Chapter 8-10
.pdf
School
Central Philippine University - Jaro, Iloilo City**We aren't endorsed by this school
Course
COLLEGE OF 1231-1235
Subject
Management
Date
Dec 18, 2024
Pages
44
Uploaded by DrRiver15872
Chapter 8 Franchisor Support and Services In Chapter 7, we presented the components of franchise development and how to recruit, qualify, and engage franchise prospects to complete a franchise transaction. After the franchise agreement is signed and the initial franchise fee paid, the contractual relationship between the fran-chisor and franchisee begins. To facilitate the symbiotic relationship between franchisees and franchisors, this chapter illustrates the important toolset, i.e., the fran-chisor support and services, created by franchisors to better guide and develop their franchisees as it would make the difference between a successful or unsuccessful franchise program. Franchisor support con-sists of the contractual obligations that franchisors must provide to its franchisees while franchisor services are programs that can facilitate a more successful franchise operation. Although both parties have speciFc obligations intended to achieve a successful operation, franchisor support and services is the most im-portant obligation. Because most new franchisees are inexperienced and have not developed an understanding of their roles and tasks in the franchise system, they depend heavily on their franchisors’ guidance, and welcome their advice.1 Franchisor support includes franchisee training, startup and ongoing franchisee support, speciFc services, and marketing programs that can help franchisees generate additional revenues and proFts. Franchisor services consists of various items which typically include outside IT support, product discounts, supplier purchase discounts, payroll pro-cessing, and human resource support. We elaborate the most important components of franchisor support and how these contribute to a suc-cessful franchise program. We conclude with a discussion on how to monitor franchisee performance using key performance indicators (KPIs) to ascertain how franchisees are performing and which franchisees may require franchisor advice and assistance. DOI: 10.4324/9781003034285-8
The Importance of Franchisor Support As presented earlier, franchise support consists of those contractual obligations that the franchisor is required to provide its franchisees. These items can include site location visits, training, marketing assis-tance, and marketing programs. Some franchisor support activities may be stated as optional in the franchise agreement. It is important for franchisors to recognize the value of franchisor support and how it can facilitate the franchise development process. People invest in a franchise to build and operate their own business with the expectation that franchisors would provide the training, support, and structure needed to successfully operate their business. The expertise and ex-perience of a franchisor is part of the value that franchisees expect to receive. When a franchisor fails to fulFl the expectations of its fran-chisee, it can result in various negative consequences. When a franchisor fails to properly support its franchisees, it can leave some franchises adrift which can lead to mediocre or poor franchise performance. In addition, insufFcient franchisor support can prompt a franchisee to request additional operational assistance which would place an additional burden on franchisor resources, that could result in a lack of overall franchisee support.2 Such a lack of support could result in the failure of franchisees. Given franchise prospects seek positive validation from existing franchisees, the frequent dissatisfac-tion or even failures of franchisees could lead to serious litigation and make it difFcult to convince future franchise prospects to invest in the franchise. Appropriate franchisor support is needed to ensure that franchisees would have sufFcient resources to manage a successful franchise unit. Each component of franchisor support is individually and collectively important. Based on our experience, we have found that the most suc-cessful franchise brands deliver substantial franchisee support for all components of franchise operations. This pattern is also observed from a report from Franchise Business Review and InGage Consulting, illus-trating the impacts of these franchisor service and support engagements being material and quantiFable. With a sample of 300 brands and 24,000 participants, this study found that franchisees that receive sup-port and are engaged with franchisees are 3.7 times more proFtable than franchisees that do not receive active support.3 Next, we discuss several key components that are required to grow a new franchisee unit into a successful one. These components include pre- opening assistance, franchise opening assistance, marketing programs, operational support, measuring franchisee Fnancial performance, and franchisee counselling. 122 Franchisor Support and Services
Pre-opening Assistance Pre-opening assistance refers to a set of franchisor activities that will effectively prepare a franchisee for launching their new franchise busi-ness. This assistance typically includes site-selection assistance, fran-chisee training, and franchisor services. The pre-opening assistance is important because it would prepare the franchisee for Fnding the right location, understanding the fundamentals of franchise operations, and arranging for the operational services that the franchisor provides. When a franchisor does not provide adequate pre-opening assistance, a franchisee often makes biased decisions. that could impair the performance of its franchise operation. For example, signing a lease for a location that has not been properly evaluated and approved by the franchisor can have negative consequences. These can include poor sales which can result in signiFcant operating losses. If a franchisor does not provide the franchisee the appropriate support re-garding recruiting and hiring the right employees, it can negatively im-pact the franchise operation. Site Selection Assistance While a small unique type of franchises may use a homebased operation, most franchisees will need to Fnd a location to operate their franchise. Site selection assistance is franchisor provided guidance that helps a franchisee identify and lease the most desirable franchise location. The right franchisee location can be critical to the success of many franchise concepts and for promoting the franchise brand. This is especially true for franchise concepts such as retail and food franchises, compared to a nonretail concept such as homecare or business services. When a franchise operates from a poor location due to poor trafFc fiow, ingress or egress, its potential franchises revenues and earnings could be decreased. A poorly selected location often led to the closure of a franchise unit, either because of a franchisee’s self- abandonment or the franchisor-initiated termination. Such closure could harm the franchise development program as future franchise prospects might equate a closed location to a poor franchise investment opportunity. Site selection can include the services of a site selection Frm, a de-mographic site selection software, or a national or local real estate company to Fnd the most suitable available site for their franchisee. Some franchisors prefer to Fnd and develop a site, which they will then lease to their franchisee. While most franchisees execute the site lease themselves, some franchisors have a different approach. When Christian Brothers Automotive, a franchise business that offers automotive repair and service products, looks for a site to present to the new franchisee for Franchisor Support and Services 123
approval, it considers certain factors including customer demographics, access, trafFc, competition, natural and man-made boundaries, and potential customer base. Once the site has been approved by a fran-chisee, Christian Brothers will purchase the site and construct the building to be leased to the franchisee. When a franchise prospect has a location in mind before signing the franchise agreement, they must request prior approval from the fran-chisor before completing the transaction. This prevents both parties from making a major commitment before the franchise transaction is com-pleted. Except for most home-based franchises, franchisors will retain the right to approve a location before the franchisee executes the lease. A typical franchisor site selection process is used by Ben’s Barkek Place, in Roseville, California, which franchises retail health food pet stores that sell pet food, toys and related products. They provide site selection guidelines and other location advice and require their franchisees to Fnd and select the site for a location within their territory, subject to fran-chisor approval. As discussed in Chapter 5, the Franchise Operations Manual will in-clude a chapter that provides guidance on franchise site selection and development. It should include important features of the site such as ease of access, available parking, trafFc fiow, existing businesses, and other features. There should be several alternative plans for building conFg-urations, equipment, decor, and signage. Once the site is approved and before any construction or modiFcations are started, a copy of the blueprints and scope of work should be sent to the franchisor for ap-proval. After approval, the franchisor should be available and prepared to help once work has started on the new location and be responsive to emails and telephone calls from the franchisee because site renovations could be delayed until questions are answered. Franchisee Training For franchisees to reproduce a successful business model in multiple lo-cations, the franchisor is required to provide its franchisees the knowledge, skills, and ability to operate a franchise business.4 Franchisee training is an important component of franchisor support. When franchisees are poorly trained, they may not be prepared to properly staff, open and operate their new franchise, potentially resulting in business unit failure, lengthy liti-gation, and severe damage to the franchise brand. Quality training is so essential, the training schedule, agenda, name, and title of presenters must be disclosed in the Franchise Disclosure Document under Item 11. A survey of Millennials and younger workers by Accel in 2018 in-dicated that training is a major priority when that group is looking for employment. As this group represents the largest number of franchise 124 Franchisor Support and Services
employees, franchisors should formulate training as a top priority.5 This strategy can enhance franchisee recruitment and improve employee performance. Depending upon the complexity of the franchise operation and type of franchise business model, the training program can range from 1 to 6 weeks or longer. Training can take place at the franchisor’s corporate ofFce and can include onsite training at a company or franchise location. The training agenda should include presenters that are knowledgeable about a speciFc component of franchise operations, including marketing, product purchasing, and day-to-day franchise operations. It is beneFcial to include franchisor staff who will interact with franchisees because they can bring their experience to the training program. Some training programs are done in two segments: the Frst segment before a location is approved and prepared, and the second segment before the new franchise opening. This type of training schedule is frequently used in the franchise food sector. Kelly’s franchise based in Saugus, Massachusetts, is a new casual fast-food franchise that has been operating independently since 1951. Its training program is comprehensive, con-sisting of 12 weeks of training for the franchise owner at Kelly’s corporate headquarters and 8 weeks of training for management staff. A well-structured training program must be designed so that a new franchisee is able to complete their training with enough knowledge to staff and prepare their new franchise for the opening. Follow-up training and support should continue as the franchisee is preparing to launch their new location. The timing of training is important, if training is done too far in advance of the new opening the participants might not retain all the information they were taught. Some franchisors provide training while the site is under construction while others train before the site is identiFed. From time to time, a franchisor may provide training to introduce new products, services, marketing programs, or franchise operating proce-dures. Given the beneFts of technology, training can be provided in several ways from a virtual setting, webinar or at a conference or annual meeting. Despite their various setups and structures, these training programs often include the following assortment of topics: i Business management topics aim to provide franchisees the basic knowledge and skills to manage their business units. It could cover leadership skills, motivation techniques, and other important man-agement toolset. iiFranchise operating procedures will provide franchisees both de-clarative and procedural knowledge on the operation of their franchise and the corresponding requirements. Franchisees need to understand and follow the proper procedures when operating their Franchisor Support and Services 125
