Franchise Management Articles

Article / Updated 08-31-2017

Many of the resources available to traditional NGOs are also available to social franchise systems. Take a look to see a few of the options. Government funding agencies for global development Following are the top government agencies involved in providing global aid, grants, and assistance. On each country/agency site will be information on the type of organization, development budget, focus on target countries, contact information, and more: Agence Francaise de Developpement Australian Agency for International Development Austrian Development Agency Belgium Foreign Affairs, Foreign Trade and Development Cooperation Canadian International Development Agency Danish Ministry of Foreign Affairs Dutch Ministry of Foreign Affairs Finnish Ministry for Foreign Affairs Gesellschaft für Internationale Zusammenarbeit Greek Ministry of Foreign Affairs Irish Department of Foreign Affairs/Irish Aid Italian Ministry of Foreign Affairs’ Directorate General for Development Cooperation Japan International Cooperation Agency Korea International Cooperation Agency Kreditanstalt für Wiederaufbau Luxembourg Ministry of Foreign Affairs Millennium Challenge Corporation New Zealand Aid Program Norwegian Ministry of Foreign Affairs Portuguese Institute for Development Support Spanish Ministry of Foreign Affairs and Cooperation Swedish International Development Cooperation Agency Swiss Agency for Development and Cooperation U.K. Department for International Development U.S. Agency for International Development Private philanthropic foundations Private foundations are playing an increasingly important role in funding international development, especially when bilateral and multilateral donor funds are restricted or restricting. Private foundations often support social enterprise development and may be interested in supporting the expansion of some of the social businesses in their portfolio through a franchise model. Following is a list that Devex (an international development news agency) compiled of the top ten private foundations according to their global development contributions. The Devex website provides more information about each of the foundations and their total global development giving. Bill & Melinda Gates Foundation Open Society Foundations Ford Foundation William and Flora Hewlett Foundation Children’s Investment Fund Foundation United Nations Foundation John D. and Catherine T. MacArthur Foundation Conrad N. Hilton Foundation Rockefeller Foundation Gordon and Betty Moore Foundation Corporate philanthropists Corporate philanthropy has been essential to the delivery of products and services to consumers at the base of the pyramid. Through grants and the access to significant human and other resources, corporate philanthropy has played an essential part of providing the necessary resources. According to a survey of Fortune 500 companies, the top 20 most generous companies donated $3.5 billion in cash in 2015. Those companies are as follows: Gilead Sciences Walmart Wells Fargo Goldman Sachs Group ExxonMobil Chevron JPMorgan Chase Bank of America Alphabet (Google) Citigroup Microsoft Merck Coca-Cola AT&T Target General Mills Pfizer Kroger PNC Financial Services Morgan Stanley Impact investors Impact investing seeks investments that have the potential to make a significant and positively impact on society. Impact investments are made in organizations that seek to generate measurable social benefit as well as a financial return. Investors in this space are typically interested in businesses that address social issues such as health, education, poverty reduction, and environment. According to Investopedia, the top five impact investors, based on assets under management, are as follows: Vital Capital Fund Triodos Investment Management The Reinvestment Fund BlueOrchard Finances, S.A. Community Reinvestment Fund, USA

