Marketers Must Understand Franchising When Assisting A Franchisee
By Ron Fletcher, M.C.Inst.M., FCM Consulting and Marketing
Franchising has grown steadily over the years. Franchisors are viewed by many hopeful souls as having the answers and formulas to success. We usually hear of the McDonald's example when the discussion of franchising comes up. It is true that we see more and more new franchises offering just about every service, or type of merchandise, in today's market. However, one must give thought to how those who now offer their formulas for success succeeded, and just what qualifies them to suggest that they have a formula for each geographic location and market. In other words, what do they have to offer the potential franchisee who is ready to lay down his or her hard earned (or borrowed) dollars?
I present the following issues regarding the franchise industry in the belief that we, as members of the CIM, must be aware of the multifarious facets of the franchising business; and how we can warn of potential problems or assist those franchisees who may come to us for help.
If we look beyond the shining examples of success held out by the franchisors, we can find many examples of failure in the franchise industry. These examples are seldom reported, or acknowledged. One example that comes to mind is a pizza chain which had an excellent run and then disappeared. What happened to the franchisees and their investments? Another example is a transmission firm which was a booming success in the early 70s, but now only a memory. There are numerous examples; the list of failures is virtually endless.
This leads one to ask if being a franchisee is not a safe, secure way to earn a living (or a fortune) and secure his or her future? Let's look at the franchise industry as a whole, and see what these future franchise owners really are buying. Just how bright might their future be if they do buy their dream franchise?
Most of the purchasers of franchises have little or no previous knowledge of the type of business in which they are about to invest. These people look to the franchisor to train them and provide the knowledge needed. They allow themselves to be guided in choosing the location, the type of equipment, the inventory and the advertising. But is this a wise decision? Are those locations chosen by the franchisor the best possible for a particular type of business? Is the rent reasonable, or is the franchisee subletting from the franchisor at an inflated rate? Is all the inventory recommended necessary, and again at a reasonable price, or are there better alternatives?
These questions are also applicable to the equipment and the advertising that are recommended. As new franchisees, not experienced in the business, they are not qualified to make informed decisions. Is the location desirable? The writer has seen many franchise locations chosen by franchisors for the uninitiated franchisees. Any informed person would dismiss these locations as farcical. Unfortunately, people paid good money for those locations. As a result, they lost their investments either due to accessibility problems, or the fact that potential customers would never be able to find the business. These problems are further compounded by the fact that the franchisee cannot relocate due to the franchise agreement and the fact that they are subleasing from the franchisor.
This brings us to our next problem, the franchise agreement and just what it is and what it entails. As with any sound business arrangement, it should, and indeed must be consummated by contract. What goes into the contract is most important and franchise agreements are often designed to ensure that the franchisor will be the winner in all cases. Most franchise agreements have at least one clause in which the franchisee gives some form of power of attorney to the franchisor, over the business being purchased. The results of the clause, once signed, may allow the franchisor to dictate the hours and days of business the franchisee will be opened, where inventory will be purchased, and in many cases at what price it will be sold. In some cases, it dictates who can work for the franchisee, who can relieve the franchisee in his or her absence (sickness or vacation) and to whom he or she can sell it.
Some also set out the franchise fee to be paid up front, plus the franchise fee percentage to be paid on all monthly gross sales. These are important issues, as what may appear to be a miniscule percentage (i.e. 5, 6, or 7 percent of the gross) can actually represent 50 percent or more of the net profit. Some also dictate what percentage of the gross sales will be allocated to the franchisor for advertising. Some do not include local advertising, the yellow pages or other promotional initiatives the franchisee may feel are justified. It must also be noted that the fees paid to the franchisor for advertising, in some cases, go toward national campaigns that offer little help to those franchisees in outlying locations. I mention this as much national advertising emphasizes the franchisor, and those areas most heavily populated by franchisees such as Toronto, Montreal and Vancouver.
Another issue that arises is the choice of accountants and lawyers dictated by the franchisor. If the franchisee's accountant and lawyer are chosen by the franchisor, chances are their loyalties lie with the franchisor and not with the interests of the franchisee.
This brings us to the training and management assistance promised to the franchisee by the franchisor-training for which the franchisee has paid a handsome fee. With very few exceptions, many training courses consist of little more than learning the rules and regulations set out by the franchisor. The assistance provided once the franchisee has acquired his or her business is often minimal. It is not uncommon for the district representative of the franchisor to visit infrequently, especially if the franchise fees have not been paid. It is often surprising when someone from head office spends a couple of days with the franchisee.
A new franchisee needs all the help and guidance he or she can obtain. As marketing professionals, we must be aware of the problems these people are facing and how we can provide assistance. We might be able to recommend effective promotional vehicles that novice franchisees can afford, and that will not conflict with the policies of franchisors.