HM F Elec 8

Franchising

Module 6: SIGNIFICANT ELEMENTS OF THE FRANCHISE RELATIONSHIP

Introduction

This chapter discusses a wide range of subjects that bear on the development of
franchise
programs and management of franchise relationships. Other than starting with elements
of successful franchising related to the development of a program to expand a
distribution network through franchise relationships and the establishment of such
relationships, the order in which these subjects is presented is not intended to imply
relative importance. Though intelligent planning and testing before granting franchises,
selecting high potential franchisees, effective training, furnishing valuable support
services and maintaining effective communication are critical to successful franchising,
each of the nine subject areas — elements — discussed in this chapter is significant to
the expansion and management of a successful franchise network. Except for critical
elements, the relative importance of these elements will vary from one network to
another.

Some of the elements discussed in this chapter are covered in greater detail, or from a
different perspective, in other chapters of this book. This chapter largely reflects the
author’s views of these elements of the franchise relationship that contribute to — or
impede — successful franchising. Subjectivity is inherent in analyzing a subject as
complex and varied as franchising and though the views expressed have been widely
endorsed by many franchising company managers and attorneys, and by franchisees,
not every observer of the franchise relationship will agree with everything written in this
chapter. It will also be obvious that most franchising companies will take years to adapt
and implement all of the elements outlined and many will never implement all of them.
The author nevertheless believes that this chapter can serve as a useful road map for
companies that range from start-ups to mature companies developing franchise
programs to mature franchise networks that are endeavoring to establish durable
franchise relationships with high potential franchisees and effectively manage those
relationships.
Learning Outcomes
At the end of this chapter the students should be able to:
1. Identify and apply key elements in franchise relationship
2. Practice skills in decision making and critical thinking
3. Enhance interpersonal relations

Learning Content

I. THE DECISION TO EXPAND BY FRANCHISING

1. The Decision To Expand

Most franchise networks do not begin with firm plans, or any thought at all, relating to
franchising. Without regard to whether the business operates from a single location or
several outlets, whether to expand, and if so, the method to use, frequently is a question
generated by the success of the business after several years of operation. Whether to
expand at all should, of course, precede consideration of method. Many businesses are
not easily expanded into a network of outlets Many entrepreneurs are not
temperamentally suited to manage expansion and will be happier, and probably more
successful, operating their original businesses or growing only to a second or third
outlet in the same city. The determination of whether or not to expand can be
considered the first step.
2. Expansion Methods
Once the decision to expand is made, the different methods by which expansion can be
accomplished will naturally be considered. One obvious method is the establishment of
additional outlets patterned on the original business and financed with its net cash flow,
debt, equity from friends and relatives or a combination of one or more of these
sources. Expansion by this method is slow and may strain the management (see the
Introduction to this book for a discussion of this method of expansion). A variation on
this method would be the establishment of first ventures, either with passive investors (a
financing device) or active operators to insure that owner-operators will be responsible
for the management of each outlet). Finally, the business owner will likely consider
franchising.
The method chosen is likely to be influenced in part by the goals of the business owner.
If the goal is a relatively small, local chain of outlets, expanding with company owned
outlets, or possibly joint ventures with passive investors, probably is the most sensible
method. If the goal is to build a regional or national, network of outlets, franchising is the
logical choice. In many instances a decision is made to expand with both company
owned outlets and franchisees, perhaps by establishing the original market as a
company store territory with franchising reserved for other metropolitan areas. In order
to develop in new markets, a few franchise networks have established company outlets
in such markets and ultimately sold them to franchisees. In many larger franchise
networks the ratio of company and franchisee operated outlets has fluctuated greatly
during the past two decades, most recently tending toward a greater percentage of
franchisee ownership.

The selection of the method(s) of expansion can be considered step two. The selection
of franchising as an expansion method should be made subject to meeting the criteria,
and the willingness of the owner to follow the guidelines, discussed in this chapter. The
success of the company’s brand will be determinative of the success of its expansion by
franchising and developing and enhancing a successful brand in a franchise network is
a complex and demanding endeavor. As will be discussed at length below, franchising
is much more than selling franchises and opening outlets.
3. Sound Concept
Franchising has been used extensively as a method of expanding businesses in 75 or
more business classifications, and has therefore been an effective business relationship
for a wide variety of businesses. This rapid growth of franchising in a wide, and ever
increasing, variety of service and product businesses has influenced many would be
franchisors to believe that franchising is a relatively simple business technique, readily
applied to almost any business. As noted above, this is not a realistic view. To be ready
to develop and implement a franchise expansion program that has a reasonable
prospect for success (even survival), a business must meet certain criteria and its
management must be prepared to follow certain guidelines. If the business has an
operating history of several years and operates in more than a single location, these
criteria already may have been met, at least to some degree.