Article / Updated 08-31-2017

Like any other franchise, social franchises need funding to get off the ground. Social franchises use the following sources of capital to help them fulfill their missions: Fees for goods and/or services Individual donations and major gifts Bequests Corporate contributions Foundation grants Diaspora funding Government grants and contracts Debt and equity capital (usually via impact investors) Interest from investments Loans/program-related investments (PRIs) Tax revenue and government grants Membership dues and fees Different and sometimes blended funding vehicles are used to support different growth drivers at each stage of a social franchise’s development. It is critically important that each stage of development be adequately funded in order to achieve key performance benchmarks before progressing to the next stage. Stage one: Developing and proving the franchise concept During stage one, the social business concept requires development level funding generally in the form of grants to develop the concept, its infrastructure, and working capital. The donor also provides or pays for technical assistance and provides subsidies for the consumer to purchase the products or services. Stage one is used to test the viability of the concept as a social business and refine the model until it is able to deliver desired social and financial results in one location. The proving stage is where several locations are opened and operated to fine tune the concept and prove its economic performance and consumer acceptance. Development benchmarks for this stage include the following: The concept is based on well-established consumer demand in a stable and growing industry. The regulatory environment in the country doesn’t impede operations. The concept is well defined (brand personality, marketing, expenses, pricing, product sourcing, seasonality, location requirements, labor and training requirements, and so forth). The concept is operational and is achieving earnings and impact goals. Technical assistance required to achieve benchmarks includes developing the tactics. Stage two: Proving the replicability of the franchise concept During this stage of development, the concept will be tested in additional locations and further fine-tuned to optimize performance and prove consumer acceptance and profitability in a variety of settings. Development benchmarks include the following: There is sufficient consumer demand in additional markets for the system’s products and services. The consumers or third-party payer is able/willing to purchase products or services. The business can be replicated (the system can be transferred and operators can achieve brand standards consistently). Last-mile quality supply chain can be sustained. Potential qualified franchisees for the business are willing and able to afford initial investment. Potential franchisees have access to capital needed to invest in the franchise. Business can achieve economic benchmarks, including return on investment (ROI), ability to support debt service, acceptable breakeven point, and providing a living wage for owner operator. The franchisor management team is committed and capable of supporting franchise system. The following technical assistance is required to achieve those benchmarks: Replicating the social enterprise in one or more additional markets Adapting the business to new markets Assessing the expansion readiness of the business after it has been operating in additional markets Determining the best replication model for the business Preparing the business for expansion through the selected replication model (for example, franchising) Stage three: Developing the franchise system During stage three, the social franchisor’s concept and franchisor offering are designed, developed, and tested. Through mainly grants, but with some acceptable equity participation, the franchisor’s support organization is designed and developed, and local franchisees are provided with the necessary development and working capital to open locations, prove and fine-tune the franchise system. Subsidies will generally be required for local consumers. Development benchmarks for this stage include the following: The critical elements of a successful franchise system are in place — franchisee recruitment, location selection and development, operations expertise, marketing, supply chain, legal, initial and continuing support, merchandising, compliance, research, and more. Growth capital for franchisor and franchisees is available and committed. Expansion plan is geographically developed to enable franchisor support. The following technical assistance is required to achieve the benchmarks: Designing the franchise system (creating the franchisor entity and the strategic plan for operating an effective and sustainable franchise). Producing the franchise tactical elements (preparation needed to execute strategy: operations manuals, training programs, supply chain, marketing plans, legal documents, and so on). Stage four: Expanding the franchise locally and nationally Once the franchise system and support requirements have been developed, consumer acceptance has been validated, and financial sustainability of locations has been proven, debt and equity investment is used to expand the social franchise system on a local or national level, with donor funding generally targeted at consumer subsidies: The brand is recognizable and drives customers to the business. There is sustained and growing retail demand for franchisees. ROI is attractive to investors and donors. Social results are strong and attractive to donors. The following types of technical assistance are required to achieve those benchmarks: Recruiting, selecting, developing, and supporting master franchisees nationally Evaluating the system performance nationally Refining the system to improve performance nationally Stage five: Expanding the franchise globally Once the franchise system has expanded locally and nationally and the franchisor has gained the necessary experience required as a franchisor, the social franchise is now ready for a more global approach to expansion. As with stage three, a blend of debt, equity, and grant capital is used to support growth. Development benchmarks for this stage include the following: The franchise system is meeting its national impact and financial goals. The brand has achieved national recognition. Global expansion opportunities have been evaluated, and analysis reveals opportunities for products and services in additional global markets. Funding is available to expand to new global markets. The number of franchisees is growing. The support system including supply chain can be replicated in the additional targeted markets. There are available potential franchisees in the targeted markets. The system can be changed and supported based on local consumer requirements. The following technical assistance is required to achieve benchmarks: Adapting the franchise business to new global markets Executing the franchise sales plan globally Executing the franchise training program globally Recruiting, selecting, developing, and supporting master franchisees globally Evaluating the system performance globally Refining the system to improve performance globally

