I recently read that more than 75 percent of the population does not understand how franchising works. They fail to realize how franchisors and franchisees interact and the roles they play with each other. A big reason to invest in the franchise model is the built-in support that the franchisor provides on an ongoing basis. The brand must be strong, but if franchisees are left to “figure things out” on their own, it could make success that much more elusive.
In evaluating a brand, prospective franchisees must look further than royalty fees. Some concepts charge additional fees for the tools and services franchisees need to succeed, and these fees are often significant and an integral part of the franchisor’s revenue. Perform your due diligence before investing in any franchise to see exactly what you’re paying for—and what costs extra and why.
Tools for Success
Running a business requires operational tools, as well as tools to review your financial position. Franchisors should provide a POS system that gives franchisees the data they need to run the day-to-day operations of their business. Ascertain if the system is proprietary or off the shelf. Proprietary systems often offer much more flexibility. The franchisor should also provide financial tools, especially models that allow you to compare yourself to other franchisees on performance figures like sales and controllable costs, which will help you see where you need to improve.
The national advertising or marketing fund should support brand identity, as well as give franchisees the marketing tools they need to get the word out about their business. Most concepts should have a web program, email program, loyalty program, app and more. Some concepts go even further to provide tools like site analytics software, personality tests for hiring and digital training programs. These kinds of technologies are key to success, and part of the benefit of joining a franchise system is the franchisor’s investment in these business tools.
An example of Penn Station’s custom predictive site analytics software
Operational Support
Franchisor support should begin from the construction phase. Franchisors should be able to help with lease negotiations, finding architects and contractors and ensuring the buildout is completed in accordance to brand specifications. There should be policies and procedures in place to ensure construction is a smooth process.
After you’re open for business, the franchisor should provide operational support beyond just providing the tools your business needs. Many people buy a franchise so they don’t have to reinvent the wheel. A franchisor that has been in business for many years has already made mistakes, learned from them and identified the best policies and processes for success, which should be incorporated into a comprehensive operations manual.
Many concepts employ area representatives to consult and check on franchisees in person. While one to two visits per year is most common, some concepts, like Penn Station, provide at least six to eight visits per year. These corporate employees can evaluate how you’re performing against operational standards, giving you specific ways to improve to make more money. Penn Station uses a 1,000-point rating system to show franchisees exactly where to make changes.
The Intangibles
The franchisor you choose should care about your return on investment. Item 19 in the Franchise Disclosure Document (FDD) should provide financial statements and data as to how much franchisees actually earn annually. You should evaluate how detailed these disclosures are, how inclusive the Item 19 is and whether or not the franchisor has included all relevant data or only selected data to make the brand appear more successful than it actually is.
Cultural fit is as important when investing in a franchise as it is when accepting a traditional job. Sometimes the small things a franchisor does can make the biggest differences. For example, Penn Station has an open door policy, and franchisees often call me directly to talk about their issues. Franchisees love that they can reach the president easily, and I like to stay in touch with franchisees so I know their concerns and how they think. Assess not only this form of communication, but all forms of communication. Relationships often fail due to a lack of candid communication, so it’s important to know how, when and why the franchisor communicates with franchisees before you pay your franchise fee.
Beware of Nickel and Diming
You’re already paying royalties to your franchisor. You’re most likely also contributing to a national advertising or marketing fund. Those fees should cover the majority of the tools and services the franchisors provides, especially the ones that are required or critical to running your business. If a franchisor is charging for Intranet access, point-of-sales system access and more, make sure to consider that in your financial overview before you partner with the franchise. Many franchisors also take rebates as profits from vendors after negotiating contracts instead of passing a lower price on to franchisees. These things can increase your monthly burn and significantly counteract a seemingly low franchise fee or royalty rate.
Paying attention to the details is critical for success in franchising. Look for a franchisor that gives you the tools, knowledge and support you need to do so.