The first criteria is a product or service for which there is an established and growing
demand, or at least good potential to achieve such demand. A start-up franchisor with a
sensational product or service concept is nevertheless at a disadvantage vis-à-vis
established, franchisors in attempting to sell franchises to high potential franchisees. If
the demand for the company’s product or service is not expanding relative to business
generally, or is little different from the offerings of many other franchisors, its start-up
handicap is increased. It is also important for the company’s business to have some
degree of distinctiveness. The more unique or distinctive the business concept (subject,
of course, to a proven demand for its products or services), the easier it is to attract
franchisees and develop a market for the franchise network’s goods and services. A
copycat business will have difficulty attracting high potential franchisees. The market for
high capability franchisees is increasingly competitive.

Different elements of a franchised business can make it distinctive: (1) its operating
systems, (2) its products and/or services, (3) its delivery systems, (4) its trademarks and
trade dress, including a unique feature or symbol that is easily remembered and can be
prominently featured in advertising (e.g., McDonald's golden arches, the Re/Max red,
white and blue hot air balloon), and (5) its marketing, including both regular advertising
and marketing, sponsorships and public relations that generate publicity.
4. Ready To Franchise
a. Prototypes
When is a company ready to franchise? Fully tested prototypes of the business are
essential. Prototypes test and refine the business concept, products/services and
operating system that the franchisor will license to franchisees. They are the models of
the business to be franchised. Prototypes should be tested in different types of markets
and locations - and for a sufficient time period. The operation of one or more prototypes
will afford the prospective franchisor the opportunity to test and refine: (1) designs,
layouts, décor and signage; (2) products and services; (3) customer reactions and
satisfaction; (4) equipment and fixtures; (5) training methods; (6) advertising and
marketing; (7) job descriptions; (8) number of employees needed at different times; (9)
required skill levels; (10) wage levels and benefits; and (11) other operating
characteristics and costs. Problems will be identified and the prototypes can be modified
to test proposed solutions. Such testing of the business concept and operating system
in prototypes of the actual business will prepare the company for effective franchising.
Using
franchisees to debug a theoretical business model is a high risk approach to
franchising.

The operation of prototypes also enables the business to develop the operating system
standards (sometimes called “brand standards”) — the aggregate of the specifications,
quality and other standards and operating procedures that will define the network brand
and serve as the guide and the legal standards for the franchise relationship. System
standards, of course, are not static, and will continue to evolve as the network expands.
Nevertheless, it is essential to have the basics of the operating system and standards
developed and understood before franchise expansion is launched.

Before implementing a franchising program, a company should evaluate what the pilot
operations, have shown about the business. Will the products or services satisfy current
and probable future consumer needs, be readily adapted to other areas of the country
and be salable at projected price levels? Does the business have a significant incidence
of repeat customers? Are there proprietary elements of the operating system that
cannot be easily duplicated? Can the operating system be effectively communicated in
an operations manual? Can managerial and other employees quickly and effectively
learn the operating system of the business? Can the operating system and standards
be readily teachable to ― and implemented by ― persons of varying education, ability
and experience? Is the design of the outlet significantly flexible to be scaled up or down,
or otherwise modified, to fit into the variety of sites that are likely to be available? Are
there major financial or operational problems to resolve? And perhaps most importantly,
does the business operate profitably and is the return on investment satisfactory? If a
company has operated for several years in multiple locations, these outlets will be its
prototypes. However, if expansion with franchisees will include difficult types of markets
or facilities, additional prototypes may be desirable to test those markets and facilities.
b. Financial Criteria
To be effectively franchised, a business must be capable of producing a reasonable
return
on the franchisee’s investment ― after deducting the value of the franchisee’s labor. In
other words, a reasonable return on the franchisee’s invested capital. The profit
potential of the business must appeal to high caliber franchise buyers and compare
favorably with other franchises. The business must also be able to generate sufficient
revenue to the franchisor to support essential franchisor services and generate a
sufficient return on the franchisor’s investment in franchising.

