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Finding the right franchise structure

Guest post by: Simon H Lord

Article Overview: Getting your franchise structure right at the beginning is vital. One size doesn't fit all, so you should take advice to save yourself - and your franchisees - from future problems.

Finding the right franchise structure

One of the reasons that franchising has become so popular as a way of doing business is that it is so flexible. With variations, the franchise model has been applied to industries as different as fast food and building, hotels and home services. There is almost no industry, it sometimes seems, that a properly-developed franchise system cannot flourish in.

And yet while the failure rate for franchisees is commendably low compared to that of independent small businesses, the failure rate for franchisors is probably rather higher. Some newly-touted systems never get off the ground while others fail after just a few years.
Why should this be? Well, the reason franchising is so flexible is that it is highly adaptable. The original fast-food model of modern franchising has evolved into a large variety of structures and formats, each designed to suit a particular style of business. This means you need to do your homework. If you just copy something that seems to work for someone else, the chances are that you will pick the wrong structure.

Let’s take territories, for example. Every franchisee likes to feel that they have an exclusive territory within which they can market their business knowing they are free of competition from other franchisees within the same company. That seems only fair, doesn’t it? And it’s certainly a structure that their lawyers and accountants like. But how big should that territory be? What should it be based on – maps, malls or phone book areas, to name just three possibilities? Should it be capable of being divided or sub-franchised? Should there even be a territory at all? For the new franchisor, thinking through all these aspects is crucial to establishing a successful and sustainable business model both for the franchisor and the franchisee. Make the territories too small and the franchisee may never prosper. Make them too large and they may never exploit their territory properly, reducing franchisor income and leaving gaps for the competition to enter. In some cases, where referrals and networking are important ingredients, having a defined territory at all may damage franchisee growth.

Fee structures are another area where things regularly go wrong. Like territories, fees need to be carefully set. Initial franchise fees must be large enough to offset most of the franchisor’s costs in establishing a new franchisee (although even this is not fixed in stone) but small enough to be affordable. Ongoing fees or royalties must be large enough to provide the franchisor with the revenue required to fund their ongoing support services, but small enough to ensure that the franchisee can make an acceptable return on their investment. Many new franchisors don’t actually know what support they will be required to provide on an ongoing basis. Visiting the first four or five franchisees on a personal basis every few months is one thing: establishing a professional support office for fifty or more franchisees with staff, communications, travel and accommodation bills is a very different matter.

Then there is the issue of how the ongoing fees will be calculated. In some sectors, a flat weekly fee is the norm; in others, a percentage of turnover is more common. There may be a mark-up on products or services provided. Suppliers may pay a commission, or the franchisor may take the head lease on property and sub-lease to the franchisee at a profit. There may be additional fees for, say, national marketing or accounting services. All of these structures and more are in use and all of them are working for someone. But none of them is working for everyone – and that’s where the pitfalls lie for franchisors who don’t do their homework.

In mentioning just the areas above there are over 250 different combinations of structure and I have only scraped the tip of the iceberg. Structuring a franchise properly takes a great deal of research, care and experience, and the truth is that few business owners – no matter how well they run their existing business – have the breadth of knowledge necessary. Consequently, many new franchises find their early stages are typified by trial, error and luck both good and bad. It should be no surprise, then, that some new franchises fail to take off.

However, get it right and the rewards can be huge. Take care to think things through and to take advice. Talk to existing franchisors, use experienced consultants (and some have broader experience than others) and read widely. Make sure that you develop an approach and structure across all the key areas that works for your business and your franchisees. And remember – one size doesn’t fit all.

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Each Franchise is different! - No two franchises are alike. Build the fee structure that makes most sense for all parties involved, franchisor, franchisee, and vendors. Yes vendors, some franchises take the the % that vendors (for example coke and pepsi) give them and contribute those to the advertising fund. Many franchises don't manage the advertising fund by themselves but seek franchisees to have a say in how the money is spent, some times thru regional franchisee groups. Speak to a few of the franchise development companies (franchise mills) be careful for the fill in the blank, one size fits all franchise development companies, those companies seldom produce successful franchise systems.
Franchising vs. Licensing - While Ken's definition of a franchise is correct, I disagree with his statement that a franchise and a license can mean the same thing. A franchise [u:2pwsjr5r]contains [/u:2pwsjr5r]two licenses. A trademark license (the name and fee) and a business opportunity license (a system and a fee). The combination of those licenses in the same relationship creates a franchise. If you want to license a business opportunity, you need to tell your licensee that they [u:2pwsjr5r]cannot use your trademark[/u:2pwsjr5r]. If this is your growth strategy, you will neglect to build a brand. While that is not always important, it often is. We tell our clients not to think of whether a particular business relationship will be, but instead to structure the relationship the way it makes sense from a business perspective. If it then turns out to be a franchise or a license, then so be it. The difference in cost between the two forms of expansion, done properly, is not very signficant. If you are interested in learning more, I would be happy to send you a free copy of a one hour seminar on "How to Franchise a Business." It goes into some detail on this topic. You can write to the email below or get it on my website.
Hello I am a franchise expert - Hello, I recruit franchise owners for successful franchise concepts based in the USA. Many of my franchises are looking to expand north to Canada in all major centers. I enjoy networking and answering questions about franchising. If anyone is interested in the franchise world or looking to buy a franchise then contact me. I have a wealth of information and like to help. Thanks for your time. Michael Somer
Re: Franchising Brokers vs Franchising Consultants - Franchise consultants are free and work with you without any obligation. they do not work for any one franchise but do get a percentage of the franchise fee when a franchisee that was registered with the franchise came from the consultant and the franchisee signs. They will try to match up your interests and skills to franchise businesses that are right for you. They can explain franchise guidelines and help you in any way they can. Franchise brokers usually get paid by the client and/ or franchise (generally get some type of commission). Additionally, they can get points or referral fee off the deal if they refer you to a lending resource too after they sell you on a franchise. Typcally they will try to sell a prospective franchisee on a larger deal so they get a larger commission.
Re: Which franchise would you buy? - The franchise to buy, the one that will succeed is the one that is either underrepresented or not represented in the community. Look at your community, identify what service is missing. That is the franchise to pursue. Too many people buy a franchise based on their "heart". A franchise is a "widget". I have found that once people began to investigate a franchise they had never thought of, but find their is a need; the entrepreneurial "gene" kicks in and they get excited. They began seeing the possibilities of success, and as they uncover the nuances of the franchise, they become more interested. It is the uninformed that are uninspired.


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