franchise, so the overall franchise system could maintain a consistent brand image and product quality for its franchise customers. iii Human resource management is an important training segment that can ensure that franchisees will have a basic understanding of how to effectively obtain, allocate, and manage their human resources to effectively improve franchise performance. It provides guidelines on various employee-related issues, such as job descriptions for various position, the recruitment and selection of employees, and perfor-mance evaluation and management. iv Franchise-speciFc marketing information will provide the franchisee with the product or service knowledge that will acquaint them with a keen understanding of the franchisee’s customer offering. This can include, but would not be limited to, franchisees in the food business, residential and commercial services, home care, business services or retail products and fast food. v Marketing aims to cover the foundation techniques and tools to help franchisees to communicate and engage their target customers to create and capture values. Some common topics include sample franchisor ads, product placement and layouts in the case of retail franchises, competition analysis, and pricing strategies. vi Financial Management enable franchisees to better understand the allocation and management of Fnancial resources relevant to the speciFc business activities of their franchise units. It includes the required Fnancial reports for franchisors and often highlights the Fnancial obligations of the franchisees, such as the amount and frequency of royalty and advertising fund payments. It often speciFes bookkeeping software programs that a franchisee may be required to use. Operational Services In addition to franchisor support, franchisors frequently provide various operational services that enhance franchisees’ ability to manage and operate their franchise unit. These operational services include payroll services, vendor purchase discounts, accounting, HR and IT support. Operational services are important as these could assist in franchise growth as it can allow franchisees to focus on their new franchise op-eration. These operational services can be an attractive feature that may appeal to prospective franchisees who are considering investing in the franchise. The scope of these services can differ depending upon the type of franchise business, franchise operating system, and projected system growth. Franchisors that operate franchises that employ more than several people can provide payroll processing by contracting at lower 126 Franchisor Support and Services
fees with a payroll processing company such as ADP or Paychex. This enables a franchisee to process payroll, have withholdings made and produce payroll checks more efFciently and at less cost compared to doing it themselves. Franchisors in the food sector will specify required suppliers that provide franchisees quality products at reduced costs. Franchises in the commercial maintenance category such as ServePro a large residential and commercial franchisor will usually provide their franchisees with pre-packaged client service accounts that are pre-sold. This enables a franchisee to have ready business. As a franchise system continues to grow, the franchisor can arrange for franchise purchase discounts from speciFc suppliers of required products, equipment, services, and supplies. For example, some fran-chisors might arrange for IT support, equipment, and accounting soft-ware to be purchased by franchisees from vendors at a discount. First Light Homecare, based in Cincinnati, Ohio, franchises homecare ser-vices. First Light provides its franchisees software for client scheduling services, accounting services and intranet access that supports their First Light homecare business. This enables their franchises to focus addi-tional time on marketing their services and recruiting caregivers. Franchisors may arrange for a third party to process payroll and perform mandatory withholdings and payments. SurePayroll, a division of Paychex, provides large and small franchises a Franchise Management Portal. Their portal enables franchises to easily process their payroll and will pay and Fle federal, state and local payroll taxes for the franchisee. SurePayroll cites their ability to free up valuable time for small franchise operations. The Franchise Opening A franchise opening consists of those activities that enable a franchisee to effectively introduce the new franchise unit to the media and public in the targeted franchise territory. The franchise opening is important as it represents the beginning of the franchisee’s responsibility for managing their new franchise. It also serves as the beginning of the active franchisor–franchise relationship. The activities leading up to this point were preparatory in nature and did not require the franchisee to generate on-going revenues and expenses. Once the franchise is open and oper-ating, the franchisee will expend capital until the franchise achieves break even and then proFtability. Executing a successful franchise opening can mean the difference be-tween achieving franchisee Fnancial goals or having the Fnancial goals fall short. To a new franchisee preparing to startup, nothing can be more frustrating when they request assistance from their franchisor, and it’s not provided in a timely fashion. As the Frst author who has participated Franchisor Support and Services 127
in and attended numerous franchise openings, I have observed how a successful franchise opening could generate enthusiasm and instill con-Fdence for both franchisees and franchisors. A successful franchise opening would translate to a positive customer experience because the franchisee and their employees will exhibit a positive and welcoming attitude, attracting more potential customers. For the franchisor, it could also result in a positive recommendation regarding the franchise pro-gram from the franchisee to subsequent franchise candidates. Because of the importance of successful grand openings, savvy fran-chisors carefully design their grand opening program. They aim to create attention to the new franchise, generate consumer trafFc, and provide a successful launch of the franchise. Creating attention to a new franchise opening can provide other beneFts such as attracting potential employees and individuals who might be interested in a franchise opportunity in another market. While some franchisors will fund a portion of the grand opening, others may require the franchisee to expend a minimum amount on grand opening advertising and price promotions. The grand opening program usually consists of invitations to local business and political leaders, a ribbon cutting, and special product promotions. The franchise opening offers franchisors and franchisee representatives an opportunity to meet special visitors and engage with the public. The franchisees, their employees, franchisor CEO, and franchisor staff should be in attendance and play active roles interacting with potential customers. While the franchisees are often an active member of the local community, local business and political leaders should be invited to help attract added attention to the event. The opening of a new franchise business is an opportunity for these stakeholders to be recognized and connected with franchisees and franchisors. It is also important to ensure that photographer and videographer are hired to record the grand opening for local media because they can help to generate publicity for the franchise. Except for smaller communities, onsite media coverage is usually reserved for franchises with strong branding such as a McDonald’s or Chick-Fil-a or a franchise hotel chain. Each of which hire a signiFcant number of employees which is newsworthy. Ribbon and Commemorative Scissors should be available for performing and re-cording the ribbon cutting ceremony. During grand openings, one of the most effective ways to generate attention and consumer interest is through special product promotions. Various franchises offer different promotions. For example, product coupons can be provided to visitors to the grand opening who will be the Frst franchise customers. The coupons should offer substantial savings and be redeemable for a speciFc period. Some franchises offer 2–4 weeks of coupons. Certain businesses such as a home remodeling franchise that provide services or other types of service may hand out a certiFcate that 128 Franchisor Support and Services
provides a discount off services. Others, such as a franchise that provides residential home services like bathroom or kitchen remodeling could offer major discounts off the cost of a speciFc project while a homecare franchise may offer several hours of homecare services at a reduced cost for the Frst 30 days. An example of an effective franchise grand opening program is how Chick-Fil-a promotes new franchise openings by featuring numerous specials and price promotions using direct mail and print media for several weeks. Some franchises distribute children’s handouts for franchises have children as potential customers. This is especially appropriate for fast food franchisees that serve families. Franchisees also hand out key chains or other in-expensive gifts with the franchise logo and address. Franchisors in the food and retail sector often use a “soft opening” for several weeks, prior to a grand opening. A “soft opening” enables a franchisor to train and provide support to the new franchisee and help Fne-tune the franchise operation before conducting a full-blown grand opening program. This strategy can produce a trouble-free grand opening. Grand opening services are usually large scale for highly recognized franchises, such as quick-service restaurant brands such as McDonald’s and KFC. Their grand opening programs often include press releases and direct mail to potential customers that feature special price promotions. Conversely, franchises in the commercial, residential, and personal services category may have a modest onsite grand opening and unveil the grand opening with a campaign of direct mail, print, and electronic advertising. After the franchise opening when the new franchise unit is up and running, franchisor staff should remain in contact with the franchisee for several weeks to ensure that the franchise is operating to their satisfac-tion and expectations. It is not unusual for some franchisees to be re-luctant to contact their franchisor representative after the onsite grand- opening support has ended, the franchisor representative should take the initiative and contact the franchisee to ensure there are no unresolved problems. In fact, some franchisors provide post-grand opening assis-tance for several days or longer. The Huddle House based in Atlanta; Georgia has 400 locations that offer a Southern type of diner menu. It provides two to three weeks of pre-opening and post-opening assistance to its new franchisees. This type of onsite support is important because the franchisee will be operating their franchise for the Frst time. In some instances, a franchisor will assign a person to prepare the new owner for its grand opening and remain onsite during and after the grand opening. Franchise Marketing Another key component of franchisor support is the marketing and advertising assistance that franchisors can provide. Franchise marketing Franchisor Support and Services 129
consists of the advertising, promotional, and marketing programs that enable franchisees to build strong relationships with their potential customers and generate consumer interest to purchase the franchisees products or services. Marketing is a key activity and integral component of the franchise business model because it can result in positive franchise branding enabling franchisees to increase their exposure, which in turn can lead to increased revenues. Marketing support is one of the main reasons why individuals invest in a franchise, because they can take advantage of the exposure, branding, and marketing support that a franchisor can provide. Although certain franchisors may provide limited marketing support most agree to provide some marketing services. When franchisors fail to fulFll their marketing obligations and leave their franchisees responsible for promoting their own franchise units, it could impact franchisee per-formance. This can include dissatisFed franchisees and lower franchise sales. Also, franchisors that fail to provide adequate marketing support on behalf of their franchisees can suppress franchise brand awareness for the overall system. Next, we highlight important components of franchise marketing assistance that franchisors should focus on. Implementing Marketing Programs Franchise marketing program consists of both regional and national advertising activities intended to promote the franchise brand and increase consumer awareness in the local franchisee market. It often features major franchise products or services by utilizing effective ad-vertising vehicles and has been considered as the most productive ways to promote franchise brand awareness. Franchisors should follow three steps when launching its franchise marketing program. The Frst step is to provide marketing materials, consisting of advertising brochures and ad slicks for print advertising. Many franchisors provide these materials in a franchise start-up kit be-fore the franchisee opens their new franchise. The second step is to identify those promotional items that will appeal to consumers in the target market to generate added revenues while preserving franchisee gross margin dollars. The last step is to measure the Fnancial results of advertising programs to identify their effectiveness in generating addi-tional revenues. As part of this process, it is important to solicit fran-chisee feedback to determine their satisfaction with franchise marketing program. As a franchise system grows, marketing activities will become more sophisticated and complex, prompting franchisors to include franchisees in a marketing committee to gain their insights and support for their advertising programs. 130 Franchisor Support and Services