A business cannot be successfully expanded by franchising if it has any major

operational
or financial deficiencies. This does not mean that a business outlet cannot be more
profitably operated by a franchisee. Franchisee owned outlets frequently, though by no
means uniformly, have higher revenue and profit and better system standards
compliance than franchisor operated
outlets. An owner-manager has greater motivation and incentive than an employee to
make the business successful. Thus, a business with multiple retail outlets, some or all
of which are underperforming, or even struggling financially, could convert those outlets
to franchisee ownership and realize an improvement in their operations and financial
performance. However, owner management will not overcome a fundamental
operational defect or financial deficiency.
c. Business Plan
A business plan is the design for the business model and the expansion of the
business. It has been accurately observed that a design is the first signal of human
intentions. This
proposition applies equally to architectural designs and plans for a business and its
expansion.

An individual or company management that is developing a franchise expansion

business plan should keep in mind that the plan will reflect, and signal, the intentions of
the individual or company with respect to the many elements of a franchise relationship.
The plan can reflect the intention to develop a network of franchise outlets as fast as
franchises can be sold, at any available locations, without regard to the qualifications of
the franchisees, the viability of the locations or the long-term success of either. The only
real criteria is rapid expansion and positioning the company to sell its business in one
form or another, an exit strategy for the individual or company owners and managers.

A company considering franchising as its expansion method needs is a business plan.

