Is Franchise Friction Inevitable?
Friction is rife in the $146 billion Australian franchise industry that is littered with controversy.
The Franchise Council of Australia claims there are some 79,000 franchises employing nearly half a million people.
High profile news cases have exposed many issues and the recent Royal Commission has aired questionable practices and attitudes.
The core of many franchise problems that is very rarely spoken about because it appears to be counter intuitive.
It is a fundamental mismatch in the goals of the franchisor and franchisees.
What is a franchise?
Franchising gives franchisors an ability to package their business and achieve scale by selling “off the shelf” businesses.
Franchisees can access a readymade and tested business model, complete with branding, systems, marketing collateral, website and the use of intellectual property for an agreed period and territory.
In return for a new the Franchisee usually pays a one-off fee and ongoing royalties to the franchisor.
Both parties sign a franchise agreement to define all the terms, including the duration of the agreement.
This all seems like a win, win situation.
So, what could possibly go wrong?
A proportion of people attracted by the concept of buying a franchise are doing so because they lack business experience and feel comfortable being under the franchise umbrella. In many cases these buyers are not savvy business buyers and may never have run a business before. They want to feel part of a collective, supported in the common goal of making money. In essence they see buying a franchise as a low risk investment.
They assume that their goals and the franchisors’ are the same.
Some also hope that the brand name alone will be a sufficient magnet to attract customers and sales. They believe the marketing fees should also bring throngs of customers.
Some believe that once they join the franchise and pay their fees then the money will roll in, simply by following the system.
This is perhaps akin to the “buying a job” mentality.
The franchisor should vet these buyers out; however, greedy franchisors never like to pass up the income from selling another new franchise or allowing the sale of an existing franchise to a new Franchisee.
The franchisee mindset changes with time.
Initially the franchisee values the franchisor and their system and they quite happily pay their royalties and fees. The more experienced the franchisee becomes, the less reliant they are on the franchisor and then resentment about the royalties can set in. This often coincides with the new franchisee meeting fellow franchisees who have already gone through the “honeymoon” period.
The terms of franchise agreements may compel franchisees to buy materials and services from the franchisor at prices above market prices. This understandably is infuriating as they expect better than market prices to be achieved through the Franchisors purchasing power.
When the franchisee starts to feel the financial squeeze they soon realise that the team they joined is actually two teams, even though they are wearing the same shirts!
As an independent business they must take responsibility for their own franchise and yet meet all the conditions of their franchise agreement.
Many franchises do general brand awareness marketing and require the franchisee to actively market their own business. This can also be a source of tension as the franchisees may have not have the disposition toward sales.
Franchisors can be frustrated by the performance of some franchisees who appear incapable of growing the brand. Performance managing franchisees can be challenging because they are independent businesses with their own goals.
A franchisor has a more corporate mentality, as it is essentially an head office. Its work force in the field are the franchisees. Its goals are around selling franchises and maximising market penetration through effective franchisees. It seeks to maximise its royalties and any other sources of income that it can from the franchise network. This includes any margin from goods that must be bought through them.
Franchisees are all independent businesses that have a gamut of goals and motivations that often are not aligned with the franchisor’s.
Franchisors want to build a brand name and return value to their shareholders.
If the mismatch becomes too big, the relationship can become negative and adversarial as the trust in the relationship deteriorates.
Tips for less friction:
Get legal and business advice before buying a Franchise.
Negotiate the terms in the Franchise agreement-don’t just take what is presented.
Franchisors should thoroughly vet potential Franchisees to make sure they have the skill set needed.
Franchisors are the experienced “partner” who writes the rules of the agreement and they need to manage the Franchisee’s expectations.
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