Franchisee Advertising Funding Franchisors often administer an advertising fund that receives Fnancial funds from its franchisees. This fund is in a segregated account separate from any royalty or other franchisee payments. The monies can be spent on local, regional, or national advertising activities. The use of advertising funds is important because they can be used on behalf of an entire fran-chise system or for targeted markets. Advertising funds enable franchisors to leverage advertising monies more efFciently than an individual fran-chisee. Once a certain amount of money in an advertising fund has been accumulated, franchisors usually establish an advertising committee, comprised of franchisor and franchisee representatives to effectively utilize advertising fund based upon a consensus of both parties. The amount a franchisee contributes to an advertising fund is usually calculated as a percent of franchisee revenues ranging from 2% to 4% or in some cases a Fxed dollar amount. For example, Property Stewards, a franchisor located just north of Atlanta, Georgia, manages and main-tains vacation homes for clients, and has required its franchisees to contribute from 0% to 2% of monthly revenues to the national adver-tising fund. Large franchise brands can have millions of dollars in their advertising fund, which allows them to aggressively promote its franchise locations and brand. For example, a national franchise brand could utilize its national advertising fund to pay for the high cost for a Super Bowl commercial. There have been several highly publicized lawsuits between franchisees and franchisors that involved the use of advertising funds. Burger King, KFC, Subway, and McDonald’s are franchise brands that encountered major pushback from its franchisees regarding the appli-cation of advertising funds. It’s not unusual for a startup franchisor to defer contributions to the advertising fund until they have a minimum number of franchisees, such as Fve or more. Some startup franchisors would defer franchisee con-tributions to the advertising fund until there are a minimum number of locations, for example, 10 or more. The franchisor is obligated to keep the funds in a separate account and may be required to provide its franchisees an accounting of the fund upon request from franchisees or on an annual basis. In addition to an advertising fund, franchisees are usually required to spend a minimum Fxed dollar amount each month for advertising in their territory. This amount can range from $1,000 to $4,000 or more depending upon the type of franchise. Franchisees must document for the franchisor how much they spent on local advertising for each month and may be allowed to make a deFcit spend in 1 month by exceeding the requirement in the following month. Franchisor Support and Services 131
Franchisor Pricing: Mandated versus Suggested Retail Prices In terms of pricing, there are two main strategies that franchisors can employ regarding the price of products or services. One is mandated pricing, i.e., the practice of a franchisor requiring its franchisees to charge speciFc prices for products or services. Unlike employing this practice for company-owned locations, mandated pricing for franchisees can create major problems for franchisors because this practice may violate various federal and state statutes regarding allegations of price Fxing, unfair competitive practices and legal challenges from franchisees that could end up in the courts. The other strategy is the use of suggested retail pricing (SRP). SRP is the most prevalent approach in franchising and refers to a franchisor providing prices that a franchisee may charge but is not required to. Franchisors often specify these suggested prices in the franchise operations manual and in various franchisor communications. Franchisors must exercise caution regarding franchisee pricing. Although franchisor and franchisee mar-keting use promotional pricing in its advertising, franchisor pricing regimes should consist of SRPs rather than mandating prices for its franchisees. A common phase included in franchisor generated price promotion adver-tising is “At Participating Locations,” which alleviates a franchisee from being required to participate in promotional pricing campaigns while providing notice to the customer. Despite some highly publicized disputes regarding certain franchisor promotional price advertising programs, in-volving Burger King, Subway, and KFC, most franchisees actively parti-cipate in franchisor price promotions without complaint. Franchisor National Account Programs A National Account (NA) program is a marketing strategy employed by franchisors to provide speciFc clients or customers beneFcial pricing when purchasing franchise products or services from a franchisee or franchisor company location. An NA is important because it can provide franchisees with a pre-sold customer in their territory. Although there are price discounts granted to the NA, which can lower franchisee margins, an NA can be beneFcial for the franchisor and its franchisees because it’s a source of revenues that do not require extensive sales ac-tivities. The established business from an NA program can be an at-tractive feature of a franchise program and can be valuable when recruiting and signing new franchisees. Thus, as the number of franchise locations grows, the franchisor may consider establishing a NA program. A franchisor will require a minimum number of locations to attract a potential NA customer. However, it is not necessary that the NA company be national in scope 132 Franchisor Support and Services
because it could have ofFces or business locations in a state or geo-graphic region where there are franchisees. In most NA programs, the franchisor has the exclusive right to negotiate and enter into an agree-ment to provide products or services to a company and will have the option to provide its franchisees the right to service the National Account customer. If the National Account is in a franchisee territory, most franchisors will provide the franchisee the opportunity to service that account. However, if the franchisee declines or is not qualiFed, most franchisors will retain the right to delegate the business to another franchisee or can choose to service it themselves. Examples of franchise services that could appeal to a potential NA customer may include maintenance, commercial, and sanitation services for property management Frms, homecare franchises could establish a NA with health insurance providers and senior retirement communities and franchise Ftness and gym memberships could be a perk provided by companies to their employees. JAN-PRO which is a large international commercial cleaning franchise based in Alpharetta, Georgia, has National Accounts throughout the United States with commercial building management companies. Its National Account Program features a National Account Manager, consolidated billing, Fnancial reporting and franchisee access for service issues and requests. Franchisor CertaPro Painters provides painting services to multi-site Kindergarten, Tutoring, and Brick and Mortar Colleges and Universities accounts. As the Frst author, I worked for a franchisor that had NA customers that included McDonald’s and Carrol Corporation the largest Burger King franchisee. These NAs added prestige to the franchisors brand and provided added revenue opportunities for our franchisees. Government Contracts Another important part of marketing programs is government contracts, i.e., agreements between Federal, state or local governments and non-government entities that allow the government to purchase products or services from a non-government entity. Government contracts are an important way for generating revenues and are frequently used by healthcare and medical stafFng franchises. A number of personnel and temporary employee stafFng franchises also use government contracting programs for their franchisees. Other government contracts are also available for a wide range of products and services that both local and federal government agencies may utilize. Some franchisors choose to contract with local, state, or Federal government agencies that enables the franchisor and its franchisees to provide products or services to the contracting entity. To secure a gov-ernment contract, a franchise or business must be a recognized business Franchisor Support and Services 133
by the government which allows them to bid and compete for govern-ment contracts by submitting a business proposal for the execution of work, delivery dates, and other requirements. The Small Business Administration provides a menu of services that provides guidance on bidding for government contracts. The SBA web-site states that it works with federal agencies to award twenty-three percent of prime government contract dollars to eligible small businesses. It also offers counseling and help to small business contractors and disadvantaged businesses may beneFt from participating in the SBA 8(a) business development and mentor program for minority and dis-advantaged small businesses that provides training and resources to help participating businesses compete in the federal contracting marketplace. National Account and government contracts can provide Fnancial ben-eFts for franchises, providing there are the available resources to apply for and administer the contracts. An example of how franchisors utilize government contracts to attract franchisees is Pestmaster Services. It is a franchisor based in Bishop, California with franchises locations throughout the United States. It provides vegetation management, mosquito control, and traditional pest control services. Its franchisee recruitment advertising informs potential franchisees they could provide services under a government contract. Franchisor Operations Support Franchisor operations support and evaluations are the various activity’s franchisor staff engages in to provide franchisees the ability to enhance or improve its franchise operation and Fnancial performance. It includes processes that can support and improve franchisee operations, evaluate franchisee Fnancial performance and assess franchisee compliance with franchise operating standards. These activities are important because as franchisor staff interact with franchisees, they will be able to learn how franchisees are performing, obtain information on competitors, and learn if a franchisee may require special assistance. Next, we describe three main components of franchise operation support: Franchise Site Visit, Franchisor Operations Representative, and Key Performance Indicators. Franchise Site Visit A franchisor site visit often involves a physical visit by a franchisor or representative to a franchisee operating location to gauge franchisee compliance. It is useful for obtaining market intelligence, feedback re-garding competitors, marketing programs, and products. Its importance is illustrated by a recent survey, highlighting that 72% of franchisees did not think their Feld consultants spend enough time in the Feld visiting 134 Franchisor Support and Services
franchise units.6 These site visits offer signiFcant beneFts for both par-ties. For example, the franchisor representative can provide the fran-chisee an assessment of their location appearance, product presentation, discuss current challenges the franchisee may be encountering and the competitive environment in the franchisee marketing area. The fran-chisee and franchisor can beneFt from the personal interactions that provide each party what they expect from the site visits. It’s also an opportunity to communicate with each other face-to-face which is more effective than emails or the telephone. Although site-visits are the most effective method of interaction, there are franchise brands, such as most homebased franchises, residential remodeling services, and business coaching franchises, that do not require site-visits. The Franchisor Field Representative Providing franchisor visits is the franchisor representative, also known as a regional director, Feld consultant or franchisee consultant. This position aims to support, advise, and audit the assigned franchisees. Franchisor Operations representatives play a signiFcant role in franchise organiza-tions as they are constantly monitoring and managing the performances of their assigned franchisees. Typically, a franchisor representatives may be assigned to 15 or more franchise locations, depending upon the type of franchise. Their responsibilities can include visiting franchise locations, inspecting the location for franchise system compliance, discussing fran-chise performance results with the franchisee and providing suggestions to improve the franchise operation. The most important time for the Frst franchise site visit is during 1–2 months after opening or earlier. This is when the franchisee is enthusiastic about their new business coupled with high expectations and a willingness to work long hours to build a successful franchise. If the new franchise operation falters during this critical start-up phase, it could harm the franchisees conFdence and jeopardize the future success of the franchise as a result. A franchisor that reviews and nurtures the performance of its new franchisees can contribute to a successful franchise network. Franchisor Feld staff can visit their franchisees on a schedule that can range from every 2 weeks to once per month or quarterly. In less com-plex and home-based franchise systems not frequented by customers, such as residential remodeling and cleaning services a franchisor re-presentative may visit the location once or twice per year or upon the request of the franchisee. As the Frst author, my regional directors were the most important resources I had. They provided me important fran-chise information and could be used to gather vital intelligence ranging from identifying the most successful franchise operations and signs of franchisee unrest to new competitor information. Franchisor Support and Services 135
The beneFts from face-to-face contact are more effective compared to the use of email or a telephone conversation. Franchisor representatives need to keep in mind that a franchisee is not an employee of the fran-chisor and as such should be treated with a degree of respect in view of their contractual relationship with the franchisor and the franchisee’s local knowledge of their marketplace. This means using a more con-sultative approach rather than a supervisory role used in company- owned operations. As a person invests in a franchise to capitalize on the knowledge and experience, the franchisor has acquired franchisees will expect that franchisor staff will interface with them and have competent staff to share franchisor knowledge. From a franchisee perspective, a visit from a franchisor representative is usually welcomed because it enables the franchisee to provide feedback on their operation, learn about the performance of other franchisees and obtain advice and assistance if needed. It is important that a start-up franchisor makes more frequent contact and visits during the Frst year it is in operation. When a franchisee requests assistance from its franchisor regarding an operational or Fnancial issue, it is important that the franchisor responds promptly to the request. To help establish a business relationship, they can build a rapport with their franchisees and become familiar with individual franchisee and their operation. These tasks enable Feld representatives to develop in- depth knowledge on why some franchisees are more successful than others. These Fndings should be documented with any recommendations provided to the franchisees and franchisors. This should include, where necessary, a plan of action that the franchise should implement. Some franchisees use a checklist or other form for documenting the results of the site visit. As indicated at the beginning of this chapter, one of the leading causes of franchisee dissatisfaction is a lack of franchisor support. Because this can sometimes lead to disputes and litigation between the parties, the importance of proper franchisor documentation in the relationship be-tween a franchisor and its franchisees cannot be over emphasized. Proper franchisor documentation can motivate a franchisee to take corrective action and may discourage a franchisee from escalating an issue into litigation. Finally, the availability of accurate and available doc-umentation can result in exonerating franchisors unfairly accused of failing to support a franchisee. It can be challenging for a franchisor representative to address a franchisee’s operating and performance deFciencies because franchisees will have more knowledge about their individual franchise business than the representative assigned to support them. To accomplish these, we next discuss how franchisors should use KPIs to acquire key operating data to track and improve franchisee performance. 136 Franchisor Support and Services