A
sensible business plan for a would be franchisor includes actually testing prototypes of
the business that franchisees will be required to operate. The very fact that a franchisor
proposes to develop a business concept and format that will be implemented by
independent contractors requires that its business plan be carefully developed and
thoroughly tested before it is implemented. A company that develops a business plan
that will be implemented by its own personnel will have opportunities to adjust elements
of that plan as it is executed. Though a franchisor can make adjustments as its business
concept and format is expanded (franchisors invariably do make such adjustments), if
its basic plan has not been well structured and sufficiently tested, making significant
adjustments, which typically will require the cooperation of franchisees and additional
capital investment, will be difficult at best and may result in confrontation with
franchisees (e.g., demands for fee reductions). One element of a business plan for
franchise expansion that is sometimes overlooked is the need for the company to
transition from an operating company to a franchising company. This transition is not
always readily accomplished and can strain the relationships with the initial franchisees
of the network.
Recognizing the differences and planning to develop management properly attuned to
dealing with independent business owners attempting to implement the company’s
operating plan can avoid frustration with franchising as the company’s franchise network
expands. No business plan can be foolproof, but a would be franchisor needs to come
fairly close to that standard to avoid problems that can easily cripple its expansion
through franchising.
d. Sufficient Capital
To develop and implement a franchising program, a company needs sufficient capital.
Both a franchisor and its franchisees contribute capital to an expanding franchise
network. The franchisor contributes the capital to develop, test and refine the business
concept and operating system that the franchisor licenses. Franchisees contribute some
of the capital (frequently, most of the capital) that is used to develop and grow the
network. A franchisor needs capital for many essential elements of developing a
franchise network: (1) operating system; (2) products and services; (3) trade identity; (4)
prototypes; (5) professional fees; (6) experienced personnel; (7) marketing and
advertising; (8) regulatory compliance; (9) franchise sales; and (10) assisting
franchisees. A company that does not have sufficient capital, exclusive of initial
franchise fees, to develop and implement its franchise programs, will be dependent on
franchisees for that capital. Such dependence leads to granting franchises to low
potential franchisees, which can significantly, often fatally, hamper the growth and
success of the franchise network.
e. Capable Management
Expansion by franchising requires experienced management personnel. Franchisor
management must have real skills in franchise network management to recruit, train,
communicate with and support franchisees. Required experience and skills span a wide
range of functions: (1) franchise sales; (2) franchisee training; (3) site selection and
outlet development; (4) start up assistance to franchisees; (5) legal compliance; (6)
monitoring franchisee compliance with system standards; (7) continuing operational
assistance to franchisees; (8) communications with franchisees; (9) network and
franchisee advertising and marketing; and (10) developing and implementing
technology for the franchise network. At the commencement of its expansion, a typical
franchisor will generally have limited management and most managers will perform two
or more functions. As the network expands the franchisor’s management will become
more specialized, growing both by promotion from within and hiring experienced
franchise company managers from other companies. The relative importance of
different specialties and skills will change as the network grows. The entrepreneur who
made the decision to expand by franchising and guided the early expansion (probably
knowing each franchisee and his or her family on a personal level) may not be the
appropriate CEO when the network has expanded to a regional or multi-regional level.
There is usually a meaningful role for the founder long after considerable growth has
occurred, but that role frequently is not as the manager in charge of operational and
financial decisions.
C. Grow The Franchise Network With The Right People, In The Right Places And
At A Manageable Rate
1. Selecting High Potential Franchisees
The greatest obstacle to growing a franchise network successfully is finding and
recruiting the right franchisees. The capabilities, resources and attitudes of the
franchisees of a
network will have an enormous influence on the network success. The best concept,
operating system, site selection and marketing will not result in a successful franchise
business and network if franchises are granted to the wrong people. In contrast, high
potential franchisees can overcome deficiencies in the franchise business and the
locations of franchised outlets. The most productive and successful franchisees are far
more valuable to a franchisor and its network than average franchisees in terms of
revenue and outlet growth, fewer problems, lower operating costs and brand
enhancement.
a. Core Values And Other Characteristics
Though no selection criteria will be 100% predictive, and franchisors emphasize
different
characteristics of successful franchisees, there is general agreement on the importance
of the franchisee’s core values (sometimes termed “character”). A very important core
value is a positive attitude toward employees (viewing employees as an asset rather
than as a cost, a willingness to treat employees with respect, a willingness to invest
resources and effort in the training and mentoring of employees and the leadership
qualities to build an organization to operate the franchise business). A franchisee who
takes a participative approach — as opposed to an autocratic approach — to managing
employees will have a happier, more productive staff and lower employee turnover. A
more satisfied staff reduces training costs for replacement employees and improves
customer relations. Leonard Roberts, then the CEO of Radio Shack, observed that
“before a store can be a great place to shop, or a restaurant a great place to eat, it must
be a great place to work. And franchisees dictate that culture.” Other core values that
franchisors have identified include positive responsiveness to customers — even
unreasonable customers; the motivation to be successful (people who believe they can
and will be successful, and have positive attitudes toward life and business, tend to be
successful; people with negative attitudes look for excuses for failure, do not accept
responsibility and will usually blame the franchisor); a strong work ethic (managing a
business is hard work and can require long hours for many years); the ability to work
independently, with a mindset of “how can I make this business perform better;”
receptivity to new ideas relating to marketing, selling and operations; a willingness to
share ideas and work cooperatively with others (e.g., the employees, suppliers, the
franchisor, other franchisees); sociability (the ability to work interactively and effectively
with large numbers and different types of people (employees,
customers, suppliers, the franchisor’s management personnel and other franchisees) in
a variety of situations — an attitude toward working with people that will bring out the
best qualities and efforts of those people); a willingness to become involved in the
community (which can be helpful in building a customer base). In general, the success
of franchisees will depend upon and correlate well with the character of the relationships
they establish and maintain with their customers, employees, suppliers, fellow
franchisees and the franchisor.
b. Recruit High Potential Franchisees
A franchisor should make the effort to recruit franchisees with the highest potential.
Many individuals are not appropriate to be a franchisee of a specific franchise network
(or any
franchise network). Selecting prospects that match well with the franchised business
results in successful, motivated, productive and happy franchisees. A franchisor should
endeavor to match a prospective franchisee’s interests, operational ability and financial
resources with the requirements of the franchised business. Granting franchises to the
wrong people is probably the most common mistake made by new franchisors.
Franchise sales are difficult to pass up, but a franchisor can do so secure in knowledge
that the lost revenue and expansion opportunity is small compared to the cost of a
wrong person.

Expansion with the wrong franchisees is a road to failure. A franchisor should develop
and adhere to a profile of a high potential franchisee. This profile should focus on the
characteristics that are important to successful operation of the franchise business and
be realistic in terms of the candidates likely to be attracted to the network.
This profile will include a variety of criteria, such as financial resources
(undercapitalized,
overleveraged franchisees have a high failure rate); personality traits; motivation;
education; experience; human relations skills; general skill sets; a positive attitude about
selling; success in a prior business and other endeavors (has the candidate maintained
long term business or professional relationships or moved frequently from one
relationship to another); goals; a demonstrated interest in the franchised business (will
the candidate be likely to maintain a long term relationship with the franchise network
and acquire additional franchises — or suffer from “burn-out” early in the relationship);
and an understanding of a franchise relationship (e.g., the need to operate in
compliance with system standards). Different franchise businesses will have different
skill requirements.

