Download A successful business is the short and obvious answer to

Vol. 4, Issue 6, Part I June 2003.
What do Franchisees Really Want? Part 1
A successful business is the short and obvious answer
to “What do Franchisees Want?” In this issue of
FranchiseHelp OnLine Newsletter, we talk to
franchise owners about their expectations of success
in franchising and what role the Franchisee and the
Franchisor play in fulfilling these expectations.
Part 1 is a case study of unrealized expectations. We
talk to a franchise owner who invested his life savings
in a casual restaurant that continues to be a financial
drain. This case study does not represent the typical
franchise situation, but it is a true story that describes
the risk element of franchising and illustrates how
several mistakes can lead to a very bad outcome.
Picking a Winning Franchise Concept
Who do you blame when your entrepreneurial franchise dreams turn into a business and personal
nightmare? The subject of our case study operates a casual restaurant on the weekend but
continues to hold down a well-paying job to support his family and the cash shortfall of his
franchise business. He primarily blames himself for his plight and holds no animosity towards his
franchisor. He tells his story so prospective franchisees understand the risk side of franchising
and can learn from his plight.
The story begins with a 50-year-old senior executive facing corporate downsizing. With children
in college, retirement was not an option. After years of marching to the tune of a corporation and
having a modest financial nest egg, owning and operating a franchise seemed like a logical move.
The strategy was to invest hard-earned savings into the concept and rely on his years of
management experience to operate and grow the business. With experience in a related industry,
a restaurant franchise seemed like a good fit.
Researching the Concept
After researching numerous franchise opportunities, a decision was made to go with a casual
restaurant concept in operation for eight years but just starting to franchise. The performance of
the company-operated locations disclosed in Item 19 of the Uniform Franchise Offering Circular
(UFOC) was good and the concept was effectively expanding in its core market area.
Unfortunately, there were no existing franchise operators to discuss the franchisor’s training
program, marketing and operations support. The concept seemed unique, fairly easy to operate,
and had strong customer appeal. Our new franchisee was optimistic about aggressive growth and
a development agreement for two locations was inked.
To complicate matters, the franchisee was laid off, but then accepted a full time position with
another company. Operating the franchise quickly turned into getting an operating partner until
the franchise revenue overproduced the new day job. The operating partner had no restaurant
experience and no cash to put in the business but was a trusted business associate for many years.
The operating partner completed an extensive franchise training program, which included in-store
operations experience. Because of the time constraints of a new job, the franchisee was not able
to participate in training and learn the intricacies of the business and how to solve store level
problems.
Building a Brand in Virgin Territory
The initial challenge of the franchise owner was to find a high traffic location in his market area
where his restaurant could grow revenue and build brand loyalty quickly. The franchisor’s site
selection criteria required demographic and traffic studies. After completing the required
research, a decision was made to go into a location that had some of the demographic attribute
needed and 8,000 cars passing by daily. The franchisee reports, “Even though we agreed that it
was not an ideal location, we could get a heck of a deal on the rent and we wouldn’t have to do
quite the sales numbers to make a go of it.”
The location was expected to have good long-term potential but did not have the best visibility
from the street. In retrospect, selecting a less than ideal location, which was approved by the
franchisor, was indicative of the growing pains of a new franchisor. “The franchisor has been
through three marketing Vice Presidents and three real estate companies in the one year I have
been associated with them,” states the franchise owner.
High Expectations Turn to Cash Crunch
High volume expectations quickly turned into operational shortcomings and red ink. Cash
problems started from opening day with store revenue coming in at about 50% of projections.
“The first six months were a disaster. Food costs were out of line, labor costs were out of line,
and sales were nowhere near expectations. My partner became more and more frustrated,” reports
the franchise owner.
Increasing the advertising budgets to 8% of sales, significantly higher than the mandatory 3%,
proved only moderately successful in boosting store sales. The franchisee was able to get a rent
reduction after threatening to close the failing business. Because of the franchisee’s commitment
to a full time position, he was only able to do grass roots and guerilla marketing efforts on the
weekends. The franchisor’s support focused on operations and did little to introduce the concept
to a new market area. Due to the trials and tribulations of the failing business, the operating
partner exited after six months and a new operations manager was hired. With the franchisee
directing the restaurant operation on the weekend and taking a more active role in cost
containment efforts, the cash drain has slowed and the restaurant is getting closer to breakeven.
Lessons Learned
A tired and disillusioned franchisee now realizes the downside to franchising a business and
considers what different steps should have been taken. Admittedly, the franchisee made many
mistakes from the outset. The original plan called for a business savvy executive with adequate
capital to be the owner/operator of a franchise operation. The Adding a marginal site for the first
franchise location into the equation spelled disaster. The franchise owner reports the more
obvious lessons learned include:
1) Don’t bet the ranch - As a first time small business owner, the franchise selection should have
been a concept with a smaller investment and more in line with his financial situation.
2) Location is everything – With no brand awareness in the market, location is paramount.
Getting a deal on a marginal location is only a deal for the landlord.