Article / Updated 08-31-2017

There is a range of business structures used in social franchising. The franchisor may be structured as a nonprofit, for-profit, or other type of structure that is specifically designed for a social enterprise, such as one of the following: Social purpose corporation Low-profit limited liability company (L3C) Benefit corporation Cooperative Hybrid There are advantages and disadvantages to the nonprofit and for-profit approaches. The key advantages of structuring the franchisor as a for-profit entity are the following: Incentives between franchisor and franchisee are better aligned, which drives performance at all levels of the system. The franchise system is funded as it would be in a commercial franchise from continuing fees and supply chain revenue. Donor funds can be used more efficiently to create direct subsidies for the poor through insurance and other programs so that more people can access products and services delivered by the franchise. As a consumer offering, there is a greater incentive for the local franchisee to meet brand standards and consumer expectations. The key advantages of structuring the franchisor as a non-profit are as follows: The franchisor uses third-party grants and donations to cover its operating costs. The franchisee is subsidized, reducing some of the profit pressure on the business. If there is a disadvantage to the nonprofit approach, it’s that the incentive for meeting brand standards and consumer needs is diminished to some extent, as the normal commercial pressures of consumers making independent choices about where they shop may also be diminished. That lack of consumer focus may introduce inverse opportunities for a lessening of brand standards. Also, because social franchising relies to a great extent on donations, any restrictions on donor funding or requirements by donors looking to make changes to the underlying system to meet their unique views of how they want the products and services they want to support delivered can have a negative impact on the social system overall. This routine requirement, often factored into donor funding, can be extremely damaging within a social franchise structure. Ideally, over time a social franchise will deliver both social and financial returns to stakeholders (often referred to as double bottom line). Financial results are critical to the mission because it is financial success at the unit level that drives expansion to more franchisees in additional markets. Through scaling (developing sufficient locations to service the market and create an economic base for the system), the additional locations will increase the overall social impact of the franchise system. Social franchisees, like commercial franchisees, are local business owners who operate their franchised business at a profit. Although the social mission of the business may be important to them, because the business is generally their primary source of income, the social mission is usually secondary to their profit incentive. Therefore, in selecting social franchisees, in addition to all the other requirements found in the selection of commercial franchisees, the social franchisor must ensure that the franchisee understands and accepts the critical need of the social mission. It is because of the profit incentive that many social franchises are started — not to solve a social need, but because the franchisor saw the social need as a business opportunity. Again, because of its adaptive nature, franchisees can be single-unit or multi-unit owner operators but can also include social investors seeking to own and operate multi-unit operators and who will employ the professional staff working within the local operations.

Article / Updated 08-31-2017

For social franchises to be part of the solution, they need to be scalable, affordable, effective, sustainable, and accessible to the poor. The most common methods employed by NGOs in delivering services to the extreme poor too often fall short. You should remember that given the enormous population at the BOP, even with extreme poverty, it should be a significant consumer market for companies to sell their products to. However, according to “Reality Check at the Bottom of the Pyramid” by Erik Simanis (Harvard Business Review), it is not because the “low price, low margin, high volume” requires “an impractical penetration rate of the target market — 30 percent or more of all consumers in an area.” However according to the same report, “The model works well if two conditions are met: One, the company can leverage an existing infrastructure that serves wealthier customers to offer a product or service to poor consumers; and, two, the consumer already knows how to buy and use the offering.” The goal of social franchising is to target an underserved population living in extreme poverty by increasing access to products and services that “consumers already know how to buy and use.” The products and services currently offered through social franchising now are focused on safe drinking water, food, sanitation, healthcare, education, and clean energy — the products and services the consumer needs to survive. Ultimately, the products and services that become available through franchising will expand as the economic conditions in the markets improve, and will then include those the consumer may simply want. Social franchising has the potential for solving the first hurdle identified by Erik Simanis — the lack of an existing infrastructure by effectively creating that infrastructure through supported local ownership and management. In effectively addressing this concern, franchising’s inherent advantage over other methods of downstream distribution used currently at the BOP is its ability to effectively develop, scale, and support a local infrastructure necessary to distribute the products and services at a lower cost at higher consumer standards, while also leveraging alternative methods of distribution. Franchising must always be viewed, whether in a commercial or social setting, as part of the mix of available methods of expansion and downstream distribution of products and services. Franchising works best for enterprises when it is viewed as an alternative method of distribution and not viewed as the sole method of distribution a company employs. Social franchising provides opportunities for local franchisees that have limited access to capital and other resources and provides them with the support needed to create local businesses and succeed. Because of the methods and techniques used in commercial franchising, social franchising’s business model is capable of low cost and rapid growth while at the same time maintaining consistent standards and achieving economies of scale. What social franchising is, is the use of the methodologies found in commercial franchising to scale businesses and solve both the economic and social problems for those that live at the Base of the Pyramid (BOP).

