The Franchisor/Franchisee Relationship: Bill Hendrie from The Franchising Centre
What are the basic guidelines for establishing an effective franchisor/franchisee relationship?
|Recognising from the outset that the business relationship is a partnership and not an employer/employee relationship is crucial. This means that franchisors cannot treat their franchisees as they would employees. In turn the franchisee has to accept that whilst they own their own business, the very act of signing the franchise agreement means they have agreed to run their business within the parameters permitted by their franchisor, while adhering to the ‘system’ which has been developed. This should be clearly outlined via the operations manual, by the franchise agreement and through the training given to franchisees.||
What relationship advice would you give first time franchisors and franchisees?
The relationship goes through stages, and communication is crucial.
Stage 1: Parent/Child
The franchisee occupies the role of child. They know very little and are happy to receive help and training and do as they are told (as they know no other way). They take up a lot of the franchisor’s time (the parent) and give little back.
Stage 2: Parent/Teenager
With some knowledge (but often very little) the franchisee (teenager) starts to question the ‘rules’ and offer their own opinions as to how to ‘do it better’. This stage is often the point where they see the franchisor (parent) taking a lot of fees as the franchisee starts to earn greater profits. This leads to resentment.
Stage 3: Parent/Adult
The mature stage. The franchisee has grown to accept the relationship (normally coinciding with the increased earning capacity they now have). They still question things but in a mature, adult manner.
Stage 4: Parent/Grandparent
The franchisee at this stage is comfortable (occupying the grandparent role), business is good and there is no longer a need to work so hard. The challenge here is for the franchisor to get the franchisee to realise that it may be time to sell the business.
The problem is that each stage does not necessarily follow the other chronologically. One day the relationship can be parent adult and the next day it could revert to parent child. As is the case in most families, if you don’t talk about it you won’t solve it.
How do the obligations of the franchise partnership impact business development?
Business development is usually facilitated under a franchise model. The franchisee is able to utilise an already tried-and-tested system or sell an established product. They may have the benefit of a recognisable brand. They certainly should not have to make the same mistakes that their franchisor made when they piloted the business. Add to this the training and support that should be provided and you can envisage the path to success being easier than it would be if they had ‘gone it alone’. One downside may be the inclusion of a franchise fee within their pricing structure, something which an independent competitor does not have to account for.
How is knowledge transferred in the process?
Franchisor knowledge is one of the reasons why a franchisee ‘buys into’ the franchise. The transfer of knowledge should be a commitment for the duration of the franchise (after all why would a franchisor not want to share information that may improve performance). The process starts with the initial training which should be comprehensive and cover all aspects of processes and procedures. Training should be a mixture of ‘chalk and talk’ theory along with practical application. Experience shows that there are many individuals who excel in a training situation but ‘freeze’ in real life, hence the importance of real-life situations. Good franchisors do not simply give classroom training and then leave the franchisee to get on with it. Field-based follow up in the franchisee's own territory with an experienced franchise manager is invaluable. Additional training should be offered throughout the duration of the franchise. This could be to cover innovations/changes within the industry or be ‘topic’ driven when there is a common need.
Is there a handbook of guidelines for franchisees and franchisors to follow?
The typical handbook is the operations manual. The manual should be comprehensive and include all aspects of how to run the business. It should be noted that operations manuals are by necessity works in progress. They alter with time due to industry innovations, changes in legislation or after coming up with a better or new way to do something. Do not expect your first operations manual to be the same as the one you use five years down the line.
How are standards enforced for the franchisee?
Firstly, clear guidelines should be established as to what is expected from a franchisee. These could include minimum sales levels, activity levels or customer service guidelines. Whilst standards are relatively easy to set, enforcing them is a more difficult task. From the outset a reporting system should be in place providing the franchisor with the key performance indicators required to analyse the business. Feedback should be given to franchisees in the form of ‘league tables’. There is no point in collecting information unless you do something with it. Care has to be taken however to ensure that the information that you feed back is accepted by all. Many franchisees are happy to divulge general figures such as number of clients and number of orders but are sensitive about financial data such as turnover and profit. As a franchisor you have to respect that it is their business and their choice to keep the financials between you and them. They have to view the collection of data as a positive to help the network improve and not see it simply as a ‘monitoring tool’ to be used against them.
Field-based franchise managers whose role is to both train and monitor are a common way of ensuring that the theoretical standards which are set are applied in practice.
The ultimate enforcement is obviously the franchise agreement, however when you have to use this as a means of control you probably already have a problematic relationship with the franchisee.
How flexible are franchisors when it comes to franchisees?