3) Experience in the business is key relevant experience - The person responsible for the day-today operations should have
4) Set realistic goals
5) Interpret the data instead of extrapolate the data - Item 19 earning claims disclosures in the
UFOC are not always clear indications of how your unit will perform. Other considerations
that you must factor into the equation are brand awareness in your market place, how long the
units have been in operation, and quality of The franchisor has some flexibility on how to
state the numbers in Item 19 disclosures. You can be sure the disclosure will have the most
positive slant.
The lessons learned for this franchise owner were difficult and expensive. “Everybody has
a dream to be in business for themselves. The other side of it is, you can lose everything you
have,” notes the franchise owner. Franchising provides tremendous opportunities for most
investors but only if all aspects of the franchise decision are thoroughly investigated.
Vol. 4, Issue 6, Part II June 2003.
What Do Franchisees Really Want? Part II
In this issue of FranchiseHelp OnLine Newsletter, we talked to Robert Purvin, Chair,
Board of Trustees of the American Association of Franchisees & Dealers (AAFD).
Purvin has a wide reaching understanding of the goals and aspirations of franchisees
and the risk/reward relationship of franchising.
Many of the concerns of franchisees were the impetus for the formation of the AAFD
in 1992. The AAFD is a national non-profit
trade association representing the rights and
interests of franchisees and independent
dealers throughout the United States with
the
stated
purpose
of
"Employing
marketplace solutions to define, identify and
promote Total Quality Franchising."
With input from the AAFD we continue
answering
the
question,
"What
do
franchisees really want?"
Proven Operating System
Franchisees like to know what they are
getting for their franchise and on-going royalty fees. They expect a proven and
uniform operating system and do not want to be the system “guinea pig”. Franchisees
want a system that has been tested and refined and that will allow them to generate a
fair return on their investment.
Consequently, it is the franchisor’s responsibility for developing, maintaining,
protecting, policing and enforcing the trademarks, copyrights, patents, trade dress, and
confidential information associated with the franchise system for the benefit of the
franchise system. Franchisees expect equal enforcement of system standards. In most
franchise systems, uniformity of products and service are achieved when everyone is
following the system.
Collaborative Approach Best for System Changes
Ever-changing market conditions may require adjustments to the franchise system to
keep it current and competitive. Any proposed changes or improvements to the
system should be tested in company units or designated test units before rollout. In
many franchise systems, franchisees are actively involved in the day-to-day operation
and often have a unique understanding of the current and future market conditions.
These franchisees should play a key role in making any system changes.
Franchisees expect improvements to the system that will grow their business.
Ongoing research and development by the franchisor in cooperation with the
franchise network is a good way to accomplish this. Franchisees want to have input
into system changes that they will pay for eventually.
Franchise agreements typically require the franchisee to upgrade their operation upon
renewal or at predetermined intervals. Problems occur when the upgrades are not
thoroughly tested, appear frivolous, and/or provide an excessive economic burden that
cannot be easily absorbed by the budgeted cash flow of the business.
The Power of Many, the Strength as One
The purchasing power of the franchise system is an important reason to venture into
franchising instead of starting an independent business. The role of the franchisor is to
set the purchasing standards and negotiate the best prices and vendor allowances and
rebates so the savings can benefit the entire system. There is a critical caution here:
franchise system purchasing programs can literally define a quality franchise system
or can be abused to take undue advantage of the franchisee as a captive customer for
the franchisor’s sole benefit.
The franchisor designates the approved vendors for any products or services and is
entitled to a reasonable profit on the sale of such products. Price fixing and collusion
are examples of franchise group buying gone astray. Franchisees expect a competitive
price that enables them to achieve a reasonable profit margin.
Problems arise in franchise systems that attempt to use purchasing practices as a profit
center. Abuses occur when franchisors exact commissions, rebates and other benefits
from suppliers at the expense of the franchisees in the network.
THE AMERICAN ASSOCIATION OF FRANCHISEES AND DEALERS HAS
DEVELOPED THE FRANCHISEE BILL OF RIGHTS AND WORKS TO PROMOTE
AWARENESS AND ACCEPTANCE OF IT AMONG THE FRANCHISING
COMMUNITY AND THE GENERAL PUBLIC.
Franchisee Bill of Rights
as the minimum requirements of a fair and equitable franchise system:
•
The right to an equity in the franchised business.
•
The right to engage in a trade or business, including the right to a post-termination right
to compete.
•
The right to the franchisors loyalty, good faith and fair dealing, and due care in the
performance of the franchisors duties, and a fiduciary relationship where one has been
promised or created by conduct.
•
The right to trademark protection.
•
The right to full disclosure from the franchisor, including the right to earnings data
available to the franchisor which is relevant to the franchisees decision to enter or remain
in the franchise relationship.
•
The right to initial and ongoing training and support.
•
The right to competitive sourcing of inventory, product, service and supplies.
•
The right to reasonable restraints upon the franchisors ability to require changes within
the franchise system.
•
The right to marketing assistance.
•
The right to associate with other franchisees.
•
The right to representation and access to the franchisor.
•
The right to local dispute resolution and protection under the laws and the courts of the
franchisees jurisdiction.
