7 Major Obstacles when Running a Franchise Business
Running a franchise can be cumbersome, especially if you are unfamiliar with the possible hindrances. This article delineates them, providing you with an 1) introduction, 2) 7 major obstacles, 3) systems affected by the obstacles, and 4) solutions.
A franchise business or a “franchisor” owns the name, business logo and the model. The rights of these can be sold to a “franchisee”; independent third party operators who own retail outlets. It is incumbent upon the franchisee to follow a set of guidelines and rules that are a part of the existing business they have bought rights from. The franchisor benefits through the ongoing royalty fee payments, or in some cases, a one-time upfront fee paid by the franchisee.
Franchising is an exceedingly common practice among owners who are looking to expand their businesses. Although we are all familiar with franchise businesses; seeing them on every corner, there is a common misconception that only fast food businesses are franchises. There are many other business ventures that can be expanded through franchising. About 120 different types of franchises exist today. These vary from health & fitness to automotive, financial services, cleaning & maintenance and even pet-related franchises.
It is important that the franchisor ensures an existing, established business model is being followed by the entire network that falls under the franchise name. This includes business methods, signs, logos, uniforms and anything that is an identity of the franchise. While the franchisor is benefiting through expansion, the franchisee is responsible for selling the product or services in keeping with a tested business process.
Although a proven method for expanding a business successfully, franchising has numerous challenges particularly for newcomers.
7 MAJOR OBSTACLES WHEN RUNNING FRANCHISE
#1. Enforcing the Vision and Consistency
Proper functioning on the behalf of the franchisee is beneficial for the franchisor as well as the franchisee. Failing to do so affects both parties. But the stakes are highest for the franchisor. Monitoring of franchisees becomes an integral part of the expansion through franchising. It is important that the vision of the parent company is enforced and there is a consistency in the product or services that a brand is selling.
Taking the expansion further means a franchise grows onto territories that cannot be physically inspected by the franchisor as part of the daily operations. This brings into perspective concerns regarding infrastructure, capital, time and the right kind of people.
#2. Lacking a Harmonious Relationship
Business relationships are rarely harmonious. It is common knowledge that no two people can think completely alike. Disagreeing upon the most mundane of decisions or choices to be made is inevitable and there really is no method or prescription that can resolve them. Avoiding them is a possibility and nearly a solution. Although there is no sure way of having a completely harmonious relationship, identifying the deep rooted cause of disputes can help.
In most cases, a minor let-down or interruption in communication between the franchisee and the franchisor can turn into a major dispute. Lack of communication can also result in a franchisor being completely unaccommodating to the franchisee. On the other hand, it could also cause a complete refusal of meeting obligations of a franchise agreement from the franchisee.
#3. Managing Rising Costs
Expansion of a business through franchising has an ultimate goal; better financial prospects. However, attaining that goal takes time, patience and facing obstacles such as rising costs particularly in the initial stages of expansion.
Franchisors often have unrealistic expectations regarding the payable fees for granting rights to the franchisee. Developing the franchise internationally in less developed countries has cost considerations that require a very realistic approach. It is a common error at the part of a franchisor to underestimate these costs.
Demanding affront-end, large fee is not uncommon. However, capital is needed in underdeveloped areas for effective growth of the franchisee. Under these circumstances, franchisors have to make initial invests and be patient for the franchisee to sustain itself. Once up and running, the franchisee can then increase or accelerate the payments, most likely after meeting certain milestones set by the franchisor.
#4. Building a Management Team
Turning a business into a franchise means the owner is taking a different position in this expansion process. From being an active part of the business, the franchisor becomes more of a leader who strategizes and monitors. Franchising is a set up with regards to recruitment and training of management teams. This is an important step in business expansion through franchising because managerial tasks also have to be delegated.
Management teams are an essential part of building an organization. In the successful running of a franchise business, the empire builders need to trust their teams and delegate tasks. Growing and evolving is as important for the franchisor as it is for the business.
#5. Growth and Investment in Infrastructure, Technology and People
As strange as it may sound, meeting bottom-line expectations in uncertain economic times may not be a wise decision for those who intend to grow their business. Creating functioning systems, developing them during adverse economic conditions and seeing opportunities for acceleration of growth of the business are sure signs of a strong company.
Investing in infrastructure, technology and expanding through hiring more people allows a smooth expansion of a company. A more opportune approach requires the company to continue these processes for franchising under all economic conditions. This decision of continued investment during tough economic conditions is also affected by pressures from stakeholders. The franchisor needs to weigh the pros and cons and make intelligent decisions which often require taking big risks.
#6. Supporting Franchisees
It is important that the franchisees are upholding the agreement made with the franchise. The franchisee should follow the business model of the franchise entirely, and protect the name of the company. However, it is a two-way street. True success requires the franchisor to provide full support to the entire chain. This support benefits the franchisees which ultimately benefits the entire business franchise. Support can be provided through different means such as holding training programs, using online learning modules and additional efforts that ensure quality control and assurance that there is uniformity in the experience at all units of the franchise.
#7. Bringing Innovation
It has already been established that a business franchise will benefit from the success of its franchisees. Beyond successfully executing the franchisor’s business model, bringing something special to an individual setup as an independent effort through innovative ideas brings something special to the franchisee. Despite being smaller businesses, franchisees have been profiting from the execution of inventive ideas as long as they abide by the agreement laid down by the franchisor. Franchisors need to monitor the business model is being followed but beyond its acceptance, innovation should be welcomed as a source of profitability. Allowing innovation at the franchisee level develops a relationship of trust and helps maintain harmony.