c. Evaluating Prospective Franchisees

Franchisors can use effective tools to assist in franchisee selection and a variety of,
selection tools are available for evaluating prospective franchisees. Such tools include
structured, behavior-oriented interviews that require the candidate to state how he or
she would react to and resolve hypothetical situations — tests of core values. Some
franchisors use psychological and personality testing techniques to assist in franchisee
selection. A variety of tests are available for prospective franchisees. Such tests are
designed to determine various characteristics of a prospect and relate those
characteristics to the franchised business. Some franchisors believe that personality
tests may not be as effective as interactive interviews and protocols designed to test
real world reactions and problem-solving skills. Personality traits vary widely among
successful people, but core values are common to such people.
d. Do Not Mislead Prospective Franchisees
Franchisors seek accurate and complete information about a prospective franchisee
and
will be quickly turned off by a candidate whose veracity is in question. It is equally
important for a Franchisor to furnish accurate and complete information about the
company and its franchise business to a prospective franchisee. Franchise buyers are
much more sophisticated than they were in the past and they have much more
information available to them. Avoid misleading prospects with respect to profitability;
the time likely to be required to become profitable; investment and working capital
requirements; the time and effort required to operate successfully; the competition the
franchisee will face; or the risks inherent in acquiring the franchise. It is far safer and
sounder to undersell and overperform. Creating realistic expectations avoids
disappointment and disputes.

e. Grant Franchises — Don’t Sell Them

It is important to understand (and easy to overlook) that the relationship with a
franchisee
begins during the period in which the prospective franchisee and the franchisor are
deciding whether to establish a relationship. The way a franchisor approaches
establishing franchise relationships will influence the future relationship. The franchisor
has many such explorations; the franchisee has only one with that franchisor and will
remember how the franchisor approached and implemented the process. Did the
franchisor fully and fairly explain the relationship, the obligations and responsibilities of
both parties, the role of the franchisee in the network, the effort required to build a
successful business? If the franchisor makes the effort to explain its operating system,
network, business and the franchise relationship it offers, the franchisee will have a
positive view of the franchise grant process. The more the process resembles a mutual
exploration of whether the prospect and the franchise business are a good match, the
more positive is the beginning of the relationship. “Grant” the franchise when the match
is good. Certain elements of a “sales” environment are inescapable for most
franchisors,
but “granting” a franchise should more closely resemble the process of establishing a
long term business relationship — a soft sell approach. Overly aggressive “selling” of
franchises has turned off many qualified prospects — resulting in lost opportunities for
both franchisors and franchisees. A prospect should be encouraged to talk with existing
franchisees and to get professional advice. It should be made clear to a prospect that it
is important that both the company and the franchisee make the right decision.

2. Developing Leads To Prospective Franchisees

A franchisor must develop strong lead generation sources. This can be approached by
first determining the characteristics of the network’s successful franchisees. How were
those franchisees attracted to the network? What characteristics of the network
influenced them to acquire a franchise? How can similar prospects be located and
motivated to join the network?
a. The Internet
The internet has become the most important source of leads for many franchisors. For
many companies, the internet is responsible for a majority of leads and a high
percentage of franchise sales. This trend is likely to continue as more information about
franchise opportunities is posted on franchisor websites and by various organizations
and prospective franchise buyers become increasingly aware of the availability of this
information. The internet is an efficient and inexpensive communication channel for a
large volume of information. Though relatively few franchisors put their Franchise
Disclosure Document (FDD) on their websites in read only format for downloading by a
prospective franchisee, the number of franchisors that include their FDDs on their
websites is increasing and many franchisors are steadily allocating a larger share of
their recruitment budgets to generating leads via the internet.