Key Performance Indicators Managing franchise Fnancial performance is a process that includes the gathering of individual franchise Fnancial data, analyzing the data, and identifying the performance results to determine how each franchisee and the overall franchise system is performing. It is an important process for building a successful franchise program. When a franchisor acquires key franchisee Fnancial data, it can be used to ascertain the operational and Fnancial performance of individual franchisees and the overall franchise system. This information enables franchisors to compare franchisee and franchise system performance and identify any deviations. To manage franchisee Fnancial performance, franchisors often utilize KPIs to capture speciFc Fnancial data submitted by each franchise. The corresponding monthly report is an effective method to measure fran-chisee operational and Fnancial performance. This process can serve as an early warning system to identify franchises that are under performing. KPIs help to maintain operating standards and identify franchisees who are not meeting important goals.7 Following are KPIs that franchises use: i Gross Sales is one of the fundamental measures of franchisee performance. It is also used to calculate franchisee royalty payments and other fees like advertising fund payments. Franchisors often use gross sales to rank franchisee performance. This indicator provides information on how much sales a franchise location is generating which would allow for comparisons among franchise locations. ii Monthly sales growth by percent enables the franchisor to identify and compare the rate of sales growth or decline among franchisees and a way to rank franchisee sales growth into quartiles. This information can be used to diagnose why some franchisees perform better than others. iii Franchisee monthly gross margin percent and dollars are metrics that indicates the gross margins that each franchisee is achieving. As gross margin dollars pay the expenses, this data can be used to analyze why some franchisees have higher gross margin dollars than others. In some cases, it could be type of products or services that a franchise customers purchase. iv Franchisee proFtability is an important KPI used to identify which franchisees are proFtable and those who may be losing money. Like other KPIs, these data can be ranked, and certain franchise operations diagnosed to identify why some franchisees are more proFtable than others. The usage of KPIs can vary depending upon the type of franchise. For example, a report by Franconnect illustrates that certain KPIs that are Franchisor Support and Services 137
mainly useful for franchise food concepts. For example, Speed of Service which is (Food Order Time) minus (Food Delivery Time) is a good metric for time-starved customers and does not require any new data points. A Point-of-Sale register used to record customer purchases can be used to automatically measure the time the customer walks in or drives up to a restaurant to the time when the food is delivered to them based on your kitchen display system.8 Using KPIs is an efFcient way to evaluate and compare franchisee F-nancial performance. This is easier and timelier than extracting this in-formation from franchisee quarterly Fnancial statements. Franchisors should implement the required technology to pull KPI franchise data from their franchisees to provide franchise decision-makers the in-formation they need more quickly.9 Summary Franchisor support is one of the most important services that franchisees expect to receive from their franchisor. Individuals invest in a franchise to beneFt from the expertise and knowledge that can be transferred from the successful franchise business model. Because of such expectation, a lack of franchisor support can adversely impact the franchise-franchisor re-lationship and franchisee performance. Franchisors should be diligent when supporting its franchisees and comply with its contractual obliga-tions. Ultimately, franchisors need to ensure its franchisees can enhance their ability to operate their business more effectively via providing sup-ports in the training, operation, and marketing areas. It can also include additional franchisor services, such as vendor purchase discounts, human resources support, Fnancial, and technical services. These support and services are required to be provided in the Franchise Agreement and Franchise Operations Manual. It is important that franchisee operations are audited on a periodic basis to conFrm they are complying with their contractual franchise operational and Fnancial obligations. Franchisors can also measure the operational and Fnancial performance of their franchisees using KPIs. Based on these indicators, they can then counsel and advise those franchisees that may require operational assistance and counseling. Ultimately, the franchisor needs to carefully manage these support and services areas to ensure the development and growth of a successful franchise company. Notes 1 Blut, M., Backhaus, C., Heussler, T., Woisetschläger, D., Evanschitzky, H., & Ahlert, D. (2011). What to expect after the honeymoon: Testing a lifecycle theory of franchise relationships. Journal of Retailing, 87, 306–319. 138 Franchisor Support and Services
2 Frazer, L., & Winzar, H. (2005). Exits and expectations: Why disappointed franchisees leave. Journal of Business Research, 58, 1534–1542. 3 Franconnect Blog (2021). How to do On-going Franchisor Monitoring Right. https://blog.franconnect.com/how-to-do-ongoing-franchisee-monitoring-right 4 LaVan, H., Coye, R. W., & Latona, J. C. (1986). Training and development in the franchisor – Franchisee relationship. Journal of European Industrial Training, 12(3), 27–31. 5 Hackel, E. (2019). The value of ongoing training for building franchise suc-cess. Franchising.com 6 Franconnect (2021). High-impact franchisee engagement. https://blog. franconnect.com/franconnect franchise library 2020/high impact franchiseeengagement 7 McCoy, R. (2018). Franchising KPIs and Their Use in Crisis Avoidance. LIGS University. 8 Franconnect Blog (2021). The 15 Most Important restaurant KPIs August, 2021 The 15 Most Important restaurant KPIs. https://blog.franconnect.com/ the-15-most-important-restaurant-franchise-kpis?utm_campaign=FranConnect %20Blog&utm_medium=email&_hsmi=150901962&_hsenc=p2ANqtz- 9zpgvYLWlL8Cew-X5MMJfLuwaKCPwS1HqlUjminbmTRKYD4rpRbTThdE mcwk8wGMItROP6-qXmYCpX1dwh1S_aOIAm6aQ2n0NDtm61yNPKm443 Zd4&utm_content=150901962&utm_source=hs_email 9 Franconnect (2021). High-impact franchisee. Engagement. https://blog. franconnect.com/how-to-do-ongoing-franchisee-monitoring-right Franchisor Support and Services 139
Chapter 9 Franchise Relationship Management In Chapter 8, we discussed the importance of administering and sup-porting franchisees. We then elaborated on the essential franchisor support services, including franchisee training, onsite franchise site visits, providing marketing and advertising programs, human resource, payroll programs, and favorable vendor purchase programs. Franchisees have an expectation to receive support from their franchisor along with properly managed services to ensure the development and growth of a successful franchise company. The franchisee–franchisor relationship needs to be carefully managed to ensure a harmonious productive relationship. Successful franchise performance results ensue from dependable fran-chisor support and Franchise Relationship Management (FRM). FRM is a franchisor strategy that utilizes procedures, policies, and tactics to promote a positive relationship between a franchisor and its franchisees. It is one of several important activities, including franchise development and support, that franchisors should focus on after the emerging franchisor has introduced new franchisees into its network. The importance of positive franchise relations cannot be overstated be-cause it’s a characteristic of successful franchise operations. In this chapter, we begin with a description of the various phases a franchisee passes through during their relationship with the franchisor. We then present the FRM strategy including speciTc tactics that can produce positive outcomes between a franchisor and franchisees. These tactics include managing con–ict between the franchisor and its fran-chisees, surveying and measuring franchisee satisfaction levels, evalu-ating and monitoring franchisee Tnancial performance, as well as how to utilize franchisee associations to maintain open lines of communication between franchisees with their franchisor. We conclude with how FRM can help to avoid and manage litigation between a franchisor and its franchisees by using alternative dispute resolution. DOI: 10.4324/9781003034285-9
The Phases of a Franchisee Based upon our experience, we have found that a franchisee passes through certain phases from the beginning to the end of their franchise ownership. It’s important for franchisors to be aware of these phases and how they can impact franchisor–franchisee relations. The initial franchisee phase starts during franchisee–franchisor inter-actions before the franchisee signs the franchise agreement and continues through the franchising process. During this phase, the franchisor usually establishes expectations on the part of the franchisee. For example, if the franchisor representative states that franchisor staff responds promptly to a franchisee’s request for assistance the franchisee will expect to receive this beneTt when they begin operating the franchise. During this phase franchise candidates usually ask questions that deal with the subject of franchisor support. For example, how often would a franchisor re-presentative visit the franchisee location, and how does the franchisor assistance process work? If the franchisor representative misinforms the franchisee and the franchisor fails to deliver when the person is a fran-chisee it can result in a negative impression that can detract from a positive relationship. Once a franchisee opens their new franchise, and assuming that they have received the proper training and initial support, the franchisee will be enthusiastic about their new franchise. This can help to es-tablish a harmonious relationship with the franchisor. During this operational phase, most franchisees settle into a performance level that is either acceptable or unacceptable to them and their franchisor. This is a critical phase in FRM because franchisees that fail to exhibit current or potential success need to be identiTed and franchisors need to provide assistance. Otherwise, this is when underperforming fran-chisees start to doubt the viability of their franchise operation and are trapped on a trajectory leading to failure, resulting in serious con–icts with their franchisor.1 Most franchisees eventually enter a Tnal phase of their relationship with their franchisor when they decide to sell their franchise. If there has been a positive relationship with the franchisor during their tenure as a franchisee, it can result in a positive end to the relationship. This can assist the franchisee in obtaining a favorable selling price for their franchise rights and may validate the quality of the franchise brand to potential franchisees. It is important that franchisors are aware of how the franchisor–franchisee relationship evolves so its staff is prepared to respond to franchisee issues and challenges as a franchisee passes through various phases as a franchisee. Franchise Relationship Management 141
ConLict Management between Franchisees and Franchisors Con–ict management represents practices and tactics that franchisors implement to resolve disagreements between the franchisor and its franchisees. Disagreements in a franchise relationship can occur anytime from the franchise grand opening when they decide to sell their franchise. When con–icts are unresolved, it can lead to major disputes, litigation and can carry over into negative feedback to other franchisees and franchise candidates. Franchisors should employ con–ict management to prevent disagreements with their franchisees from escalating into a major dispute or legal actions. The Source of Franchisee Franchisor ConLicts Franchise con–icts can arise when the franchisee or franchisor has a disagreement with the other party or fails to fulTll their contractual obligations. Sources of con–ict can result from speciTc actions by a franchisee or franchisor. If a franchisor fails to fulTll a commitment to a new franchisee that was made before the franchise transaction was consummated, the franchisee will be disappointed and may seek redress from the franchisor. For example, the franchisee reports a problem and requests assistance, and fails to receive a response from the franchisor. In this case, franchisor management should contact the franchisee and advise them they will review and determine why the franchisee failed to receive a response from the franchisor. Another cause of con–ict is when a franchisee fails to comply with their obligations to comply with certain franchise operating standards. For example, a franchisee does not spend the required amount of money on advertising, opens their location late, or closes earlier than the required hours of operations. In these cases, a franchisees’ continued failure to comply could result in a serious con–ict. The best way to resolve this con–ict is to verbally remind the franchisee of their contractual obligations and document in writing. In addition, the franchisor representative should explain to the franchisee why it’s important to comply with their obliga-tions using the example of how they would react if a neighboring fran-chisee did the same thing which could harm the franchise brand. A different source of con–ict can occur when a franchisor sells com-peting products through alternative retail channels in a franchisees’ territories. For instance, a franchisor grants supermarkets the right to sell the same franchise products in an existing franchisee’s territory, al-though the franchise agreement may grant the franchisor this right. This type of con–ict can be minimized or avoided by sharing some of the Tnancial beneTts from the supermarket product sales, which is exactly what franchisor Dunkin’ Donuts did in the case of its coffee pod sales. 142 Franchise Relationship Management