SYSTEMS AFFECTED BY THE OBSTACLES
On an international level, franchising takes up a whole new set of challenges. Beyond borders, a lot changes owing to a different economic conditions, local customs and business practices of the targeted country. In lieu of ideal arrangements, realistic expectations are the key to staying on the road to successful expansion of the business. The following are systems affected in the process of international expansion of a franchise and how these affects can be countered.
Territory and Exclusivity
Boundaries cause territorial rights and restrictions. Franchisors should abstain from exclusivity specifically when it comes to international franchisees. Insisting on implementing similar rights in all territories may cause disputes and competition between the franchisee and the franchisor. Avoiding conflicts is a smart choice for the franchisor through relaxation of rights; impeding adaptation to the environment of the franchisee should be evaded.
International boundaries often create conflicting situations in countries where political situation is unstable or the official borders are under scrutiny. In such cases, the franchisor should assess plausible changes and add the fate of the disputed territory in the agreement in advance. Withdrawing a territory or forfeiting it from an exclusivity grant in the post agreement phase under difficult political times would give the franchise bad reputation in the international market.
Demanding an upfront payment even from a local franchisee may not be a suitable arrangement. Fees can be charged as royalty so that a franchisee can establish itself before making large sums of money to pay for the rights. In the case of international franchisees, upfront fees will hinder the development of the systems. Other than the fees for the rights bought from the franchise, demanding reimbursements for developing products and service expenses may be going a bit too far. These are costs that the franchisor needs to bear as part of international franchise development. Neglecting concerns like inflation and implementation of cost-of-index of the home country rather than where the franchise is being introduced, are concerns that should be considered.
Financial arrangements in international franchising should be kept very realistic. A major obstacle in business franchising occurs when international franchise tax laws are implemented. Since the franchisee is a small establishment independently, the tax implementation can cause up to 15% burden in most jurisdictions. The franchisor should make considerate and realistic arrangements for royalty payment. Adopting methods like receipt transfer from the franchisee to the franchisor for claiming tax credits in the home country helps to relieve the burden.
It is idealistic to apply the rate of development in the home country to foreign regions. An extensive research on local systems as well as market and economic changes should be done before drawing up a contact for the development schedule. The event that the development obligations are not met, the agreement should not be terminated. It makes more sense to surrender a part of the exclusive territory or reduce the exclusivity in order to have some productive outcome of the efforts invested so far.
Considerations for local country regulations, laws, customs and culture are very important. It should be kept in mind that modifications and adaptation will be required for the benefit of the franchisee as well as the franchise on the whole. The target country franchisee should be allowed modifications in site selection, equipment specifications, fixtures, décor furnishings, signage and a few products and services. In laying down the agreement on modifications, the sole aim should be the betterment of the franchise by making it more adaptable to its surroundings.
The franchisor should demand notice of any changes that need to be made in compliance with local demands or requirements. These changes are inevitable in international franchising and are the right of a franchisee given that prior notice or approval is requested from the franchisor.
It is best to address supply arrangements at a very early stage of international franchise development. The most practical approach for proper supply arrangements is providing standards and specifications to the franchisee to adhere to. The franchisor can monitor the supplier premises, facilities, test samples and change or disapprove them.
However careful a franchisor maybe, disputes are inevitable. It is important for the owner of a business franchise to take the best possible route to resolving a dispute. It is preferable that litigation be avoided at all costs and international arbitration should be a preference. It is best, though, to resolve disputes through meetings and discussions.
Governing law of the franchisee’s country should apply to the franchise. Laws of the home country may sound ideal to the franchisor, but would be unrealistic and impractical. In furthering the matter of dispute resolution, courts of the jurisdiction of both domiciles can be conferred, or those of the party that does not initiate legal proceedings. A third party can also be involved for a neutral and exclusive jurisdiction. All three possibilities have their own pros and cons. Therefore, assigning any one for dispute resolution in a franchise agreement should be done through careful consideration.
Having Sufficient Capital
Business owners should be perceptive of the fact that franchising is a huge venture which requires large initial investments and starting costs include administration, marketing, operations, accounting as well as staff and lead generation. It is estimated that profit from 20 franchise units generates enough royalty to benefit the franchise.
Building a Solid Infrastructure
Studying the prerequisites for systems and processes is extremely important. Establishing the requirement of infrastructure, for example, is not sufficient. It is essential for the franchisor to ensure that the process of establishing and growth of systems and processes that ultimately support the expansion of the business through franchising have also been taken under consideration.
Building Solid Relationships
Franchisors should be conscious of the fact that quality of franchisees is very important. True value of a franchisee takes precedence over numbers in the long run. Expansion should not only be seen in numbers but also evaluated for the quality of product or services. The quality maintenance can be practiced through monitoring. In addition, a solid relationship with the franchisee supplements quality maintenance. Franchisee validation is a source of further multiplication of the franchise and this is only possible through a happy, honest and successful relationship.
Bringing the Right Staff on Board
It is not always about hiring the right people. Particularly in business franchising, it is important to hire people that can be molded and trained into employees that represent the values of the company and reflect the brand through their performance.
Understanding your Role as Franchisor
Establishing a franchise requires a major paradigm shift. From being the owner of a business to being the owner of an expanding enterprise, a franchisor must assume the role of a leader. The focus of the business needs to be shifted from performance, expense control and staffing to training, support and addition to the franchise.
Large ventures require big investments, careful planning and taking immense risks. Entrepreneurs have to be risk takers and dreamers in order to achieve and be successful. Being conscious of all the obstacles in franchising a business is extremely important. But victory is only in the destiny of those that dare to be fearless!
Dear fellow entrepreneurs and readers of Entrepreneurial Insights / Cleverism! In autumn of 2014 …