If you manage to create a clone model that can be operated
by the right people, you have a great start as a franchisor. Everyone else want
to get involved. At this stage you’ve engaged a consultant and a lawyer to get
the franchise offer framed up properly, and invested in marketing the concept.
Quite often those steps have required an equity investor
with franchise experience. Australia has more franchises per head of population
than America which sends a message but the answer is not obvious – other than
that we like to ‘have a go.’
Phase one is the start and in that phase the original designer
of the business is engaged and usually quite enthusiastic, which helps the
franchise sales.
After an initial group of new franchisees have operated
their businesses for a period, some tweaking of the model is bound to happen.
Supply chains are modified, branding updated, pricing examined closer. The effect
of scale has become quantifiable, costs are clearer, margins are analysed more
closely.
During this middle phase, the original owners may have
become less enthusiastic or taken things for granted. With the inrush of
franchise start up fees also came the need for more operating capital to bridge
the cost of expansion and often a reduction in owner’s equity. Having been at
the coal face for some time and working long hours, many owners see the merit
in cashing out some of their share and relaxing a little.
The franchisees are all beavering away and growing the
market for the product, which better informs the system as to what to do next.
Pricing decisions are made across the whole network in response to competition
or changes in customer tastes. All franchisees are bound to whatever price and
selling decisions the franchisor makes. Imagine how the Domino’s store owners
felt when head office announced the $5.95 pizza – a loss leader.
In Phase two, the management and shareholders become
dominant and the original owner usually slides towards a minority share – with less
input. At some point, they exit or the management dominance sidelines them.
Now in Phase Three, the product offering is less important
than recurrent sales of franchises. Existing franchisees find selling their
franchise difficult because head office won’t cooperate or approve their
prospective buyer. Head office is more interested in selling new franchises
because an existing outlet changing hands is worth less to them.
In 1989 I looked at buying a Snap Printing franchise and it
wasn’t a long analysis. Once I realised that head office would hold the lease
and could bone me for any of many little breeches in their lengthy and very
binding contract, I wanted nothing more of it. The would control inputs by
selling me EVERYTHING I needed at whatever price they decided, and they would
control output by pricing the printing and services. They could – and probably
did – increase the fees they charged, without any real justification.
If anything the franchise ecosystem has worsened as it
expanded. It’s not ‘being your own boss, running your own business’, it’s
servitude that most closely resembles legal slavery.