Tools for Managing ConLict in the Franchise Relationship Avoiding con–icts between a franchisor and its franchisees can be achieved by employing franchisor practices that prevent con–icts from escalating. Good communication, measuring franchisee performance, and identifying franchisee satisfaction levels are the most important factors in successful FRM regardless of franchise system size whether emerging or mature. Effective Franchise Communication This is a process whereby; franchisees should expect they can bring their questions and concerns to their franchisor and receive a timely and ade-quate response. Some franchisors have a policy that states, except for an emergency requiring a rapid response, a franchisee should receive a re-sponse to an important question or concern within 24 hours. Franchisors have an obligation to inform their franchisees about important changes to franchise operating model, upcoming marketing programs, and other events that can affect franchisee operations. Failing to inform its franchisees about these changes in a timely manner can lead to franchisee dissatisfaction. Communication remains a critical feedback mechanism regarding franchise performance and the direction of future relationships.2 This is a tool that should be used while a new franchisee is in the early phase of their franchise operation. As the Trst author, I reported to a CEO who learned of a franchisor representative failing to respond to a franchisee issue which led to a disgruntled franchisee. The CEO asked me if they should call the franchisee and if so would it help calm the situation and appease the franchisee. This gesture by the CEO indicates how important commu-nication can be to maintain and promote positive franchise relations. Another way a franchisor can prevent con–icts from escalating is by a franchisor soliciting feedback from its franchisees using its Teld re-presentatives, franchise meetings, and conference calls. When a franchisor is out of touch and unaware of the concerns of its franchisees these con-cerns can escalate into major disputes. For emerging franchisors, the CEO should personally contact select franchisees on a regular basis to obtain feedback regarding their performance and whether they have any concerns regarding the franchisor support. This is an important tool for a new franchisor because most new franchisees require nurturing and welcome hearing from the CEO. An example of how important good communication is to the franchise relationship is offered by Jimmer Bennett a franchisee with Unishippers who states that the key to his strong relationship with his franchisor starts with honest and trustworthy communication, not just the occasional email Franchise Relationship Management 143
check in, or holiday text message. Being in the logistics and transportation industry, Bennett states that events can happen over the course of a day, when he needs to rely on the franchisor for assistance. Measuring Franchisee Performance As discussed in Chapter 8, franchisors measure franchisee Tnancial performance by acquiring monthly franchisee reports on key perfor-mance indicators (KPIs). A KPI is a measurement of a speciTc set of metrics that indicates how a franchise is performing against its goals and the performance of individual and collective franchisees in the same franchise system. KPIs are identiTed by collecting and tabulating speciTc franchise T-nancial information. KPIs should include monthly sales, gross margin percent and dollars, payroll costs, and other pertinent franchise Tnancial data. A franchisor should guide each franchisee toward achieving their Tnancial goals, therefore it is essential that the franchisor is aware of whether their franchisees are meeting their Tnancial objectives by iden-tifying and comparing their individual Tnancial performance. KPI is a tool that franchisors should use as part of their operational and FRM strategy. Identifying how each franchisee is performing enables the franchisor to identify which franchisees are performing well and the rea-sons why. They also need to identify those franchisees who are performing below the top performers and learn why. A potential source of poor franchise relations is when certain franchisees are either unproTtable or dissatisTed with their Tnancial results. By monitoring franchisee perfor-mance, a franchisor can provide operational guidance and if necessary, grant Tnancial assistance such as deferring royalty fee payments for a period of time. These interventions that assist deserving franchisees are important for enhancing positive franchise relations because they demon-strate the commitment by the franchisor to individual franchisee success. Measure Franchisee Satisfaction Levels Franchisee satisfaction levels are measured when a franchisor surveys its franchisees and tabulates the results to identify how satisTed franchisees are with various franchisor support, services, and the total franchise program. Identifying franchisee satisfaction levels are important during the various phases of a franchisee operation, especially during the initial 1–3 years which is when franchisees are at a critical phase of their franchise operation. Measuring franchisee satisfaction levels enables a franchisor to identify and address those areas that require improvement and the opportunity to identify and correct any major problem areas their franchisees may have. 144 Franchise Relationship Management
Surveys should be conducted by the franchisor or a third party that specializes in measuring franchisee satisfaction levels. The process consists of franchisees being requested to respond to various questions using a rating system. For example, 1 to 5, with 5 being “totally agree” and 1 “being totally disagree.” Survey questions should be designed to conform to the franchise category and include franchisor support, franchisee proTtability, franchisor response, and the effectiveness of franchisor marketing programs. After a franchise system has several franchisees, the franchisor should begin to survey its franchisees to measure satisfaction levels. For emer-ging franchise systems with less than 10–15 franchisees, satisfaction surveys can be done by telephone or even in face-to-face meetings. As a franchise system gets larger some franchisors use a third party to conduct their franchise satisfaction surveys. These companies are specialized in conducting satisfaction surveys. One company is Franchise Business Review (FBR), located in Portsmouth, New Hampshire. According to its CEO, Eric Stites, a common complaint found in FBR’s research is that franchisees often feel uninvolved with their franchisor when key deci-sions are dictated by the franchisor. Franchise companies with high sa-tisfaction scores have learned to engage and involve their franchisees using clear, transparent, two-way communication. Sites believe that the top franchisors allow their franchisees to provide feedback which fosters a collaborative, win–win culture. Sites also stated that better-performing franchise brands manage to keep their marketing and technology-driven programs less complicated which demonstrates to their franchisees the effectiveness and return on investment these tools can provide. Whether franchisors conduct their own satisfaction survey or use a third party, it is important to identify how franchisees rate critical components of their franchise system and their satisfaction with the franchise program. Obtaining regular franchisee feedback is a necessary requirement for maintaining positive franchise relations. Knowing how satisTed or dissatisTed franchisees are regarding various aspects of their franchise performance can enable a franchisor to address those issues that can negatively impact FRM. Additional FRM Tools In addition to managing and avoiding con–icts with their franchisees, practicing good communication techniques, and measuring franchisee satisfaction levels franchisors can employ other tools that can enhance FRM. When combined these components will provide the proper busi-ness climate where the franchisor and its franchisees can achieve and maintain a continuing positive relationship. Franchise Relationship Management 145
a Documented Franchisor Operating Principles: Franchisors should have an organized set of principles or practices they follow. Documented franchisor operating principles and practices are published guidelines that franchisor staff follow in the administration and support of their franchisees. It’s important that franchisors have their principles fully documented in their franchise operations manual or website so that their employees, existing and prospective franchisees are fully aware of franchisor business and operating standards. An example of franchisor operating principles is shared by Mark Jameson, Executive VP of Propelled Brands a franchisor based in Carrolton, Texas. The four principles that guide Propelled Brands are to: 1 Drive franchisee proTtability 2 Promote and drive top-line franchisee growth 3 Grow the franchise system 4 Assure that franchisee satisfaction is measured In addition, Propelled brands use a third party to survey franchisees and conduct a conTdential company survey that is shared with the franchisor employees. They have a Franchise Advisory Council and every six weeks the CEO has a virtual town hall meeting that all franchisees can attend. There is a National Advertising board that includes six elected fran-chisees. A Diversity and Inclusion Task Force was formed by the fran-chisor in 2020 to help attract potential franchisees. b Franchisor FRM Leadership: Regardless of the role franchisor staff may occupy it’s important for each employee to be aware of the importance of positive franchise relations. Franchisor leadership in FRM occurs when all members of the organization act in a professional manner and are responsive to the needs of franchisees. Important franchisee issues or problems should be brought to the attention of franchisor leadership to devise an appropriate course of action if needed. As the Trst author, I’ve been responsible for conducting meetings with franchisor support staff to communicate the importance of good FRM practices. c A Franchise committee: A franchise committee is a representative group of franchisees who meet with select franchisor staff on a periodic basis. The most frequently used committee is a franchise marketing or advertising committee. This is an effective vehicle for supporting FRM because it enables franchisees to provide input regarding proposed franchisor marketing and advertising initiatives. An emerging franchisor with a minimum of 25 franchisees should establish an advertising or marketing committee that includes 146 Franchise Relationship Management
franchisor and franchisee representatives. It can provide a forum for the franchisor to obtain feedback from their franchisees especially when the franchisor is considering implementing operational or marketing changes that can have a signiTcant impact on franchisee operations.3 d Franchisors Share Best Practices: Franchisee best practices are operating practices that a franchisee employs to enhance their performance. Best practices can include employee recruitment and hiring tips, unique marketing practices, product enhancements, and other methods that are transferable and which can improve fran-chisee revenues and proTtability. Franchisor Teld representatives are usually aware of certain franchisee best practices because they communicate with their franchisees on a regular basis and discuss their operating practices. It’s important that franchisors share successful franchisee best practices because it can improve franchise relations. Soliciting and sharing fran-chisee best practices can lead to new processes and programs that can enhance franchise operations. An effective method for sharing best practices is for the franchisor to solicit examples from franchisees and share this information in a bulletin or newsletter. This will ensure other franchisees are aware of best practices and support positive FRM. Sharing what successful franchisees do can encourage other franchisees to do the same.4 For example, McDonald’s Filet of Fish and Big Mac sandwich were both the creation of franchisees. Franchisee Owners Associations and Franchise Advisory Councils One of the most effective ways to improve franchise relations is via a franchisee owners association (FOA) or franchise advisory council (FAC). An FOA is operated and funded by franchisee representatives. The FOA will include by-laws governing the election of association of-Tcers, payment of dues, and functional procedures. An FOA is an in-dependent organization comprised of franchisees and administered by a consultant or individual experienced in franchising or organizational leadership. Another franchisee organization is an FAC, which is a joint association or afTliation typically comprised of Tfty percent franchisor and franchisee representatives. An FAC meets several times per year and is encouraged to share any signiTcant franchisee issues with the fran-chisor and will discuss and establish potential operational and marketing initiatives. In most cases, the franchisor will pay for the travel, lodging, and cost of meals for the FAC meetings. Franchise Relationship Management 147
