Three phases of Franchise - Get in on the first, third is worst

 A well-crafted product offering that people want to buy. That’s the one-in-fifty new start businesses, or the result of years of research and development, otherwise known as trial and error. Once you have this utopian restaurant, retail store, or product, you want to clone it and gain more economy of scale.

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.