It’s not a marriage
- What is the main challenge facing any new franchisee?
- Is it the rental of a business space?
- Is it managing the daily running costs?
- Is it finding the right staff members?
- Or perhaps the difficulty of dealing with established competitors?
No, it’s none of these. Sure, these are all important issues that need to be addressed, but there is an even bigger challenge: Managing the relationship with one’s franchisor, according to the 2014 Franchise Association of South Africa (FASA) Franchisee Survey.
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Of all the franchisees questioned during the survey, 28% cited the relationship with the franchisor as being the main challenge.
This makes it, by quite some margin, the biggest issue facing new franchisees (second place is a tie at 13% between managing staff and paying franchise fees).
The main problem is that franchisees (and even many franchisors) define the nature of the relationship incorrectly.
Far too often, it is described as a marriage, but it isn’t that at all. It is actually more of a parental relationship than anything else.
Why it’s not a marriage
We’ve often heard people compare the franchisor-franchisee relationship to that of a marriage.
They will talk about the ‘honeymoon’ period and how the franchisor and franchisee are in ‘partnership’ together for a common purpose. And while this analogy may have some merit, a marriage is exactly what the franchise relationship should not be.
When we think of marriage, we think of a joint-venture relationship. In a joint venture, there are partners. Because of the relatively equal footing of the ‘partners’, the typical joint venture starts out with a negotiation – and is often a series of ongoing negotiations.
Like a marriage, there are the ‘who does the dishes’ issues, and then there are the more serious issues, such as money. Because each joint venture is unique, every one of these issues is usually subject to negotiation.
Because a joint-venture partner is usually compensated based on how much money goes to the bottom line, one concern that most ‘marriages’ have is how the accounting gets done.
On a one-off basis, this is fairly easy to monitor. But on a massive scale, it is almost impossible. And when your joint venture spouse cheats on you, it can become a battle among equals in divorce court.
In fact, that is one of the big differences we find between franchising and joint ventures.
Unlike partnerships, franchising is much more like a parent-child relationship. The franchisee, like the child, will go through a variety of growth phases.
When children first come on the scene, they are very dependent on their parents, relying on them for the education and training that will allow them to survive in this world. And as they grow older, they become less dependent, and parents begin to allow them some latitude.
As they get older still, they will begin to test the boundaries of their relationship, pushing a little around the edges, trying to change or influence the system that parents have set for them, and perhaps breaking some of the rules.
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But the child is still a dependent. It is simply a question of how forcefully the parent chooses to put their foot down.
The good parent
The franchisor needs to start by establishing the boundaries of the relationship. It is important for the franchisee to understand that the franchisor’s first role as ‘guardian’ is to guard the system and the brand so all franchisees can thrive.
Thus, one of the most important roles of the franchisor is that of disciplinarian. To do that, it needs to clearly communicate the rules and the intention to enforce them right from the start.
At the same time, it is important for the franchisor to understand that discipline can no longer be meted out exactly as it was before franchising took place. If franchisors try to give a franchisee the ‘it’s my way or the highway’ speech that worked so well before, they’ll quickly find themselves with alienated franchisees — the first step on the road to real trouble.
Franchisees are business owners, and as such, require franchisors to communicate with them in a professional manner. Being firm with franchisees, as opposed to managers, also means providing them with an explanation for various ‘requests’.
Most franchisees have a key desire for their opinions to be heard. A franchisor should thus avoid making decisions in a vacuum and providing direction to franchisees without a clear explanation of why the direction is being given.
Communication is key
The secret to a good relationship between franchisor and franchisee starts with communication. And that means more than the occasional newsletter and a visit from the field representative.
In today’s technology-centred society, it is all too tempting to rely on the Internet for all communication. But in a franchise context, that would be a big mistake. All too often, we have seen well-intentioned emails ignite a firestorm when they are misinterpreted.
Relationships are built through dialogue, so it’s important that dialogue be encouraged in every aspect of the relationship. Good franchisors are careful to create multiple venues where constructive dialogue can occur.
Annual conventions, regional meetings and advertising councils all provide opportunities for two-way communication.
The accessibility of senior staff is also vital. There are senior executives of some fast-growing franchisors who would not go home for the night until they had personally returned every franchisee’s call.
To be effective, the communication needs to be more than frequent. It needs to be honest. While there are some things franchisors may choose not to share with their franchisees, the key to a long-term sustained relationship is trust. And trust starts with openness and honesty. Get caught in a lie once, and you have destroyed that trust forever.
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Lastly, to be effective, franchisors have to genuinely care about the success of their franchisees. Good franchisee relationships start with a franchisor that is, first and foremost, committed to franchisee success.
That commitment, more than anything else, needs to permeate the franchisor organisation at every level.
If franchisees do not sense true commitment from franchisors, a relationship could quickly become adversarial. If, on the other hand, franchisees see franchisors breaking their backs to help them achieve their success, there is almost nothing they won’t do to assist.
Types Of Funding Available For Franchisees
If you’re interested in investing in a franchise, there are a number of funding routes available to you.