Keith R. Miller, a Subway franchisee of 32 years and franchisee ad-vocate testiTed before the United States Senate Economic Policy Subcommittee on franchising. He stated in part, that the keys to positive franchise relations are achieved when franchisees are represented and can provide feedback to the franchisor. If franchisees believe that the FAC fails to meet their needs, is not independent or effective in negotiating disputes with the franchisor, the franchisees may convert the FAC to a new independent franchisee as-sociation. For example, in the Denny’s franchise system, the franchisor had established an advisory council to address the concerns of fran-chisees and to give the franchise community the ability to communicate with Denny’s corporate. In November 1997, however, the DFAC was replaced by the independent, franchisee-sponsored Denny’s Franchisee Association to eliminate the franchisor’s veto power over the associa-tion’s decisions and to allow the franchisees to develop bargaining power with outside vendors.5 There are several beneTts of franchisee organizations. First, fran-chisees may perceive the franchisor to be more willing to engage in fair dealing with franchisees, as they have an opportunity to express their lack of satisfaction with certain aspects of the franchise. This will help contribute to enhanced franchise relations. Second, franchisees who are members of a franchisee association may have a greater sense of loyalty and commitment to the franchise because the franchisor has displayed its respect for the franchisees by recognizing them as an organization. An FOA or FAC can be used as a sounding board whereby the franchisor can introduce proposed products or strategies to obtain feedback from the franchisee representatives. By soliciting feedback and suggestions from their franchisees the fran-chisor is demonstrating a commitment to the franchise network as op-posed to the franchisor mandating a change. Both parties can speak openly at meetings and address sensitive topics in a productive way. This can help to promote a relationship with added trust among the franchisor and franchisee representatives. For example, Mosquito Joe, a mosquito control franchise based in Virginia Beach, Virginia encourages and advocates open communication with its franchisees. When a franchise system reaches a certain size it’s not unusual for the franchisees to transition from a FAC to an independent franchisee association. This is common with large fran-chise systems like Subway, Wendy’s, Burger King, and McDonald’s, which also has a McDonalds Black Owners Association. Edwin Shanahan has been the Executive Director at DDIFO, Inc. (Dunkin Donuts Independent Franchise Owners Association) for 9 years. Mr. Shanahan states that there are important differences between an FAC, which involves the participation of the franchisor and an Independent Franchisee Association, which is operated solely by franchisees. He states 148 Franchise Relationship Management
that with an FAC and its close relationship with the franchisor because it is paying for dinners, lodging, and other expenses, some franchisees may be reluctant to provide feedback regarding important concerns of other franchisees they represent. He, states this is a natural inclination for franchisees who receive certain beneTts from the franchisor. In compar-ison, an FOA is a separate organization operated and funded by fran-chisees for franchisees. Shanahan states it is in the best interest of franchisors to want honest feedback from its franchisees and credible input regarding important issues or complaints. As the Trst author, I have established, organized, and administered several FACs as the franchisor representative. We would arrange for bi- annual meetings in various off-site locations and pay for all the expenses. Although our use of a FAC could possibly inhibit some franchisees from being candid in terms of reporting franchisee concerns, that wasn’t my experience. Whichever type of group a franchisor decides to advocate, it is important that the franchisor obtains the advice and guidance of their franchise attorney regarding the type of organization and its guidelines. Whether using a FAC or dealing with an independent franchisee asso-ciation, franchisors shouldn’t fear the formation of a franchisee orga-nization. If they do, they may face far greater problems in the future. Avoiding and Managing Franchise Litigation As we indicated, con–icts and disagreements can arise between a fran-chisor and franchisee from time to time due to the contractual re-lationship between the franchisor and its franchisees on occasion, a disagreement can be so serious that it could escalate into a lawsuit. Commonly referred to as litigation it’s a complaint by one party, the plaintiff against another party, the defendant that is brought in a court of law. The franchisor or franchisee can be the plaintiff or defendant based upon who initiates the litigation. All litigation, arbitration, and related settlements are required to be disclosed in Item 3 of the Franchise Disclosure Document. Unless a franchisor has no choice it’s important that franchisors take steps to avoid litigation because it can be Tnancially costly, must be disclosed in the FDD, and can negatively affect franchise relations. An example of a dispute leading to litigation is when a franchisor continually prices advertised products or services that result in a re-duction of franchisee gross margin dollars. This causes franchisees to question this practice which leads to a confrontation requesting the franchisor to stop or reduce it. A lawsuit brought by Subway, MacDonald’s, and Burger King franchisee associations over the past number of years, although ultimately settled, impacted the reputation of both franchise brands. Had the franchisors attempted to amicably Franchise Relationship Management 149
resolve these disputes at the beginning it may have avoided litigation, saved expenses, and avoided harm to franchise relations. Each of these franchisors had powerful independent franchisee associations which can be formidable opponents of franchisor decisions. In some cases, litigation is unavoidable, for example when a franchisee commits an egregious act and fails to cease and desist. For example, a home care franchisee continues to fail to properly qualify caregiver credentials, which could place their clients at risk and damage the re-putation of the franchise brand. Its important franchisors try to avoid litigation because of the legal costs, poor publicity, and potential negative impact on the franchisor’s reputation. In addition, when a prospective franchisee and their fran-chise attorney review Item 3 in the FDD any franchise litigation is sure to be scrutinized. An unusual amount of litigation in relation to the size of the franchise system can end any interest by a prospective franchisee. A strategy franchisors often employ is to have a Tnancial resolution by agreeing to purchase the franchise back. This will avoid litigation and its disclosure in the FDD and end a disagreeable relationship between the parties. A major cause of franchise litigation is when a franchisor engages in aggressive and deceptive franchises practices which can harm prospective and existing franchisees. For example, Quiznos which franchised sand-wich shops and had experienced dynamic growth in the early 2000s was levied one of the largest Tnancial penalties in franchise history in 2010. The settlement was the result of four separate lawsuits. One lawsuit included a memorandum by a Quiznos lawyer in 2003 that stated that 40% of Quiznos units weren’t breaking even. Between 2007 and 2017, Quiznos shrunk from 4,700 U.S. locations to fewer than 400. John Gordon, principal of PaciTc Management Consulting Group, stated that Quiznos’ franchise strategy, its store-level economics and business model were deeply –awed.6 Preventing Disputes from Escalating into Franchise Litigation It is important that franchisors seek to manage and control serious dis-putes between them and their franchisees. Seeking a resolution that can satisfy both parties should be the primary objective. If there is a potential threat to the franchise brand, caused by the franchisee that remains unresolved, the franchisor may have no option except to take legal ac-tion. In many cases, resolving a dispute and avoiding litigation between a franchisor and franchisee can be achieved with the assistance of the FAC, the Franchisee Association or intervention by a well-respected fran-chisee. One of these parties may have sufTcient in–uence and experience to help broker a resolution and avoid a lawsuit. 150 Franchise Relationship Management
Certain franchisor practices, like properly documenting the support and assistance it provides its franchisees can discourage a dissatisTed franchisee and their attorney from Tling a lawsuit. By demonstrating the totality of assistance, the franchisor has provided a franchisee can be useful in the event a franchisee chooses to Tle a lawsuit. As the Trst author, I’ve had the experience of being involved in numerous franchisee lawsuits against the franchisor. In those cases where we prevailed, it was the result of having a carefully documented franchisee Tle. When the outcome was unfavorable it was the result of sloppy or poor doc-umentation by a member of franchisor staff. I was also in both Federal and state court and participated in Arbitration proceedings. It’s by ex-perience that arbitration is a more effective process for the adjudication of major franchisor–franchisee disputes. Alternative Dispute Resolution A common business and legal practice to resolve disputes and prevent litigation is to utilize Alternative Dispute Resolution (ADR) which is included in almost every franchise agreement. ADR consists of methods to avoid or settle litigation by engaging the franchisor and franchisee in a structured process that can resolve a dispute. ADR is less costly and disruptive to both parties and avoids the consequences of participating in a courtroom engaged in a formal legal process. There are two forms of ADR, Arbitration and Mediation, which can be used to resolve serious disputes and prevent litigation: Arbitration Arbitration is a procedure in which a dispute between two parties, for example, a franchisor and a franchisee are submitted, by the agreement of the parties, to one or more arbitrators who make a binding decision on their dispute. By engaging in arbitration, the parties avoid court li-tigation. Franchise agreements typically include arbitration as the re-quired method of dispute resolution in lieu of formal litigation in a courtroom. Mediation Mediation involves the use of a neutral, third-party Mediator that like Arbitration can be agreed upon by the parties. The Mediator meets with the parties and their lawyers, serving as a facilitator for discussion and negotiation that can resolve the dispute. When using a Mediator, no decision or ruling is imposed on either the franchisor or franchisee, and neither party is required to accept a speciTc outcome or proposed Franchise Relationship Management 151
resolution. A Mediator seeks to help the parties reach their own mutually acceptable solution (Table 9.1). The Franchise Mediation Program In 1994 a Franchise Mediation Program, was formed in collaboration with the International Institute for Con–ict Prevention and Resolution which is a non-proTt alliance of corporations and law Trms founded in 1979 to develop alternatives to the high costs of litigation. This program has been endorsed by the International Franchise Association, Asian American Hotel Owners Association, and the American Association of Franchisees and Dealers, and has been used by franchisors, franchisees, and franchisee associations. The Con–ict Prevention and Resolution procedure is initiated by a Dispute Letter, sent by either the franchisor or the franchisee to the other party and the Con–ict Prevention and Resolution. If accepted by the recipient, the Con–ict Prevention and Resolution Procedure requires the parties to attempt to resolve their differences through negotiations. Franchise Relationship Management is a critical component of fran-chisor operations. Positive franchise relations can enable a successful franchise program to prosper, while poor franchise relations can sap franchisee morale and sti–e enthusiasm among franchisees. When there is a lack of trust between a franchisor and its franchisees it will become difTcult for prospective franchisees to obtain a positive validation of the franchise program from existing franchisees. If a prospective Table 9.1 Major Differences between Litigation, Arbitration, and Mediation Litigation Arbitration Mediation More costly than ADR Less costly than litigation Least costly Public Private Private Formal process. Set rules Less formal than litigation Least formal InMexible rigid process Simpliged rules of evidence and procedure Very Mexible Judge is appointed Parties can choose substantive expert(s) to serve as arbitrator(s) Parties can select an arbitrator More complex with depositions May not require depositions N/A Easily appealed Difgcult to appeal N/A Decision can take time Decision provided faster Parties agree to result Process can be designed by the participants Mediator may be poorly qualiged 152 Franchise Relationship Management
