Why Transparency and Consistency are Essential to Franchising Success
Trust is essential in building any collaborative business relationship, even more so in a franchised environment. When potential franchisees decide to enter into an agreement with a franchisor, they trust their investment will be well protected and supported. Likewise, when franchisors approve new franchisees into the system, they trust that the franchisee will adhere to all the operational brand standards, ensuring customers have a consistent experience wherever they visit the brand. Understanding the interdependent nature of the importance of trust within the franchise system is critical. Transparency and consistency are the most important aspects of trust in a franchisee-franchisor relationship; let’s take a closer look.
Transparency is Everything
Transparency is often at the top of the list of characteristics needed to build trust in franchisee-franchisor relationships, and for good reason. If I were to give one piece of advice to those reading this article who may be contemplating buying a franchised business, doing your due diligence to understand how transparent the franchisor is, specifically in two key areas, is essential to your decision-making process. Those two areas are how the marketing fund is managed and how franchisees who don’t follow the brand standards are addressed.
It’s common in the franchised world for franchisees to pay into a marketing fund on top of the franchise fee paid on their unit sales. The marketing contribution can range from 1% to 4.5%, depending on the brand, making this not an insignificant impact on your overall unit economics. It’s important to understand that the monies collected for the marketing or advertising fund are the franchisee’s money and are to be spent on building brand awareness and driving traffic to the individual business units. As such, there should be complete transparency in how this money is spent. It would be best to understand how much money collected from franchisees is spent on administrative costs and what those costs are. It would help if you also understood how the fund is divided amongst the markets where the brand operates. A good franchisor partner will fully summarize how these funds are spent annually. If they don’t, it should be a red flag around the level of transparency the franchisor is willing to share about the funds they collect to promote and advertise the brand.
Another area where transparency is critical in building a collaborative franchisee-franchisor relationship is how non-compliant franchisees within the system are addressed. The main advantage of buying a franchised business is its significantly lower failure rate. A study by FranNet, found that after five years of business operations, 85% of franchised units were still operating . To protect this low failure rate, all steps must be taken to protect the brand’s reputation, built over time on consumers’ trust in a consistent customer experience, achieved through franchisee adherence to a well-designed operating system. Franchisees who cut corners, fail to follow the brand standards, or treat their employees poorly risk negative publicity and a poor customer experience that puts the entire system at risk, not to mention the investment dollars of every franchisee. All it takes is one poorly operated unit and a lack of action by the franchisor to put the chain at risk, especially other units within the same local trading area. Ensuring you understand how the franchisor deals with these situations is essential, as other franchisees are largely powerless to correct the issues themselves.
Nothing erodes trust more than an inconsistent approach to managing results and system growth.
The Importance of Consistency in Franchising
Consistency is another core principle of building trust in the franchisee-franchisor relationship, and its importance shows up in several critical areas of the business. The two most meaningful areas of consistency in the franchisee-franchisor relationship, outside of how the business units are operating, are around how franchisees are treated in the system and how new franchised units are chosen and awarded within the system. Nothing erodes trust more than an inconsistent approach to managing results and system growth.
When entering into a franchised system, it’s important to understand how franchisees are treated. I’ve sometimes experienced big multi-unit franchisees being given more leeway regarding poor operations, as franchisors can be hesitant to use a heavy hand with someone who owns multiple units in the system. Regardless of the franchisee, dealing with underperforming locations is critical irrespective of how many units the franchisee may own. Because as we discussed above, franchise success is built upon consistent execution of the franchise’s programs, systems, and tools, and at the end of the day, the customer who has a negative experience doesn’t often know, let alone care if the franchisee owns twenty locations or one. A bad experience is a bad experience and poses a significant risk to the brand’s success, so trusting that your franchisor will handle all franchisees in the same manner as it relates to underperformance is critical.
The other main area where consistency comes into play when building and maintaining trust in the relationship between franchisees and franchisors has to do with how the system grows. Not only as it relates to how system growth impacts existing franchised locations but also how those growth opportunities are awarded within the system of existing franchisees. A transparent approach to both, executed consistently across the system, is crucial for building trust.
Unit growth is a core tenant of how franchisors measure the success of their brand and, when done sustainably, provides benefits to existing franchisees as well. The more locations the brand has, the more brand awareness the system generates amongst consumers, building individual unit sales and sales for the entire system. New unit growth can become a detraction on individual franchisee success when the franchisor undertakes a growth-at-all-cost mentality, in other words, irresponsible growth. Too many units in the same trading area can negatively impact same-unit sales growth year-over-year. While the franchisor will likely continue to grow its top-line sales through increasing units, the individual franchisee could see their sales decline if an additional unit is opened too close to their location.
Franchisees must understand how growth opportunities are awarded within the franchised system.
Ensuring you understand how growth is determined within your franchised system is important to your overall success. How are new locations selected? What tools or processes do they use to assess the viability of that location and its potential cannibalization of sales on existing units? Great franchisors have a scientific approach to making these decisions and will very likely share that process with franchisees whom the new location may impact. Also, franchisees must understand how growth opportunities are awarded within the franchised system. All too often, backroom deals with large multi-unit groups are the preferred approach to awarding new locations. While I agree that granting new units to existing multi-unit franchisees is often a sound way to grow as they likely have the infrastructure in place, specifically related to people and structure, there still needs to be avenues where top-performing single-unit operators can expand their portfolio of locations. If this isn’t the case, you may forever find yourself as a single-unit operator, and building your net worth may be exceedingly difficult if you can’t grow past one location. It’s worthwhile if you are keen to build a portfolio of locations to explore these decision-making criteria with your franchisor. Asking for specific examples of how the franchisor helped single-unit operators grow in the past is an excellent way to judge if that potential exists within the system today.
Understanding the importance of trust within the franchise system is critical. Transparency and consistency are the most important aspects of trust in a franchisee-franchisor relationship and should be considered carefully before signing on the dotted line.