Article / Updated 08-31-2017

The answer to the question of whether a U.S. franchisor should expand internationally really depends on timing. Clearly, a saturated domestic market is a strong incentive to go looking outside the U.S., but that incentive alone doesn’t necessarily mean that the franchise system is ready for international expansion. International franchising isn’t going to solve any of your problems in the U.S. and may actually create additional problems for you. Smart franchisors expand internationally only after intensively planning for their expansion and only after assessing whether they have the resources and capabilities to properly support franchisees in foreign markets. Check out these key points for determining when international expansion is right for you. Before entertaining international proposals, a franchisor should have a strong and profitable base at home. To do otherwise is like serving dessert before the main course. You can’t pinpoint an exact number of units a franchisor should have operating, but your domestic operations should have a significant number of franchisees operating successfully in various regions throughout the U.S. You should have a proven capability of being able to fully support your domestic operations, and your U.S. operations should be fully supported from domestic royalties before going international. Internally, a franchisor’s executive management team should be committed to the brand for the long haul. Too many international franchise programs are disrupted when franchisors pull back or substantially reduce resources for the international expansion program because early results fall short of (often unrealistic) expectations. Long-term commitment to international franchising includes shifting or adding staff that solely focus on the international franchise expansion program. Having field staff, marketing support, product sourcing, operations, and training staff all dedicated to international expansion with the support of the rest of the organization isn’t unusual. As international operations grow, you may need to establish an international organization that mirrors your domestic organization. Franchisors also need to have a surplus of capital resources for providing support services, modifying operations, and making on-site visits. Having a successful launch of your international expansion program requires you to recognize the necessary differences between international operations and your domestic operations. For example, no training is universal. You will need to weave adaptations into your standard training for operational variations and cultural differences, as well as address the training that your franchisee will provide to its staff. Even if you don’t use cloud-based training programs at home, consider developing them for your international markets to ensure that your franchisee has the tools necessary to train their own personnel. If you offer franchises to master franchisees that will select and provide support to franchisees in their markets, you need to train the master franchisees on how to be “franchisors.” Your master franchisee will be performing many of the same tasks you do as a franchisor, such as franchisee selection, training, consulting, and support. The master franchisees will need training in the following key areas: Recruiting, vetting, and selecting franchisees Administrative functions Site selection Marketing and advertising Training for personnel who will be trained locally Local product sourcing and vendor management Standards enforcement and discipline procedures Managing franchise relations, including when and how to default or terminate errant franchisees It will be important for you to appoint one key person or group to be in charge of international franchise expansion. It is a full-time job — and it can’t be achieved successfully on the fly or in your spare time when you are not focused on your domestic operations. So many times, franchisors let their focus stray from their domestic business — the very thing that got them where they are in the first place. They mistakenly get caught up in the excitement, which can sometimes border on fantasy, of going global. Make sure you have the organization to manage both domestic and international commitments adequately — or wait until you do. Look at the flip side for a moment. Don’t pursue international franchising if You are looking for a quick fix to cash-flow problems. Executive management isn’t committed to long-term development. You are not prepared to invest time, effort, and resources. Your product or service doesn’t meet the foreign market’s needs. You are unwilling to or can’t modify your product or service to the foreign market. You can’t secure trademark protection. Your operating procedures are so rigid that you can’t or don’t want to accommodate cultural or legal differences or requirements. Political or economic instability will create problems. You can’t get your money out of the country.

