By Michael Seid, Managing Director, MSA Worldwide
When you’re considering making an investment in a franchise system, it’s important to understand what it means to become a franchisee. You also need to understand that the franchisee will expect you to operate your business to meet its own established brand standards – not the practices you may think will work better in your market.
Franchising is a method of expansion used by companies to ensure that they can achieve consistent, sustainable, and replicable brand performance in locations owned and operated by others. You should have a feel for the relationship since even though you will be sharing a brand with other companies, it’s not a partnership and the franchisor will not have any fiduciary responsibilities to you. They need to act in the best interest of the brand and the system, and sometimes you may not agree with but will still be required to follow their direction.
Becoming a franchisee is not right for everyone. For a true entrepreneur who needs to make all of their own decisions, becoming a franchisee can be overwhelming. Successful franchisees are what we call “Formula Entrepreneurs”: You are provided with a system, trained and supported, and your role is then to execute the franchisor’s system as they have laid it out. Great franchisees take that system and execute it better than others but still, as a shared brand, the consumer should be able to get the same quality of products and services from each location.
You are going to entering into a lengthy and detailed contract that contains rights and obligations stretching over an extended period of time. Also, while negotiated changes are possible, in most cases they will be few as the franchise agreement is generally an adhesion contract meant to be uniform among all of the franchisees entering the system at the same time. Therefore it is important that you do thorough due diligence about the franchisor’s offering, compare it to other offerings in the same industry or with others that interest you, and most importantly, that you have a professional and experienced advisor working for you.
As you explore opportunities, you will discover some companies that call themselves franchisee consultants or franchise consultants, but many of these are merely franchise brokers offering only the franchises of their clients. Brokers are not a good source of information or support when you are considering investing in any franchise, as a franchise broker’s role is not to support you in making the right decision, but rather to sell the franchises of their clients. Franchise brokers make a living selling franchises on a commission. Even though they may claim to represent many franchisors, no broker represents a large portion of all of the franchise offerings available. Despite what some may claim, I am not sure I ever met a Ford dealer who evaluated a customer’s needs and told them they would be better off going across the street and buying a Chevy. Brokers will steer you to the opportunities in their portfolio, and while many of those opportunities may be outstanding franchise systems, working with a broker will limit your ability to explore most of the franchises you might be interested in.
There are a host of things you should be looking for in a solid franchise opportunity, and I suggest you read Franchising for Dummies to get a detailed understanding. These include the franchisor’s:
- Ability to build critical mass in your market so you are not alone in trying to market to consumers;
- Product and concept expertise;
- Operating systems;
- Effective marketing;
- Revenue and operating costs and your ability to service your debt, make a living, and also earn a reasonable return on your investment;
- Ability to provide you with initial and continuing support;
- Ability to provide you and your management team with initial and continuing training;
- Willingness and proven ability to enforce standards throughout the system;
- A consistent and affordable source of supply; and
- Ability and wiliness to adapt and evolve the brand’s products and services to meet changing consumer demand and often within unique market requirements.
There are definite upsides to becoming a franchisee in a great franchise system, including:
- Obtaining a recognized brand consumers are already familiar with;
- A product and service that has already been proven and that has received high consumer acceptance;
- A proven operating system;
- Franchisor support and a network of other franchisees that can also give you advice and guidance;
- Experienced brand leadership;
- Initial and continuing support; and,
- An understanding of your initial investment so that you can be economically prepared to not only get into the business, but also have the resources to stay in the business until it begins to cash flow properly.
There are also some downsides to consider:
- Loss of independence and the inability to change products and services as you wish;
- Risk of bad performance by other franchisees or franchisor-owned locations that can impact the perception of your business;
- Risk of termination;
- Territorial restriction;
- Advertising and marketing restrictions;
- Limitations on whom you may be allowed to sell or transfer your business to; and
- Unrealistic expectations. You need to understand, before you become a franchisee, what the realistic financial performance of your business will be and whether or not it will meet your needs and expectations.