franchisee contacts an existing franchisee to obtain feedback on fran-chisor support and assistance, a poor relationship between the franchisee and its franchisor can elicit negative responses. When the state of fran-chise relations is positive, there is a sense of balance within the franchise system. Both parties are achieving their objectives and working in a supportive manner to grow the franchise brand. Summary We discussed FRM which is a strategy that should be implemented by all franchisors regardless of size. An FRM strategy should be based on supporting franchisees and managing con–icts between a franchisor and their franchisees. We presented how an effective way to establish positive franchise relations is by the franchisor enabling effective and timely communication with their franchisees and measuring franchisee perfor-mance using KPIs. We discussed how measuring franchisee satisfaction levels have been demonstrated to be an effective way to identify which franchisees are achieving satisfactory Tnancial results and those that may require assistance. Also, we stated that franchisors can promote positive franchise relations by empowering franchisees to provide feedback to the franchisor through a FAC or Independent Franchisee Association which enables franchisee representatives to participate with their franchisor in important decision-making. A marketing or advertising committee that includes franchisee representatives can also boost the level of positive franchise relations. Finally, we discussed how disputes can arise between a franchisor and its franchisees and why there should be a process to avoid disputes from escalating into litigation. A dispute resolution pro-cess can be used to lead to a fair outcome for both parties and help to avoid costly litigation between the franchisor and its franchisees. Notes 1 Wincent, W. S. (2019). The basics of franchising. The relationship. International Franchise Association Newsletter. https://www.franchise.org/ franchise-information/the-basics-of-franchising-the-relationship 2 William, R., Meek, B. D., Sramek, M. S., Baucus, R., & Germain, R. (2011). Commitment in franchising: The role of collaborative communication and a franchisee’s propensity to leave. Entrepreneurship Theory and Practice, 35(3), 559–581. 3 Badrinarayanan, V., Kyung-Min, K., & Taewon, S. (2016). Brand resonance in franchising relationships: A franchisee-based perspective. Journal of Business Research, 69(10), 3943–3950. McCoy College of Business Administration, Texas State University, Silla University, South Korea. 4 Higginson, D. (2019). Building a culture of information sharing improves operations, boosts franchise relations, and saves time. International Franchise Association Bulletin. Franchise Relationship Management 153
5 Wiggin and Dana, LLP (2001). Effective relationships with franchisee asso-ciations – Legal and practical aspects. ABA Forum on Franchising. https:// www.wiggin.com/wp-content/uploads/2019/09/effective-relationships-with- franchisee-associations.pdf 6 Sparks, J. (2010). Quiznos settlement among largest in franchise history. Blue Mau Mau. https://www.bluemaumau.org/story/2010/08/16/quiznos- settlement-Tnalized-among-highest-penalties-franchise-history 154 Franchise Relationship Management
Chapter 10 Franchise Trends Thus far, we have described how to qualify a business for franchising, and how to build, develop and support a franchise system. We also have explained how to successfully perform franchise relationship manage-ment, which is important for maintaining equilibrium and harmony between a franchisor and its franchisees. Each of these components must be properly executed to achieve success as a franchisor. Attempting to develop a Sawed franchise model, can be as disabling to franchise system development, as failing to monitor and support their franchisees. Since the rise and development of the franchise industry that began in the 1950s, there have been several signi1cant trends and events that have impacted the franchise industry. The Franchise Rule In the 1950s and 1960s, as franchising was experiencing signi1cant growth the popularity of franchising resulted in signi1cant franchise fraud and abuse which led certain states to enact franchise relationship laws designed to prevent franchisee abuses. These actions by certain states led to the Federal Trade Commission enacting The Franchise Rule in 1979 which set forth various regulations that franchisors must follow when selling franchises including the use of the Franchise Disclosure Document (FDD). These regulations continue to govern the offer and sale of franchises. The Great Recession Another occurrence that impacted franchising was the Great Recession of 2007–2009 which became the longest recession since the Great Depression. Accounting 1rm PwC reported that after years of steady growth the fran-chise industry lost 400,000 jobs in 2009. This was a signi1cant economic event which upset the ongoing growth of the franchise industry and re-presented a unique economic impact on franchising. The Great Depression DOI: 10.4324/9781003034285-10
led to poorly operated and marginally attractive franchise brands to drop out of franchising. Franchisors implemented more sophisticated franchisee recruiting strategies including targeting more quali1ed franchise prospects which could lower the risk of franchisee failures. In this chapter, we discuss how current trends in franchising will lead to future changes to key components of the franchise business model. These changes de1ned below include technological innovations including Arti1cial Intelligence (AI), Digital Technology, and Robotics. Also, we discuss how the use of AI will provide more effective franchisee re-cruitment processes. We will present examples of how the use of AI, Robotics, and Digital technology in residential services, home care, and food franchises is being deployed by franchisors to increase productivity and the quality of products and services. Our discussion involves more ef1cient ways to audit and support franchisee performance that will continue to evolve as franchisors seek ways to improve their methods for retrieving KPIs and to quickly identify top franchise performers along with those franchisees who require sup-port. Technology will enable franchisor staff to retrieve franchise data and conduct virtual franchise site visits more easily. Finally, the struc-tures and future role of private equity (PE) 1rms continue to occupy an increased role in the franchise industry. This affects franchisor expansion strategies, operational plans, and franchise owner exit strategies. PE can create more powerful franchise systems which can enable franchisors to grow and operate more ef1ciently with ample investment capital and business intelligence. The Role of Technology in Franchise System Development and Operations Franchisors are increasingly turning to the use of technology to improve their operational elements. At the franchisor level, technology is being used to automate franchisee recruitment and development tasks. At the franchisee level, automation has been applied to simplify and enhance the customer experience and increase franchise employee productivity. The technology that’s being introduced by franchisors consists of: • Arti1cial Intelligence (AI) is the use of computer systems to execute tasks that typically require human intelligence such as visual reading, speech recognition, decision-making, and language transformation. • Robotics is the use of robots (machines) to perform tasks that are performed by human beings. • Digital transformation is the practice of using digital technologies to design or convert current operational processes and consumer practices to meet changing business and market needs. 156 Franchise Trends
These technological applications have been introduced and utilized in a number of elements in the franchise business model. Franchise Development and Technology Although a successful franchise system is built on a foundation of franchise training, support, marketing, and positive franchise relations; franchisors from the beginning of their franchise operation pursue franchise development as a top priority. Franchisee development re-presents the process franchisors utilize to attract, qualify, and transact future franchisees. As the franchise industry continues to expand into more business concepts, recruiting quali1ed franchisee candidates for system development has become intensely competitive. Although a suc-cessful franchise program can assist in the franchise recruitment process it is essential that franchisors utilize the appropriate tools to attract, qualify and engage the franchise candidates they seek. As franchising has evolved over the past several years there have been several signi1cant changes in the franchise development process driven by the increased use of software and technology. For example, adapting and infusing technology into franchising has eliminated countless manual processes including intaking prospect data to respond to their questions. As a result, recording relevant prospect information manually, like sorting out which franchise prospects are interested in a particular market or territory has been eliminated. Software is being used to sort franchise prospects into various categories based upon speci1c personal characteristics including occupation, 1nancial pro1le, and location. This can enable franchisors and franchise brokers to reach out to those pro-spects who most closely match the franchisee pro1le. More accurate and intensive franchisee prospect screening software utilized by third parties provides franchisors another tool for increasing the precision when qualifying franchise candidates. Jeff LeSer, founder and CEO of franchise market research 1rm, Franchise Grade explains that a recent concept in franchise development is an online one-stop portal for people seeking a franchise opportunity. To attract the attention of potential franchisees, franchisors will need to recruit prospects in more ways than just advertising in trade magazines or relying on franchisee referrals like in the past. Rather, franchisors need to ensure their online presence is optimized, with inSuencers and testimonials that can help get them in front of the right franchise candidates. A one-stop franchise portal consists of a single prospect entry point, where prospective franchisees can explore and compare their potential investment. Arti1cial Intelligent (AI) –powered algorithms can make Franchise Trends 157
recommendations and help with the matchmaking process, based on the person’s speci1c needs, objectives, skills, and abilities. Once the person is matched to a speci1c franchise opportunity and indicates their interest, this system can communicate to the franchisor and cue the engagement process. This technology eliminates the need for prospective franchisees to jump from one website to another to 1nd the information they need because it would be in one central place. LeSer states that a growing variety of technological solutions is found in almost every corner of an evolving franchise system and embracing this technology will help to increase franchise brand pro1tability and competitiveness. Franchisors will still need to have inSuencers, which are reviews and testimonials touting their franchise, websites able to display the data on computers as well as mobile devices, updated social media, and live streaming. As franchisors continue to embrace the use of technology in its fran-chise development programs, they will utilize predictive analysis for franchise system investments. This includes objective performance data and benchmarking against other competitive franchise opportunities. Franchisee candidates with access to objective franchise performance data will minimize franchisee investment risk. In addition, this in-formation would enable franchisors to learn how they compare with other franchise investment opportunities and where improvement is needed. Franchisors need to embark on this paradigm shift because ad-ditional data is needed to support franchise system growth.1 Franchise Operations and Technology Technology has been introduced into various components of franchise operations by numerous franchisors. From residential services to fast food to homecare, more and more franchisors are looking to technology to increase franchisee productivity and enhance the customer experience. An example of the future role of technology in franchising is exempli1ed by franchisor, Neighborly, based in Waco, Texas, the parent company of 27 home service brands and more than 4,300 franchises in 9 countries and 8 corporate support centers. Mike Bidwell, president and CEO of Neighborly states that they are pursuing predictive analytics, which is the use of data, statistical algorithms, and machine learning techniques to identify the likelihood of future outcomes. This can be a tool to optimize opportunities to enhance their franchisees’ growth. In the food category, Tracy Skeans, COO of YUM Brands, the mega franchisor which operates Habit Burger Grill, KFC, Pizza Hut, and Taco Bell, stated that the restaurant job of the future will require strong people skills and the ability to leverage technology and be digitally savvy. Skeans said Yum increased its investments in technological tools to make the restaurant jobs easier and more ful1lling. The future of the restaurant 158 Franchise Trends
is going to be younger employees who’ve grown up in a digitally native way, no one is going to sit and look at a binder to be trained anymore.2 BrightStar Care one of the leading home care franchises uses a pro-prietary technology called the Athena Business System (ABS). It includes time and attendance of caregivers, who use a mobile device to clock in and out. The franchise operator gets an alert if the caregiver is late which enables the franchisee to let the client know their caregiver is on their way or send another caregiver. Also, when patient assessments are done, the system will instantly generate an electronic plan of care so clients, family members, and nurses can view it. Finally, the system generates 1ve questions for each visit. If any of the questions are answered af1rma-tively regarding a patient’s condition the agency’s nurse is automatically noti1ed. It creates management by exception that helps to prioritize a nurse’s time by responding to the most needy client immediately. Another increased use of technology in franchising is evidenced by McDonald’s which acquired Apprente, a 2-year-old startup in 2019. Apprente specializes in voice-based conversational technology. After that transaction, McDonald’s entered a strategic relationship with IBM to build AI-powered customer care solutions and voice recognition appli-cations. IBM was reported to be acquiring MCD Tech Labs to further accelerate the development of AI automated order taking.3 Franchisors can employ technology to help grow their franchisee busi-ness. Reis & Ivry’s Frozen Yogurt Robot is a fully automated franchise that uses machines to serve the yogurt. The franchisee can lower employee turnover and reduce certain expenses that come with owning a yogurt shop. The machines can be installed in high-traf1c areas across the country, from shopping malls to college campuses, without having to lease a store front to place them in. Robotics is also being used in several industries. Large quick-serve restaurant franchisors continue to introduce and test robots who can Sip hamburgers and perform other labor-intensive tasks. Various forms of technology can bene1t franchisor expansion because it can mean less work for franchisee employees. This can enable a franchisee to buy and operate multiple franchise units. Also, by operating more ef-1ciently, franchisees can free up valuable time, so they can focus on managing additional business’ locations. Franchisee Performance Evaluation and Support in the Future When a new franchisee launches their business, they are responsible for the operation and performance of their franchise. However, in most franchise systems the franchisee also relies upon their franchisor for periodic evaluations of their franchise performance and the delivery of support services. The role of technology especially AI, Digitalization and Franchise Trends 159