Article / Updated 08-31-2017

Your franchisees should prove to you that they can keep their commitments to the system after they become a franchisee. At the same time, you are trying to convince them that your system is the right opportunity for them. The best way to accomplish that is to give prospects assignments and dates they need to meet to get it to you. Hold them to those dates. Some of the tasks you can give them during the process include the following: Completing the preliminary and more in-depth application on time Returning the FDD receipt page Meeting with their legal, financial, and other advisors Applying for financing from their bank Looking for locations Researching the demographics of their desired markets, as well as any state or local laws and regulations that may impact their business Visiting some of your locations Coming to Discovery Day Talking to your current and former franchisees In Item 20 of your FDD is a list of your current franchisees and those who have left the system along with their contact information. Have your prospects contact your current and past franchisees so that they can get comfortable with your franchise system and begin to understand what being a franchisee is all about. This process allows them to ask about your capabilities as a franchisor and also to get answers from franchisees about the financial performance of individual operations that you may not be able to answer. Although you should not steer your recruits to your most favored franchisees or those who like you the best, you can assist them by matching them up with franchisees in similar markets or to franchisees who share similar profiles. Who the prospects call is their choice, and you should let them know that. Have them give you a list of which franchisees they are likely to call so you can alert those franchisees to expect a call. This will facilitate your current franchisees in giving the prospect information about the system, but refrain from telling the franchisee what to say or what not to say. Make sure you call each franchisee that the prospect has called so you can get feedback on the prospect. You also want to hear the types of questions the prospect is asking, which will give you a good indication of how serious they are about your opportunity and what their doubts or concerns may be. Follow up with prospects on the calls they’re making to ensure they’re getting the information they need. Address any issues or concerns that may have surfaced during their due diligence. The recruiting process is a two-way street, and making sure your prospective franchisees are comfortable with your system is as important as you being comfortable with them. When a potential franchisee checks in with your existing franchisees, you can also get incredibly important feedback on your performance as a franchisor. What will your current franchisees tell a prospect about you? Hopefully, you’ve lived up to the promises you made to your franchisees so that you get the positive validation necessary to convince prospective franchisees that your system is right for them. If not, make it a priority for you to do better. Some franchisors will pay a commission or provide some form of monetary reward to franchisees that participate in the recruitment process. Take care if you choose to do so and discuss this carefully with your consultant and attorney. Paying money or providing other material rewards to your franchisees could technically turn them into a broker or sales agent. Many franchisors use a validation service that independently contacts your franchisees and scores your system.

Article / Updated 08-31-2017

The one thing that’s rarely in short supply in franchising is people who claim to be great salespeople. The one thing that is always in short supply, however, is people who actually are great salespeople. If you’re going to recruit a salesperson from outside your organization, here are a few tips for sources to consider: An executive search firm specializing in franchising: There are several really good search firms supporting franchising. You can find a partial list by looking at members of the IFA’s Supplier Forum. Two firms with long histories in finding franchise talent are Capodice & Associates and Franchise Search. Your franchise lawyer and consultant: Besides often knowing personally the best professional franchise salespeople and who might be available at any time, your franchise lawyers and consultants have access to a powerful information source: their professional network. Ask them. Other franchisors: Franchising may be a major part of the economy, but it’s a relatively small network of companies. It’s also a community that shares information. Calling other franchisors about candidates they might have interviewed but did not select for various reasons can be a very good source of information on who is looking for a new position. Although executive search firms can add significant value — because they have interviewed and conducted background checks on candidates they are representing — it comes at a cost. The professional network in franchising is very strong, and although many franchisers use executive search firms all the time, you can always begin looking for any candidate by networking with others in franchising, because they general know the best people for the job, and of course you can avoid the cost of the executive search firm. Growth should be strategic. If you are going to succeed, you need to determine where and when you should open in new markets. You need to determine which markets will be your primary targets, which will be your secondary markets, and which you are unable to grow in because you won’t be able to affordably provide support to your franchisees. Expanding without a plan is potentially dangerous because supporting distant, isolated locations is expensive and will absorb precious human and financial resources in your early days. If you stretch yourself too thin, your entire system may suffer for lack of attention to quality standards. When you develop an expansion plan for emerging franchise clients, you should factor in a host of considerations. Begin by understanding the initial and continuing support requirements of franchisees and then determine the franchisor’s financial and human capabilities. Although you will need to explore the company’s contractual obligations to franchisees, which must be met, what is essential is that the company’s initial franchisees are successful. The goal for a franchisor must be for its franchisees to succeed. This is especially true for a franchisor’s initial franchisees. Keep in mind that your initial franchisees make their investment decision substantially based on trust in their future profitability and your capabilities to support them. Future franchisees will have an advantage in that they will be able to talk to those franchisees about how well their businesses are doing and your capabilities and level of support. Validation by existing franchisees to prospective franchisees will be the most important element of determining how well you will be able to grow and expand in the future. In addition, you should examine the company’s capabilities in these areas: Financial ability to market for franchisees Supply chain management Performance of company and franchisee-owned locations Efficient enforcement of brand standards Franchisor’s goals, culture and exit strategy Franchisor’s existing internal assets — both human and systemic — available to support franchisees An unfocused market development strategy (one in which the markets selected for development are determined by where the prospective franchisees’ phone calls or emails come from) will cause the company to be reactive rather than proactive, at all levels. For example, without a market expansion plan, you may fail to register your franchise in markets where you should be targeting or may incur unnecessary expenses by registering and advertising in states where you should not be expanding yet. Your expansion decisions need to be based on measurable criteria. What expansion methods you target for expansion — single-unit or multi-unit franchisees or even further company-owned development, in addition to the critical mass requirements in different types of markets — should be understood. Understanding the distance customers will travel to your franchisee’s location and the population (people or businesses) needed to support each franchisee’s business are needed to decide on how many locations are required to achieve critical mass for your brand. Understanding critical mass requirements, among other things, enables a franchisor to better manage its field service and distribution costs per unit and provides the most effective way to capitalize on local marketing possibilities. The goal isn’t merely to enter new markets, but also to enter them successfully. Distinguish your core market opportunities (in major and secondary urban areas) from tertiary market opportunities (in all other areas) so that you can profitably support your franchisees through effective field support, advertising, and other necessities that will be critical to your success as a franchisor. Knowing your critical-mass requirements enables you to better plan your growth. Having company-owned locations spread out over a host of markets can drain a company’s resources. If you have company-owned operations that are spread out and causing you strain, you should evaluate whether you should sell those businesses to franchisees. You can then take the proceeds from the sale of those stores to growing company-owned units elsewhere, paying down some of your debt or marketing and supporting new franchises. Following this approach is part of what is called a refranchising or retrofranchising approach.

