Franchising · 22 September 2015

Building a robust franchise business: Understanding the relationships

A good business relationship is key to a franchiser/franchisee partnership
A good business relationship is key to a franchiser/franchisee partnership

On one level franchising is simple – the recruitment of appropriate franchisees and training and managing them to operate profitable businesses using your brand and systems to deliver products and/or services consistently and seamlessly. However, what makes franchising difficult are the tensions that sometimes exist at the heart of the franchise relationship.

On one side we have the independent franchisee who, having invested in an affiliation to a brand, is seeking to grow their own business and reap the rewards. On the other, the more entrepreneurial franchisor who, upon receiving the franchisee’s investment, seeks to develop and drive the wider brand in a certain direction through management and leadership.

Underlying these tensions are questions that go to the heart of franchising. Are franchisees profitable? Are all parties to the relationship delivering and/or receiving value for money? Does the franchisor have the right ethics, business model and strategy? Are the franchisees working hard to implement the system? Are the franchisees supporting and enhancing the brand? Are the right people being recruited? And more fundamentally are all parties working effectively and collaboratively as a team?

The tensions that exist in the franchising relationship can be creative or destructive but they should not be ignored. It is only those franchisors that can find the right balance – creating a business and relationships that works on all levels – franchisor, franchisee and customer – that will ultimately thrive.

Understanding the roles

In essence, a franchised business is a group of connected businesses.

There are the underlying “franchisee” businesses delivering the products and services through independent business owners. The brand and systems are owned and developed by the franchisor and licensed to the franchisees. Within these systems should be all the tools, training and knowledge that the franchisee needs to operate its business which will include the initial set up of the business, the marketing and growth of that business and the management of its day to day operations. A franchisor should have all the knowledge, systems and software to allow it to train and support a good franchisee to operate and manage a successful business.

The “franchisor” business is focused on the systems and knowhow to (1) identify and recruit appropriate franchisees, (2) train and manage franchisees to help them to operate successful businesses, (3) develop and enhance the brand and systems and (4) deliver the products and services required by franchisees to allow them to operate their individual businesses. A key to this is a very clear understanding of the “franchisee” role so that the franchisor can recruit individuals with the right skills and resources to enable them to become successful franchisees.

Understand your KPIs

The key to any successful franchise is the systemization of its business (on both a franchisor and franchisee level) into simple steps and actions that seek to replicate behaviours and activities that create positive results and stop those that do the opposite. In short, this is often the breaking down of the business into a (1) structure of roles (franchisee and his team) and (2) a set of chronological actions that a franchisee (and/or his staff) needs to carry out daily, weekly, monthly quarterly or yearly to ensure that the business is efficiently and well run. These activities should form the work that needs to be carried out by the franchisee (and/or his team) so that it can achieve the KPIs that need to be met to achieve long term success.

So a franchisor needs to understand the KPIs (both financial and operational) that a franchisee needs to achieve and measure the activities that will be required to achieve those KPIs.

Managing your franchisees

A key aspect of any “franchisor” business is the management of its franchisees. This is all about creating the right culture and engagement strategy so that a franchisor understands the businesses of its franchisees and is able to put in place the appropriate levels of support, training and management to help them succeed.

The starting point for any an accurate understanding of a franchised business is the regular monitoring of each franchisees’ (1) financials, (2) operations and (3) structure. So, any franchisor needs to ensure that it has the right structure and systems in place to enable it to (1) access and analyze the key KPI data for each franchisee, (2) advice or train individual franchisees on changes required to improve performance and (3) deal with (and if necessary exit) consistently underperforming franchisees. Top tier franchisors invest in state of the art technology to show real performance numbers across the board so that is can understand on a daily basis the financial and operational performance of each franchisee.

Conclusion

Franchising works on a clear division of roles. A franchisor is likely to have (1) much greater knowledge and awareness of how to run a successful operation and how to transmit that knowledge to franchisees and (2) the buying power to build far greater brand recognition and provide value added services to its franchisees. A franchisee, as a business owner, is financially incentivized to be a more focused and better manager than an employee since it is their investment that is at risk. If the right balance can be achieved – and a franchisor takes the time to access and act upon the performance data from each of the many similar businesses in its network (and therefore understand on an increasingly deeper level what works and what does not – the results can be truly amazing.

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ABOUT THE EXPERT

Andrew Pena is a commercial litigator who has worked at well-known City practices. Having acted for major international companies and many recognisable high street brands, he now heads up Cubism Law’s franchise law practice.

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