The Franchising Model Basics
Franchising is an arrangement where one party allows another party the rights to use its trademark or certain business systems and processes. This allows the party to produce and market a good or service within certain specifications. The party granting these rights is referred to as the franchisor, and the party purchasing the rights is the franchisee.
The franchisee typically pays a one-time franchise fee and then pays a percentage of sales revenue as royalty continuously. In return, they are provided a licensed privilege to do business and receive assistance in management and marketing aspects. The franchisee derives many benefits from purchasing these rights:
- In using established trade names and trademarks, the franchisee gains instant name recognition.
- They save resources on research and marketing since they are buying the rights to tested products.
- In many cases, businesses do not have to re-design their physical locations as there is already a building and décor framework in place.
- There are transferrable management and training procedures that will maximize efficiency in a shorter time.
- The franchisee is entitled to advances in new products and help in promoting existing ones.
Therefore, the franchisee does not have to go through the trial and error mistakes that many new business owners make because of the proven system of management and operation. Franchisees also enjoy low prices in buying materials and services from the franchisor, which provides them in bulk to their franchisees.
The franchisor also gains from expanding their revenue base and increasing exposure of their brand and products. Franchising allows the franchisor to maximize earnings with minimal spending on acquisitions, repairs, and maintenance.
The franchisor accumulates a network of affiliated dealers that distribute their products. Constant communication with franchisees allows the franchisor to troubleshoot problems and identify trends before other competitors in the industry.
Being a franchisor is also great for successful small businesses that do not yet have access to large amounts of capital but would like to expand. Being a franchisee is suitable for business owners that want to run their business but do not want to start completely from scratch.
Top 10 Common Challenges that Franchises Will Face
1. Demonstrating Effective Leadership
Leadership strategies adopted at the start of the COVID-19 pandemic should be continued. Franchisors should be in communication with their franchisees, showing empathy and encouraging open communication. Franchisors should be transparent about concerns from across their network of franchisees and encourage collaboration.
Being able to draw insight from across the network of franchisees will be critical as businesses reopen and are ordered to lockdown again. Franchisors can use advisory councils composed of franchisees to demonstrate leadership and receptiveness.
A failure to lead during this time could result in increasing challenges to earnings, a disjointed policy, and a disgruntled set of franchisees. Franchisees must also demonstrate leadership on the micro-level, encouraging employees to voice concerns. They can also share best practices with franchisors, allowing them to be applied on a franchise-wide basis.
2. Ensuring Financial Viability of Franchise
Any franchise operating in the current pandemic climate understands that it is operating in a reduced revenue environment. However, they must continue to assess how much earnings are needed to survive and how they will adapt financially as rules change.
For example, restaurant franchises in states that have reopened realize the importance of temporary investments in outdoor seating. Franchisees should be doing everything they can to cut costs and survive. Franchisors should understand the urgency on the bottom level and show flexibility with payment and opening deadlines.
3. Providing Relief to Franchisees
Franchisors may consider reducing the royalty rates to help franchisees in the current climate. However, they must also balance franchisee concerns with their concerns. Franchisors without significant cash reserves and less access to capital may not be able to be as flexible with royalty abatements.
Franchisors and franchisees will face different financial goals. While franchises are simply trying to survive to the expected end of the pandemic, franchisors are seeking to protect their brand and minimize widespread closures.
4. Ensuring Lines of Communication between Franchisors and Franchisees
A lack of an organized communication strategy can seriously harm the symbiotic relationship between franchisors and franchisees. A lack of effective guidance from the top can result in feelings of confusion and isolation on the part of the franchisee.
Additionally, if franchisees fail to communicate with franchise management, then the franchisor will fail to recognize industry trends and miss opportunities to implement best practices. In the current pandemic, franchisors should have a carefully crafted message that acknowledges their responsibility in protecting the safety of franchise owners and employees.
5. Clear Messaging to Franchise Customers
Another reason why communication between franchisors and franchisees is critical is that it impacts consumer perception about how the overall brand is doing. Customers value consistent messaging about how a franchisee plans to address an issue or problem.
In the case of COVID-19, there is a challenge in that there will likely be non-uniform approaches to business operating procedures due to inconsistency in federal, state, and local guidelines. However, there should still be clear messaging about how franchisees in common regions should operate.
Ensuring that businesses can adapt their operations to the ongoing health situation will require them to convince their customers that their health and safety are being protected. Doing this requires coordination between franchisees and franchisors. Collaborating to send a clear message will be essential to maintaining customer relationships that will survive the pandemic.
6. Increased Importance of Public Relations
Before COVID-19, franchise systems found maintaining a positive public image much easier. The best way to build a good public image was through great customer service. Now, franchisors must worry about the health of consumers and employees and staying up to date with changing legal operating requirements. Maintaining a positive image may require going beyond the legal guidelines.
While franchisors must be concerned with financial viability and maintaining cash flows, too much cost-cutting will risk long-run damage to the business reputation. Franchisors that are worried about their long-term reputation may consider offering their employees expanded benefits.
7. Building Franchisee and Employee Loyalty
For example, enabling workers to take paid sick leave for possible exposure and bumping up pay schedules are ways to demonstrate organizational empathy. Implementing increased employee benefits shows that the franchisor is committed to preserving the workforce.
It will also help build future loyalty not only from employees but also from the public. The public is watching how franchises are treating their employees during this period of expanded need, so businesses must weigh maintaining their image with financial concerns.
8. Maintaining an Adaptable Franchise Model
In the food services franchise industry, franchises have been forced to adapt to deliver their goods and services. When businesses began to shut down this past spring, many franchises proactively shifted to delivery-only and to-go business models.
Franchisors who tried to hold out faced public scrutiny in being perceived as putting the community and employees at risk even if legal requirements were being followed. Therefore, one challenge is anticipating changes and being among the first in the group to move.
In this age, it is better to err on the side of caution, even if that puts a larger financial toll on the franchise. This makes it critical to have a flexible model and anticipate multiple operating environments.
Since operating models are distributed from the franchisor, it is their responsibility to adopt new models of operation to reflect the new reality. They must carefully communicate these changes and how customer interactions should look like moving forward. Additionally, developing a uniform cleaning policy and a standard response to a possible exposure also requires effective communication.
9. Maintaining Sufficient Capital for New Franchises
In the first years of operating a franchise, the costs of supporting franchisees typically exceed revenue from royalties and fees. New franchises will face the challenge of building enough capital to cover the infrastructure needed to support their franchisees. This includes support for marketing, accounting, and operation.
Franchisors should be aware of these costs and know how many franchisee units they can afford to operate at a loss or breaking even. They should be cautious of expansion and should consolidate franchisees if necessary. It is better to maintain the same level of support for fewer franchisees than to provide weak support for more franchisees.
10. Retaining and Recruiting the Right Franchisees
In building a franchise network, franchisors will build strong relationships with some franchisees and weak relationships with others. They must ensure that franchisees with whom they maintain strong relationships continue to be supported through the current health crisis.
Franchises should be wary of recruiting new franchisees to recoup losses quickly. Without proper due diligence, the franchisee may be poorly run, and it may divert support from successful franchisees. Building a team of happy franchisees will provide invaluable feedback that is needed more than ever.