Article / Updated 08-30-2017

Franchise growth should be strategic. If you are going to succeed, you need to determine where and when you should open in new markets. You need to determine which markets will be your primary targets, which will be your secondary markets, and which you are unable to grow in because you won’t be able to affordably provide support to your franchisees. Expanding without a plan is potentially dangerous because supporting distant, isolated locations is expensive and will absorb precious human and financial resources in your early days. If you stretch yourself too thin, your entire system may suffer for lack of attention to quality standards. When MSA develops an expansion plan for its emerging franchise clients, they factor in a host of considerations. They begin by understanding the initial and continuing support requirements of franchisees and then determine the franchisor’s financial and human capabilities. Although they explore the company’s contractual obligations to franchisees, which must be met, what is essential is that the company’s initial franchisees are successful. The goal for a franchisor must be for its franchisees to succeed. This is especially true for a franchisor’s initial franchisees. Keep in mind that your initial franchisees make their investment decision substantially based on trust in their future profitability and your capabilities to support them. Future franchisees will have an advantage in that they will be able to talk to those franchisees about how well their businesses are doing and your capabilities and level of support. Validation by existing franchisees to prospective franchisees will be the most important element of determining how well you will be able to grow and expand in the future. In addition, here are the company’s capabilities in these areas: Financial ability to market for franchisees Supply chain management Performance of company and franchisee-owned locations Efficient enforcement of brand standards Franchisor’s goals, culture and exit strategy Franchisor’s existing internal assets — both human and systemic — available to support franchisees An unfocused market development strategy (one in which the markets selected for development are determined by where the prospective franchisees’ phone calls or emails come from) will cause the company to be reactive rather than proactive, at all levels. For example, without a market expansion plan, you may fail to register your franchise in markets where you should be targeting or may incur unnecessary expenses by registering and advertising in states where you should not be expanding yet. Your expansion decisions need to be based on measurable criteria. What expansion methods you target for expansion — single-unit or multi-unit franchisees or even further company-owned development, in addition to the critical mass requirements in different types of markets — should be understood. Understanding the distance customers will travel to your franchisee’s location and the population (people or businesses) needed to support each franchisee’s business are needed to decide on how many locations are required to achieve critical mass for your brand. Understanding critical mass requirements, among other things, enables a franchisor to better manage its field service and distribution costs per unit and provides the most effective way to capitalize on local marketing possibilities. The goal isn’t merely to enter new markets, but also to enter them successfully. Distinguish your core market opportunities (in major and secondary urban areas) from tertiary market opportunities (in all other areas) so that you can profitably support your franchisees through effective field support, advertising, and other necessities that will be critical to your success as a franchisor. Knowing your critical-mass requirements enables you to better plan your growth. Having company-owned locations spread out over a host of markets can drain a company’s resources. If you have company-owned operations that are spread out and causing you strain, you should evaluate whether you should sell those businesses to franchisees. You can then take the proceeds from the sale of those stores to growing company-owned units elsewhere, paying down some of your debt or marketing and supporting new franchises. Following this approach is part of what is called a refranchising or retrofranchising approach.

