knowledge comes at a price, so before signing on a specialist to advice him or her, a franchisor should do some research to determine how good the specialist is. It is important to request list of references and to ask questions about the specialist’s history working with franchisors.

Franchising specialists will likely give a franchisor a checklist of steps to follow in determining whether his or her business is suitable for franchising. Subsequently, they will give the franchisor advice on getting the franchising process started. The franchisor will comply with these different stages of advice by assessing his or her business for reliability, financial security, flexibility, return on investment, and other factors. Additionally, the franchisor will look into the heaps of paperwork involved in the process of franchising and the structural changes that lie ahead.