•
A reasonable right to renew the franchise.
•
The reciprocal right to terminate the franchise agreement for reasonable and just cause,
and the right not to face termination, unless for cause
A crucial hurdle in franchising is finding a winning location. In most retail franchise
systems, the location of a unit is of critical importance to the success of the business.
Franchisees expect reasonable guidance with site selection. At the very least, the site
should have the approval of the franchisor based on research and experience, and not
a mere “gut feeling.”
Mature franchise systems with the muscle and prowess to
command better locations can solve the real estate puzzle.
Emerging new systems struggle with the site selection criteria
and may not have the clout to command “A” locations.
Central to much franchise litigation are radius restrictions and
other franchise real estate issues. The last thing franchisees
want is to share their prospective revenues with encroaching
units from within their franchise system. To limit territorial disputes within the
system, Purvin believes that, "Most quality systems provide realistic market
protections, which can include a defined territory, a protected mileage radius around
the location, or a limit on the number of units to be opened within a defined market or
population. At the same time, a franchisor must adequately saturate a market to
benefit the system and consumers while minimizing cannibalizing sales."
Purvin cautions that, "Often mature franchise companies present greater
encroachment issues because they tend to have successfully saturated their markets."
Notwithstanding the fact that mature companies may meet the criteria of being proven
and established, they should be more cautious with expansion. Companies like
Meineke, Burger King and KFC have established exemplary programs to protect
against encroachment, according to Purvin.
Fair and Equitable Franchise Agreement
Many franchisees would argue that a “fair and equitable franchise agreement” is an
oxymoron! After all—the franchise agreement is drafted by attorneys representing the
franchisor for the benefit of the franchisor. Franchise agreements must have some
mutual benefit or no one would sign the documents.
The new wave inching its way into franchising is the collectively bargained franchise
agreement, the product of negotiations between franchisors and their independent
franchisee associations. The purpose of this negotiated document is to have a more
balanced agreement than the previous “take it or leave it” franchise document.
Purvin and the AAFD are dedicated to promoting negotiated
franchisee agreements that recognize the legitimate needs of
both franchisors and franchisees. For example, franchisees
expect the initial term of the franchise agreement to be of
sufficient length for a franchisee to reasonably amortize the
initial investment to achieve an adequate and fair return on investment. Franchisees
also want to be treated fairly on renewal of the franchise agreement.
”The AAFD is dedicated to negotiated franchise relationships as the primary method
of reform within the franchise community,” said Purvin. “Our effort has been to
define the parameters of fair and balanced agreements, and to identify and reward
franchise systems that have adopted exemplary practices and relationships.”
The AAFD’s Fair Franchising Standards Committee has adopted and published more
than 130 standards of recommended practices affecting every aspect of the typical
franchise relationship. The AAFD Standards are themselves the product of “collective
bargaining” as the Committee is made up of franchisors, franchisees and franchise
attorneys who must reach consensus on how franchisors and franchisees should treat
each other.
Franchisee Associations—Critical for Balanced Dialogue
A franchisor should recognize and avoid interference with a franchisee's right to
freely associate and participate in an independent
franchisee association. New franchisors should
realize that franchisees will want to organize and
voice their opinion. The enlightened franchisors will
establish the terms and conditions of the franchisee
organization that will benefit the system and the
franchisor. Added Purvin, “Enlightened franchisees will form associations focused on
being productive citizens within the franchise community—intent on solving both the
problems of the franchisor as well as the members of the Association. The AAFD
calls the win-win approach Total Quality Franchising.”
Franchisees who try to associate in groups should not be subject to retaliatory action.
A franchisor should act in good faith in its dealings with an independent franchisee
association. “Given the disparity in bargaining power inherent in the franchise
relationship, group association is a primary method by which franchisee’s can
effectively voice their concerns to their franchisor,” states Purvin.
Both the franchisor and the franchisees of a franchise system should have the right to
air grievances on all issues (on both an individual and group basis) without suffering
negative repercussions. The system should adopt a jointly endorsed grievance
procedure.
Building Brand Recognition
The last step towards a successful / symbiotic relationship in franchising is being able
to build brand recognition. There has to be a recognizable image for the franchise to
distinguish its brand from others in the market place.
Building the brand through marketing is critical for the franchise partnership. The
franchisor must develop an effective marketing position and advertising strategy to
increase brand awareness and maximize system sales. The franchisee must execute
the strategy at the local and store level.
Most franchise systems require advertising fund contributions to support building the
brand. All monies in the advertising fund should be treated as trust funds and must be
segregated and kept in a separate account from monies of a franchisor.
A franchisor has the right to promote its system and the marks in order to protect the
integrity of the marks. This needs to be balanced against a franchisee's need to have a
voice in the type and content of advertising conducted. When a franchisee is required
to advertise in its local market, a franchisee should have some input into the
advertising strategies and expenditures with a franchisor's guidance and approval.
The franchise relationship is often referred to as the franchise partnership. Both
partners work together for the mutual benefit but each has independent and maybe
even conflicting goals. As long as both understand and appreciate these goals, there
can be a harmonious franchise system.