Article / Updated 08-30-2017

The words used in describing things are important because words paint a picture. In franchising, maybe because it’s easy, maybe because the franchise community has become lazy, or possibly because other terms are less understandable or simply too nuanced, you will hear people talk about franchisors “selling” franchises, and franchisees “buying” franchises. However, what is really being offered is a limited license to use another party’s intellectual property for a defined period of time. Franchises cannot really be sold or bought. Franchises are licenses and therefore are awarded and accepted. The only thing a franchisee owns will be the assets they purchase in establishing and operating their businesses. Franchisees don’t really own a franchise — they are licensees of another person or entity’s intellectual property. Maybe because it makes the relationship feel warm and fuzzy, the franchisor-franchisee relationship is sometimes called a family or, worse, a partnership, with the franchisee referred to as a partner or possibly a franchisee partner. Unlike a partnership, though, the franchise relationship is not a fiduciary relationship. If you think your franchisee is your partner, see if your franchise attorney will be willing to put that into your franchise agreement — none will. It’s difficult to understand why some folks in franchising seem to need to use the term partner at all, as the franchise relationship is a truly beneficial one and doesn’t need to rely on any other term. Franchising is also often referred to as an industry. And because it has its own trade association and a body of law and culture surrounding it, you can see why. But franchising itself is not an industry. It is merely an alternative method of expansion or distribution used by many diverse industries. In the same vein, franchisees are frequently referred to as entrepreneurs. An entrepreneur, according to the Merriam-webster dictionary, is “one who organizes, manages and assumes the risks of a business or enterprise.” Although that definition includes most of the attributes of a franchisee, franchisees are not the organizers of the business concept they license and operate, nor do they have any right to independently change it. The difference between an entrepreneur and a franchisee is that an entrepreneur doesn’t have to follow anyone else’s direction except their own. So, what is the problem with an entrepreneur as a franchisee? After all they have so many of the attributes franchisors want in a franchisee: energy, drive, and ambition. The problem with a true entrepreneur is that they want — need — to tinker. A true entrepreneur has a clear focus on what they want to create and are not satisfied until they make changes to their business to make it fit their own image. As a franchisor, if you let that happen, franchisees will do their own thing, and your system will never achieve the necessary consistency. What you are really looking for is a “formula entrepreneur.” Someone who has most of the attributes of an entrepreneur but is willing to follow your lead and understands that consistency throughout the network of locations is essential. Franchisees need to know that they are obligated to meet your brand standards and execute your strategy flawlessly, but still possess the burning desire to own, operate, and manage their own business. Those are the great franchisees you want to recruit into your great franchise system. Recruiting great franchisees take patience and the willingness to say no to someone who is unqualified to be your franchisee but is willing to write you a check. Turning down a check is difficult — you will need to overcome this difficulty because not everyone who wants to become your franchisee will fit. Take your time and be disciplined in your approach to recruitment and selection. In the long run, a bad franchisee diverts you from doing productive work and hogs the attention and resources you need to support the rest of your franchisees. The money they pay you will never be enough to make the wrong franchisees worth the effort.