Robotics will continue to play an increased role in franchise development and operations. As this trend continues it will alter how franchisors currently measure individual and collective franchisee performance and support their franchisees. As technology continues to play a greater role in franchisee perfor-mance evaluations and support services, franchisors should be cognizant of these impending changes and adapt their operations accordingly. This can enable franchisors to effectively compete by demonstrating to franchise prospects that their franchise operates on the forefront of technology. Keith Gerson, President of Franchise Operations for FranConnect, a leader in franchise management performance systems states that enhanced franchise data increases visibility and supports formal franchisor perfor-mance plans for franchisees. He states that one of the biggest differ-entiators among franchisors will be the use of software that increases visibility across the franchisor’s span of control and allows for detailed analysis of franchise performance, both individually and as a network. These solutions will aggregate all the key performance metrics into a single, easy-to-digest dashboard. Utilizing this intelligence Gerson sees the introduction of what he refers to as the “Franchise Success Coach (FSC).” This person would access KPIs, to monitor their franchisees, develop ac-tion plans and track progress. To achieve this objective, the franchisor will need to evolve its hiring, training, and ongoing development of these “FSCs” into true performance coaches and mentors. According to a comprehensive 2021 study conducted by Franchise Business Review, the top drivers of franchise performance (based on input from 28,056 franchisees) consisted of 5 categories, marketing and promotional programs, innovation and creativity, effective use of tech-nology, system-wide communication, and training and support pro-grams.4 Gerson states that the delivery of the 1ve key drivers will be dependent on franchisees’ engagement and execution. The goal for franchisors is to 1nd ways for franchisees to perform better and with fewer obstacles. The knowledge gained through this research can then be applied during coaching sessions with franchisees. Although franchise brands have various approaches to franchise business planning, the most successful franchises brands are leveraging technology to establish structured programs that utilize both data and coaching to achieve desired results. As previously stated in this chapter, AI and Machine learning are 1nding their way into franchising, parti-cularly in operations management. In the future, many brands will elect to keep their coaching virtual and those in the food sectors such as quick- serve and sit-down restaurants will hire food safety auditors to visit franchise locations in person. 160 Franchise Trends
The Future Role of PE in Franchising Since 2010, PE 1rms have played an increasing role in the franchise in-dustry. PE 1rms have noticed the attractive appeal of investing in franchise systems due to the unique features of the franchise business model. Successful franchise systems are highly scalable with dedicated franchisees who have a 1nancial stake in the franchise system and work hard to provide a steady income stream. These features allow PE 1rms to bring capital and management expertise to certain franchise brands to facilitate their growth and earnings potential. The majority of PE 1rms desire investing in larger franchise brands however some 1rms will invest in franchises with a minimum of 75–100 locations. Many PEs invest in back-of1ce support, marketing, franchise development, new market entry, product develop-ment, and technology and raise supply chain ef1ciencies. As the 1rst author, I authored an article in 2018 that reported on the increased activity by PE 1rms and the recent acquisition of the 3,600 Sonic Drive-In fast-food chain by Inspire Brands which owned Arby’s and Buffalo Wild Wings. At the time it was reported that Sonic had been facing intense competition from fast-food giants, McDonald’s, Burger King, and Wendy’s. Three years later the role of PE groups in acquiring and investing in franchise brands is expected to increase even more.5 PE’s role in the franchise industry includes food franchises, homecare, 1tness, residential services, and automotive services. For example, in 2019 there was more than $450 billion invested in six hundred healthcare-related PE deals. In the last 10 years, the number of PE-based deals has increased by 45%, which has increased the valuation of certain home care companies by increasing operational ef1ciencies and investing 1nancially in more resources.6 According to Bain & Company, a PE goal is to achieve a return on investment that beats the stock market which typically sees annual returns of 5%–10% depending on various sources. The returns are slowing down, but the broad category it dubs “consumer” still returns 1.5–2 times equity and beats the market by low single digits.7 PE 1rms’ investments range from a single franchise brand to investing in multi-unit franchise brands. Recently, more PE groups have turned their focus to investing in franchisee-owned companies that own multiple franchise brands or multi franchises of the same brand. For example, in 2020 FRANdata reported that Bandon Holdings, one of the biggest franchisees in the Anytime Fitness system, received a majority investment from PE 1rm Fireman Capital Partners to help fuel its growth. In addition, one of the largest Pizza Hut franchisees was acquired for $190 million by Olympus Partners. Due to the increased PE investment in franchising, there remains the possibility that a PE 1rm can have a negative impact on a franchise brand. As a PE 1rm invests in a franchise with the goal of generating a Franchise Trends 161
1nancial return within a certain period of time, it could encourage an increase in franchisor system growth. This could result in the franchisor signing borderline unquali1ed franchisees and encourage existing fran-chisees to invest in another franchise despite lacking the required capital or management skills to operate multiple franchises. Alicia Miller, a former franchisee and current Managing Director of Catalyst Insight Group, which advises PE groups and franchisors, states that PE investors continue to gain inSuence, if there is a need, PE will improve the systems they acquire, adding experienced managers and improving unit-level pro1tability When investing in similar franchise systems there are cost ef1ciencies through reductions in corporate staff and outsourcing key functions such as call center support. As PE 1rms need to eventually sell the business upstream to another investor or take the company public, achieving growth targets within a period of 3–8 years is paramount. Miller believes that certain franchise founders unwilling to invest in infrastructure or push for fast franchise development may be attractive to a PE 1rm that can use their expertise and capital to address these shortcomings. PE typically uses high leverage when acquiring the target (paid by the target, not the PE 1rm). We will thus see more debt-laden, PE-backed franchise brands, earlier in their lifecycles. High valuations also force PE to move more aggressively to justify those valuations by pushing harder for growth. Brands that are unable to 1nd a PE partner or 1nd a PE-owned platform in their market segment before their competitors, will 1nd it much harder to grow and attract capital. This may force the vast middle brands to address the issues that have been handicapping the brands’ growth and success. Current PE activity in franchising indicates that it will continue to play an increased role in the franchise industry in the years ahead. This can provide an opportunity for quali1ed franchise systems seeking to accel-erate growth and earnings and cause more franchisors to seek to sell their franchise equity for a fair price. The Pandemic of 2020–2021 The Pandemic of 2020–2021, considered one of the most impactful events in the past 100 years, has had signi1cant impact on the franchise industry. Franchise research 1rm FRANdata reported that 10,875 franchises closed permanently. The closures were led by the Hospitality, Restaurant, and Retail food sectors, followed by Personal Services, and Commercial and Residential Services. Unlike independently operated businesses, royalties and continuing fees which are built into the fran-chise 1nancial model enabled franchisors to provide 1nancial relief to its franchisees by suspending, reducing, or forgiving those fees. This enabled 162 Franchise Trends
the survival of countless franchisees despite the impact from the Pandemic. Each of these events had a signi1cant impact on franchising to varying degrees. Currently, there are trends taking place within and external to franchising that will have a future impact on franchising. The recent Pandemic led certain franchise sectors to seek ways to overcome its impact. For speci1c franchise categories such as 1tness and gyms, the solution was to implement virtual workout sessions for members. For other franchises, it meant accelerating planned changes to minimize the loss of customers and lower operating costs. Franchise hotel brands accelerated the use of robots to deliver items ordered through room service to a guest’s door. A boutique hotel near Apple’s headquarters has a robot butler that can move between Soors to take items such as toothbrushes, chargers, and snacks to guests. These digital systems make it easy for hotel staff to deliver items to guests, as well as offer a futuristic digital experience to people who stay at the hotel. More franchise hotel chains are using technology including online check-in and check-/out, mobile keys, and cloud-connected keyless hotel locks. In the franchise food categories, which account for 45% of franchise industry revenues, franchises such as Chick-1l-A closed indoor access to its restaurant but added faster customer drive-thru ordering plus pickup and delivery services. No franchise sector has felt more impact and im-plemented more changes because of the Pandemic than food franchises. There is little doubt that franchising and especially food franchises will continue to undergo change as they evolve in the years ahead. John Gordon, of Paci1c Management Consulting Group, specializes in the restaurant industry. Gordon states that an important consideration going forward for food is the actual size and location mix of the fran-chisee location. This is particularly true with restaurants, which, even with delivery and carryout, serve guests in a concentric circle around their locations. Gordon adds that the leading global restaurants have begun to modify their store pro1le, opting for service windows, more drive-thrus, curbside pick-up, and more customer access, while down-sizing traditional dining room seating. There have been trends in franchising that have led to permanent changes in the franchise industry. These changes range from how the franchise industry is regulated to the introduction of technology in the franchise business model. Certain changes may be transitory while others will have a long-lasting impact on franchising. Summary In this concluding chapter, we presented current trends in franchising and how these trends will evolve and change the franchise industry in the years ahead. The introduction and use of technology by franchisors have Franchise Trends 163
started to transform franchise development, franchisee performance evaluations, and franchise oversight and support. Also, we explained how these changes, supported by newly introduced technologies will enhance the customer experience and increase franchise employee pro-ductivity. We discussed how the increased role of PE investment in the franchise industry will lead to more consolidation among certain fran-chise brands and empower other franchise to grow larger. Finally, we presented the impact on franchising brought about by the Pandemic of 2020–2021 and the changes made by franchisors that enabled franchise brands to survive. Notes 1 Teixeira, E. (2017). Using Applied Technology to Improve Franchise Development. https://www.franchising.com/articles/using_applied_technology_ to_improve_franchise_development.html 2 Rugless’R (2021). Restaurant worker of the future. Nations Restaurant News. https://www.nrn.com/technology/restaurant-worker-future-needs-heightened- digital-and-people-skills-expert-says 3 Tangermann, V. (2021). McDonalds partners with IBM to replace drive-thru employees with AI. Yesterday. https://futurism.com/the-byte/mcdonalds-ibm- replace-drive-thru-employees 4 May, 2021. The top drivers of franchise performance. Franchise Business Review. https://tour.franchisebusinessreview.com/posts/the-top-5-drivers-of- franchise-performance-new-research/ 5 Teixeira, E. (2018). Franchise fast food continues consolidation as fast food chain sonic is acquired. Forbes. https://www.forbes.com/sites/edteixeira/2018/ 09/26/franchise-fast-food-industry-continues-consolidation-as-sonic-drive-in- chain-is-acquired/?sh=6ed57fd3481d 6 Nelson, B. (2020). Home care and private equity: Examining investment and quality of care. Axxess. https://www.axxess.com/blog/1nancial/home-care- and-private-equity-examining-investment-and-quality-of-care/ 7 For private equity, growth is everything. (2019). Franchise Times. https:// www.franchisetimes.com/franchise_1nance/for-private-equity-partners- growth-is-everything/article_491ab1bd-5866-5aaf-b55f-394e9b8d5337.html 164 Franchise Trends