Ask yourself a few questions (Franchising for Dummies has many more):
1. Are you willing and able to learn new skills?
The first thing you are going to find out as a franchisee is that you have a lot to learn. The second thing you will discover is that, as the operating manager of your business, you are going to have to take on a multitude of roles, from trainer, to watchdog, to customer service, to financial advisor. The franchisor sets the brand standards, but they are not responsible for how your day-to-day business is run. It is a steep learning curve, but if you can master these new skills, you just might become a successful franchisee.
One of the most important aspects of any franchise relationship is the training that the franchisee (or operating manager of the location) is required to undergo before being allowed to open. Most franchise agreements include language that allows the franchisor to terminate the agreement if the franchisee or operating manager cannot pass the training course. Passing training is, of course, not a guarantee of success – but a good franchisor won’t allow a poorly trained franchisee to open up and operate their location. Part of the training is the concept of being able to put aside your own preconceived notions of how to run the business and instead comply with how the franchisor expects the business to be run. This leads us to our next question…
2. Would you rather give or take orders?
As a franchisee, you are chiefly agreeing to follow someone else’s operating system, often including specific requirements for what marketing materials to use, what suppliers you must work with, and what specific products or services you must offer. This, along with the licensing rights and restrictions on how you can use the franchisor’s intellectual property, is what you are investing in.
In exchange for this ready-made operating system, a franchisee will have to report their sales and expenses; follow instructions on how to present the products and services; and comply with the franchisor’s advertising requirements. Every day, week, month, and year, the franchisee will be following protocols set up by the franchisor. And if they fail to meet those brand standards, they risk being in breach of their franchise agreement.
If, as a creative thinker, you are used to developing your own path and are uneasy following someone else’s strategies, franchising may not be appropriate for you. This doesn’t mean you should turn your brain off and never look for ways to improve your operation within the franchisor’s system. Many of the major advances in well-developed franchise systems have come via recommendations from the franchisee level. Additionally, a good franchisee will always add their own personal skills and personality to the business, through their management of employees, or through the atmosphere they create for customers. It is simply important to recognize that consistency in the brand experience from location to location is key in a successful franchise.
3. Are you ready to move from big business to small business?
The former corporate middle manager who wants to be a franchisee is a unique breed. This person has a broad understanding of business, knows how to work within a system, knows how to motivate staff, certainly is no stranger to long hours, and now has the capital to make a franchise investment.
While in many ways becoming a franchisee of a major franchisor means stepping under the umbrella of a very large company, a franchisee is really a small business owner, and that means saying goodbye to many of the perks that come with being an employee of a larger company, such as retirement plans; stock ownership and option plans; paid sick days; paid vacation days; expense accounts; company cars; and health, vision, and dental insurance plans. The sign on the building might not say “Ted’s McDonald’s,” but in reality you are the boss, which means you’re no longer working for someone else, for better or worse.
Perhaps the biggest adjustment that former middle managers face as new franchisees is the loss of many of the support services they have grown accustomed to. Their assistant probably didn’t come with them when they left the 22nd floor. And the copy machines, filing systems, payroll clerks, legal department, computers, and travel services are probably also back at the office where they left them. Although they’re not in business by themselves, they may sometimes feel like they are.
Success is now measured each day in performance, rather than in how good a job your superiors feel that you’ve done. In other words, operating a franchised business requires more self-reliance than many middle managers have had to demonstrate. However, a well-structured franchised system will provide the support that can make the middle manager franchisee successful.
Take Your Time to Reach a Decision
If you are still unsure about whether becoming a franchisee is right for you, we encourage you to download the free Making the Franchise Decision Workbook from the MSA website. It will provide further guidance
and advice on the investigation and selection of a franchise that will
meet your needs and expectations.
Take your time, and don’t get caught up in the excitement of any one franchise offering. Do your homework, review the company’s disclosure document, speak with other franchisees (including franchisees that have left the system), and read every article and review you can find on the internet about the company and its industry. Most certainly, before you move forward with any franchisor, engage an experienced and qualified franchisee lawyer. Besides giving you the advice you need, they can also point out to you other opportunities you may not have yet become aware of.