Article / Updated 08-30-2017

Assume for the time being that your concept is franchisable. Congratulations! Do you hurry up and start to develop your legal documents and marketing brochures? Not yet. Hold off a bit more. You have a host of business issues to focus on and decisions to make before you bring in the legal and marketing troops. Brainstorming a strategic plan for your franchise The business blueprint, often referred to as a business plan or strategic plan, examines the issues and makes the determinations needed to design and implement your franchising strategy. Although each company looking to franchise will differ, some of the key areas to consider in developing your franchise strategic plan generally include the following: Accounting (control and reporting systems) Capital requirements for the franchisor and franchisee Communication with the franchisees Consumer and other market research Conversion strategy for independent operators Cooperatives and buying groups Core and tertiary market expansion strategy, including determination of the various classes of franchisees to use for expansion Development and implementation of the internal structural elements of the franchise system Franchise relationship strategies, including dispute resolution and dispute prevention Franchisor field services Financial planning and analysis Franchisee operations Franchisee recruitment, selection, and closure Franchisee staffing, training, and certification Franchisor organization and training requirements Insurance requirements International expansion and support Investment hurdles to determine fees and other system revenue and costs Legal documentation, including FDD and franchise and other agreements Location (selection, acquisition, development, and management) Management information systems and point-of-sale systems Marketing (advertising, publicity, and promotion) Merchandising standards and plan-o-grams Monitoring mechanisms for product and service quality and consistency Ongoing services provided to franchisees and a la carte fees, if any Packaging and labeling for products sold to consumers by franchisees Policy formation Warranty and guarantee programs The franchise system you ultimately develop and the franchisor-franchisee relationship you establish will be shaped by the determinations you make in designing the franchise system. You decide upon planning, policies, procedures, ongoing administrative monitoring, and support services in the strategic and tactical plan. You can check out an expanded list of elements that you need to evaluate in the design and development of your franchise program at the Franchise Management Dummies page. Fleshing out strategies to develop your franchise After you develop your tactical and strategic plan, you also need to begin to develop some of the components required for executing your strategy. These include the following: All the operating systems and procedures Operations manuals for each class of franchisee, management, and staff Operating manuals for the franchisor’s headquarters and field and other support personnel Training programs required for all the system participants Marketing programs for use by local operators to attract and retain retail and system customers Marketing programs to recruit franchisees, including discovery days, websites, brochures, trade shows, and so on The fee structure for the franchise system Required documentation (developed by qualified franchise attorneys) Creating a plan for action Finally, you should create an action plan, which will organize and schedule the tasks you need to complete in implementing your franchise development plan. Your plan should provide for controls and feedback to ensure a clear direction for the company, an understanding of who is responsible for what, and the timeline for making everything happen. Control over the timing of your plan’s implementation is critical. The action plan ensures that something is going to happen and describes when to do it. One reason that many franchise packaging firms skip the process of developing a strategic plan and instead substitute a lengthy questionnaire is that strategic planning is time consuming and can raise issues that you need to address to properly design, implement, grow, and support your franchise system. It also allows franchise-packaging firms to artificially keep their fees low but puts you at risk. Developing the legal documents for your franchise The final output of your initial strategic development is the preparation of the legal documentation for your franchise system. You should base all the terms contained in your legal documents on the decisions you made during your strategic planning process. Your franchise agreements convey the information that legally binds you and your franchisee, spelling out the relationship between you and all your franchisees and describing the system. The FDD and franchise agreement provide prospective franchisees with at least the minimum information required by law and professional practices. The franchise agreement incorporates the business terms contained in your FDD that spell out each party’s obligations to the other. To give you a better understanding of structure of the FDD, check out the Franchise Management Dummies page. In preparing the FDD and franchise agreements, reliance solely on a FDD questionnaire is not advisable. However, if used as a tool to expand discussion, a questionnaire can be helpful. You will find a sample FDD questionnaire on the companion site. You should also prepare a strategy document to use with your consultant and franchise attorney. MSA’s proprietary document is called a business overlay, which is an enhanced version of a strategic and tactical plan that explains all the key issues to your attorney so that they can prepare the franchise agreements, franchise offering circular, and other required legal documents. It also provides guidance to the rest of the development team in areas concerning real estate, manuals, training, retail marketing, franchisee marketing, IT, and so on In addition to its clarity, a business overlay saves the lawyers developing the franchise document a considerable amount of time because the issues the attorneys need to address are covered in detail. After you complete your plan, you and your consultant should meet with your attorneys and other advisors and present them with your strategic plan. Seek their input and advice, because they have experience that should prove beneficial to your franchise system. Remember, though, that franchising is a business strategy, and your legal agreements need to reflect the decisions you made in your plan. If the language in your agreements doesn’t reflect the thinking of management and your business plan, speak to your attorneys before the documents are completed. Although customs and practices exist in franchising, and some elements are routinely found in many franchise systems, none of those matter if they don’t work for your franchise. One last bit of advice: Take your time and don’t get caught up in entrepreneurial fever. Professionals seize every opportunity to attend professional forums where they can exchange ideas with other professionals about best practices and worst practices in franchising. When franchising is done well, there’s no better method of business expansion.