Consistency rather than flexibility is crucial in any franchised operation. There is a delicate balance to be struck between allowing the franchisee to run their own business, and the requirement that they obey your rules. You should be ‘non flexible’ with the contents of the franchise agreement, accepting that upon renewal some of the conditions, such as the initial fee, may have changed but that the core conditions should remain the same for every franchisee. There will potentially be regional differences in some franchises and a good franchisor will be sensitive to these.
Can you explain the similarities and differences between franchising and joint ventures?
A franchise is a right granted to an individual or group (the franchisee) to market a company's (the franchisor's) goods or services within a certain territory or location under the franchisor’s brand name and by utilising the franchisor’s systems, processes and knowhow. A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an on-going, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. We can see that both arrangements have similarities in that each arrangement is between two parties for their mutual business benefit.
There are many more differences between a joint venture and a franchise:
- A franchise arrangement is one where the franchisor provides the brand, knowhow and systems with the franchisee’s role being to replicate. A joint venture could be two ‘equal’ parties with complementary skills (for example one party is innovative in inventing a product and the other has manufacturing capacity) who form an arrangement for their mutual benefit.
- Franchising is an on-going relationship between franchisor and franchisee. A joint venture is normally for a specified project or carried out over a defined time period.
- Franchisors always retain the Intellectual Propery (IP) rights to the brand and systems whereas in a joint venture both partners have a mutual right to control the enterprise.
- Franchising keeps the franchisor’s business and the franchisee’s business as separate legal entities. In a joint venture a third business (i.e. the joint venture itself) may be set up and owned by both parties.
- One of the main differences is that in a franchise arrangement, the franchisor is committed to helping the franchisee to succeed through training and support. In a joint venture this commitment to training and support does not exist.
How are the franchisees or franchisor disciplined in the case of a dispute?
Termination of the franchise agreement and the franchisee stopping trading is the ultimate discipline and a route that most franchisors would wish to avoid. This obviously should only happen as a result of a ‘gross breach’ of the terms or repeated breaches which the franchisee has failed to rectify. Disputes tend to be between franchisees (for example neighbouring franchisees relating to territory), between a franchisee and the franchisor, or between a franchisee and the end consumer. In the cases of inter-franchisee dispute the franchisor has the ultimate power to decide the outcome. This decision should be in line with the information contained in both the franchise agreement and the operations manual. If the situation has never arisen before it is the franchisor's role to create a precedent. This will then be included in the operations manual for future reference. If the dispute is with the franchisor the British Franchising Association’s arbitration system is the recommended way to reach a resolution. In the cases of a franchisee's dispute with a consumer the initial approach is for the franchisor to act as consultant to the franchisee as well as overall mediator. Ultimately if there is an impasse between both parties the franchisor should reserve the right to take control of the situation in order to protect the brand. Penalties can include loss of revenue if a franchisee was found to have gained revenue from a territory other than their own.
How do you facilitate communication between franchisee and franchisor?
A prerequisite of all good franchises is an open line of communication. Initially when there are only a small number of franchisees this can be face-to-face communication and even as a franchise grows and the franchisor cannot logistically see every franchisee on a regular basis, it is common for franchisors to recruit support managers who will be the face-to-face contact for the franchisee. Dedicating a time each week to phone franchisees is a good practice but it is necessary to ensure that the call is positive and not simply a 'why are your figures poor' call. Social interaction on the phone as opposed to a purely business call can often be more beneficial in forming a good working relationship with franchisees. Weekly production of figures for all franchisees to see the ‘big picture’ and newsletters at regular intervals are both proven methods of communication. The instigation of a franchisee committee or forum with regular meetings with the franchisor is also widely used. Finally, an annual convention or awards ceremony to recognise outstanding achievements should be considered as the network grows. Franchisees who feel that they cannot communicate with their franchisor simply end up complaining to each other.
How does the franchisor protect the system and the brand?
The system and the brand is what franchisees pay a considerable amount of money for. Ironically, having paid that money they then want to change things, ranging from the operating methods (which the franchisor may have spent years refining) to the corporate colour scheme! A strong franchise agreement and detailed operations manual are vital. As much information as possible should be provided to franchisees in terms of templates, centralised printing, clearly numbered pantone colours, etc. Monitoring and policing are intrinsic parts of the responsibility of upholding a brand. This is normally carried out by the field support team as part of their duties. System auditing can also be carried out. The important principal here is that the system laid down in the operations manual and more importantly in the franchise agreement should be adhered to. Any deviation from this and you start to allow the system and brand to be diluted and altered, giving the franchisor no basis to take action in the future against any deviations.