Franchising is essentially a method of business expansion. Franchisers license their know-how, procedures, intellectual property, the use of an established business model and rights to sell products and services to customers. This is what is referred to as the “franchise system”.
It’s important for franchisees to realise that it’s not a replacement for their own hard work, ingenuity and thought; rather it is simply a tested (hopefully) framework for a real business — your business. It will not run on its own, it is not immune to economic cycles and disruptive industry trends. Franchises won’t be successful without hard work and applied business acumen.
Very few countries have enacted “franchise-specific” laws that are designed to protect franchisees from unscrupulous franchisers. Where there are no franchise laws, business relationships are typically governed by commercial law, which does not afford franchisees with fundamental protection of ethical and professional behaviour by franchisers.
The relationship in this case is governed solely by commercial contracts that are often almost entirely dictated by franchisers and devoid of legal onus to the franchiser. The many recent discussions with candidate franchisees for our brands makes clear the cautionary tales of failed franchise relationships resulting in a loss of capital.
The food-tech digital revolution is rendering large established brands less relevant. Trends in health, sustainability, convenience and accessibility as well as the convergence of grocery store, meal plans, delivery and other disruptive forces are creating tectonic changes. The barriers to entry for would-be restaurateurs is arguably higher than ever, making a franchisee or franchiser choice even more important.
The online franchise brokerage industry is growing, but lacks regulation and scrutiny. Franchise brokers often work to help fledgling brands create an out-of-the box and lacklustre franchise system so that they can be packaged for sale to candidate franchisees. Brokers can make more fees by offering more brands to more people.
Anyone can go online, download franchise agreements, operating manual templates and other “paper” requirements that can be used to create the sense of depth and legitimacy. Franchise brokers often offer nascent brands these generic templates for a fee.
Today’s franchiser must be able to provide solutions to food quality, relevant and evolving menus, technology, food delivery, operating systems, training and development, reporting, corporate culture, brand values and relevance. It must have the resources to support all aspects.
‘Relationship is key’
A wise man once told me that when you are an operator, your customer is your client. When you are a franchiser, your customer is the franchisee, and you must organise yourself accordingly with each demanding different resources, attitude and structure.
The idea that you “sell” a franchise is in my view a complete misnomer and if presented with such an opportunity, franchisee candidates should run away. We do not believe in selling a franchise — we believe in building a franchise relationship.
The economics of franchising are by definition long-term. Franchisers typically receive an upfront territory/set-up fee followed by ongoing royalty and marketing fees that come as a percentage of gross sales. (Watch out for other built-in fees.)
The franchiser’s only real economic downside is damage to the brand created by a badly operated branded unit. If the brand owner does not care about this, then they accept all comers. Beware.
As a company that recently launched our own franchise programme, we believe the relationship is the key. Our objective is long-term. We value our company based on the strength of these relationships over time — which is predicated on ongoing hard work, brand evolution and support — and ultimately resulting in profitable businesses and sustainable revenues.
The character and alignment of culture and attitude with partners is of paramount importance.
(Ian Ohan is Chief Executive of Krush Brands that owns and operates Freedom Pizza and Coco Yogo.)