Franchise-Guide

Why should you become a franchisor?

What hurdles do franchise systems that are still in their infancy have to face?


Following to ignorance, misjudgement and lack of proficiency numerous franchisors have to give up their activities every year. Main traps for young franchise systems are

Underestimation of Financial Requirements
One of the reasons for the success of franchising is the use of external resources to expand a business concept. Franchisees use their own capital and working abilities and are prepared to take risks in order to push through an idea. This principle, however, should not lead to the conclusion that a franchise system can be set up with a relatively low level of investment on the part of the franchisor. The financial requirements for building up a system are frequently underrated. It is dangerous to believe that the investments required to build up the system can be financed from the franchise fees. Such companies are behaving in a fraudulent manner as they are selling something which does not exist. They may succeed in finding a "victim" now and then. However, experience shows that such non-franchise systems do not survive for very long.

Underestimation of Work Involved
Consultancy work shows again and again examples of businessmen who, despite having a successful pilot business, fail in their attempt to build up a franchise network because they underestimate the work required to achieve this or because they do not delegate the tasks in a sensible manner. The preconditions for building up a system are often good. Money has often already been invested. However, the involvement in the daily business of the pilot business does not allow the businessmen to invest the necessary time and energy to successfully create a franchising system out of this new business field. The working capacity required to build up the system should be analysed within the framework of a company plan. Tasks should be delegated and - where it is sensible - external people and know-how should be used. Once this has been achieved it is then possible to define how much time is required for each separate step in building up the system.

Misjudgement of Existing Market Potential
The existing market potential for the business concept is wrongly assessed. A franchise system’s infrastructure becomes profitable once it has a certain minimum number of franchisees. Potential franchisors should have a clear idea of their system’s expansion opportunities before building up the system:

Insufficiently Targeted Goals for Franchise Businesses
A franchise system sells its franchisees an information lead over those standing alone on the market. This information lead, however, refers not only to the know-how of the business concept but also to the targeted goals concerning the development of the business. Before concluding the contract, questions are always asked concerning the expected turnovers, yields and possible risks. Whether the contract is then signed or not depends on the structure and informative value of the data and whether it can be verified. The targeted goals will not only be looked at critically by franchisees. Generally people starting a new business receive capital from external financial backers. Banks must also be convinced by the idea, therefore, and it is here that many franchising networks fail.

Taking of Hidden Levies from the Franchisees
Franchising is a system of cooperation between partners. This cooperation requires honesty from both parties. This open attitude creates a basis of trust upon which the two parties can work together productively. Again and again cases of hidden levies are discovered by the franchisees. These charges are paid by the franchisees either directly or indirectly to the system’s head office without the franchisees realising this. If hidden levies within the system are discovered - which experience shows will happen either sooner or later - then the basis of trust is destroyed. Franchisees will no longer only use their energy to manage their business but also to ensure that their own interests are pushed through with regard to the system’s head office. The system’s performance will drop - with the danger that it may completely collapse.

Missing of a Clear Strategy for Expansion
Before searching for their first franchisees, franchisors should first be clear about what their expansion targets are. The expansion aims should also be openly passed on to the franchise partners. The situation, equipment and acquisition concept of the system’s head office depends on its expansion strategy.

Neglection of Current Legal Situation in Contract
The franchise contract does not take the current legal situation into consideration. The franchise law is complex and is constantly being updated. Despite this fact many new systems use contracts written up by themselves or use a lawyer to do this who does not have sufficient knowledge of this area. These contracts will not stand up in court or are even invalid. This can put an end to the existence of a franchise system within only a few weeks.

Ignoration of Pre-contract Duty to Warn
The current law obliges franchisors to give a clear explanation on market chances, risks and the expected profitability of starting a business before the franchise contract is concluded. The information should always be verifiable either from data from the pilot business or other existing franchise businesses. If the franchisor fails to do this either partially or completely then he may be forced to pay compensation.

Mistakes in Choice of Franchisees
Again and again the same mistakes are made in the choice of franchisees. It is necessary to recognise what requirements for success should be present in the franchisee’s personality and these should be documented in a franchisee profile. Such a profile can be assessed, for example, according to a points system with the minimum requirements clearly defined. The growth of new systems especially is determined by the entrepreneurial success of the first franchisees. The acquisition of further partners can become difficult if one of the first franchisees gives up his business or cancels his contract. It can be even worse if a dissatisfied franchisee makes his opinion clear within the system.

Insufficient Organisation of System’s Head Office
Franchisors must carry out preliminary work before building up a franchise system. They must create a system’s head office which fulfils the personnel, expert and material requirements for training and assisting the franchise partners. The system’s head office’s duties towards the franchisees are listed in the franchise contract - and it is essential that the duties be carried out. The success of a franchise system is defined by its business concept and the ability to ensure that this is consistently carried out by the franchisees. If the organisation of the system’s head office does not fulfil the requirements of an expanding franchise system the danger exists that the whole system will collapse.

(Source: Jens Syring, Management Consultant)

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