In South Africa, a franchise is considered a separate, specialised field of business and from a financing perspective is viewed differently to an existing business. It’s typically easier to get funding for a franchise as franchises have a proven product and they vet potential franchisees and offer support to new business owners. This support can include extensive training on running the franchise, branding and marketing, operational policies and procedures and a highly-tuned supplier network.
The reputation of the franchise will, to a large extent, dictate which finance options you choose and how easy it will be to raise the required funds.
It’s important to understand the cost of purchasing the business and the expected operating costs to work out how much finance you’ll need until the business starts to generate profits. Be clear about the upfront costs, including access to the brand, the market structure, start-up support and the set-up fee, which usually includes construction, equipment, stock and other necessary resources.
Consider the operating costs, which must include management service fees and franchise marketing and advertising levies. The franchisor will advise you on the time it should take for the franchise to start generating profits. Upfront costs plus operating costs are the total amount of finance required to purchase, set up and run the franchise.
What’s available for prospective franchisees?
Many of the large franchisors have their own funding mechanisms. These can range from their own established finance arm to funding assistance through partnerships with external lenders. Franchisors seldom fund 100% of the purchase costs; the amount of funding varies according to the size and reputation of the franchise and usually ranges from 25% to 75% of the costs.
Once a franchisor approves you as a franchisee, your chances of being approved for funding are significantly stronger. Some franchisors go a step further and suggest a business partnership with another potential franchisee who has good financial resources but less experience. Pairing experience with finance can be a useful option, but needs to be explored properly as it is a long-term partnership that must work for both parties.
Tandem Funding and Specialised Franchise Funders
South Africa’s B-BBEE legislation has led to a new option for franchise funding. It’s a particularly innovative way of quickly upskilling inexperienced potential franchisees. The franchisor funds the new franchise and retains ownership of the majority of shares in the business.
The franchisee initially purchases a small number of shares and is then mentored by the franchisor to set up and run the franchise. Profits are used to buy more shares until the franchisee has purchased all the franchise’s shares.
Specialist franchise funders are also a useful option. They typically consider a wider variety of franchises than banks and have in-depth knowledge of the industry. However, like other funders, their primary concern is to be sure that the loan will be repaid within the required period.
Franchise Funding from Banks
All of the large banks have specialised franchise funding departments. Their approval rate for funding franchises is generally higher than for independent businesses.
Banks will expect you to provide a sizable contribution toward the purchase of the franchise and funding is dependent on proof that the business will be able to repay the loan.
Other factors they consider are the location of the business and its proximity to competitors and catchment markets, your level of business experience, your credit record and the amount and type of support offered by the franchisor. The higher the level of support, the less the risk to the funder of the business under-performing.
If the franchisor is willing to enter into a joint venture with you to partially fund the purchase, the bank will consider this positively as it means the franchisor has a vested interest in helping you to succeed.
Government Franchise Funding
All of the government funding agencies offer franchise funding primarily to encourage black entrepreneurs to enter into the franchise business. For example, the National Empowerment Fund considers funding based on a minimum of 50,1% black shareholding, provided that the black shareholders are actively involved in managing the business.
They prefer to fund well-established franchises, fund up to R10 million and expect to exit within seven years, so you’ll need detailed projections to show that the loan can be repaid within that period. Ithala Bank considers funding for KZN-based approved franchisees who do not have collateral.
What funders expect from you
Lenders expect you to provide detailed information that will enable them to assess the risks of lending to the franchise. This means they require a detailed business plan, comprehensive and well- substantiated financial projections and full details of the franchise, its agreement terms and the levels of support they will provide. They will also need details of start-up costs; for example, construction, set-up costs, equipment and other resources required to establish the franchise.
Franchise lenders expect you to have concluded discussions with the franchisor and want to know that you have been approved. This pre-approval means that there is less risk to them. You’ll also be expected to provide feasibility studies from the franchisor.
The purchase of a franchise requires an injection of your own cash and if you are borrowing money, you’ll probably need to provide collateral. You’ll need a statement of personal assets and liabilities for each of the directors, a good credit record and detailed CVs of the owners to show the required business experience.
The more well-known the franchise, the higher the price, so do your homework before applying for finance. Understand the full cost of starting and running the business to make sure you aren’t in for future surprises. In particular, work out your current liquidity status.
Keep a small contingency fund available for unexpected expenses, so don’t invest all available capital in the venture.
Shop around. Compare finance institutions’ offerings to make sure you get the best deal. In the case of less expensive franchises, consider working with a couple of lenders; for example, an asset funder to fund equipment needs and a franchise funder for the start-up and working capital costs.
Factors To Consider Before Signing Up As A Franchisee
Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.
You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?
“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.
Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.
Ask yourself these three questions before proceeding with the process of franchising:
1. Will you be able to follow the directions of the franchisor?
You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.
“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.
“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”
2. Do you have the need to experiment?
Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.
If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.
3. Are you a team player?
These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.
“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.
Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.
3 Ways You Can Innovate And Improve As A Franchisee
Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.
When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.
But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.
“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.
This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:
1. Get the basics right first
Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.
“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”
It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.
2. Do your homework
So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.
It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.
3. Speak to the right people
Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.
To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.
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