As the regulatory issues relating to electronic transmission of FDDs are resolved, and
broad band capacity and faster modems become more widely utilized, the use of the
internet to deliver disclosure materials is likely to increase. Franchisors need to pay
careful attention to state and federal law relating to the offer of franchises on their Web
sites. Such offers are exempt from the requirement to submit the Web site as
advertising for franchisees for review by state administrators, provided specific rules are
followed. In other respects, the laws relating to offers and sales of franchises (e.g., the
use of financial performance representations) apply equally to Web sites and other
franchisor franchise sales activity. To attract interest, a franchisor’s website must have a
professional appearance, be attention grabbing, be user friendly, enabling a visitor to
quickly and easily find the information about the franchisor and its franchise that will be
most important in his or her initial investigation, including the way to contact the
franchisor for additional information. The website should convey enough information to
stimulate an interest in learning more — and therefore induce contact with the company
— including franchisee testimonials, and streaming video giving a virtual tour of the
franchised business and a description of the process of becoming a franchisee (e.g.,
completing an application, executing franchise documents, completing the training
program and the development of the franchised business). Some franchisors use a
password accessible intranet to enhance the sales process. Prospects can access
information not available to the general public after an initial qualification process. This
is an efficient and effective method of both educating, and demonstrating interest in, a
prospect.
b. Printed And Other Sales Materials
Print advertising continues to be a significant source of both quality leads and franchise
sales. As franchisors allocate more of their recruitment budgets to the internet, they are
reducing the share of their budgets devoted to print advertising for franchisees.
However, print advertising continues to be the second or third best source of franchise
sales (behind referrals from the internet and existing franchisees) and is a cost effective
recruitment method. Print advertising includes newspapers, trade publications,
magazines, direct mail and other types of printed advertising.

A franchisor needs sales materials that appeal to prospective franchisees on logical and
emotional level. The focus should be the story of the franchisee’s brand and why a
franchise relationship will benefit the prospective business owner. Sales materials
should be of high quality. A professionally prepared, multicolor, comprehensive
brochures generally is the principal franchise sales tool. This brochure will have
attractive, four color pictures of a franchised business, some of which should depict the
business in the midst of a busy period, conducting lots of business. Specific terms of the
franchise relationship should be omitted from the brochure or included as inserts that
can be inexpensively modified. Simpler, one or two page descriptions are used for trade
shows, direct mail and in-store use. Counter cards and short brochures advertising the
availability of franchises, displayed in franchisor and franchisee operated outlets, can
also be a cost effective source of leads.
c. Existing Franchisees
Existing franchisees are a significant source of leads. Referrals from existing
franchisees
(and their employees) are likely to be the most cost-effective source of leads. Satisfied
franchisees will tell friends and relative about their experience and their positive
experience will predispose those prospects to approach the franchisor with a positive
attitude. Many franchisors offer incentives to their franchisees for leads that turn into
sales, including various types of perks (e.g., free registration and transportation to the
network convention). A few franchisors maintain more formal broker relationships with
their franchisees. Operating franchisees can be effective advocates for a network’s
franchise. They know the benefits and problems better than a professional salesperson;
they are frequently better positioned to answer questions about the franchise business
and the network and they can be more credible than a salesperson. It is important to
advise franchisees who participate in the franchise sales process regarding the legal
requirements applicable to franchise sales and proper and improper sales practices. It is
also prudent for a franchisor to disclose that compensation is paid to an existing
franchisees for a lead that becomes a sale.
d. Referral Networks
Referral networks are a potential resource of leads and can be helpful to new
franchisors.
Referral networks are typically associations (or franchised networks) of independent
businesses or real estate brokers who work together to offer regional or national referral
resources to a franchisor. A referral network will generally perform preliminary screening
and qualification of leads that they generate and attempt to match a prospect with a
suitable franchise opportunity. However, a franchisor has no way of knowing whether it
(or another client franchisor of the referral network) is receiving the best prospects. Most
referral networks will not represent direct competitors at the same time, but this should
be confirmed. Referral networks are compensated by payment of a percentage of the
initial franchise fee or a flat fee; fees range from 25% to 50% of the initial franchise fee
and $5,000 to $20,000.

Under federal and state law, referral networks are generally deemed to be brokers. If
the
members of the referral network strictly limit their activity to referring interested parties
to one or more franchisors, they may avoid classification as brokers. However, the
screening and qualification of prospects and “matching” of prospects with a franchisor
typically undertaken by network members places them in the broker category under
federal and state franchise sales regulation. Such referral networks and their members
must be registered as brokers in certain states.
It is important to secure written assurances from a referral network regarding the
statements and representations that the network and its individual members will make
to
prospects with respect to: (1) the limited number of franchisors represented by the
network; (2) the franchisor and the franchise it offers; (3) the role of the network and its
members as agents for the franchisor; (4) the screening and franchise selection
functions of the network; and (5) the manner in which the network is compensated if the
prospect acquires a franchise from a franchisor to which it is referred. Due diligence is
required to assure that a network complies with disclosure regulation. It is important to
check carefully a referral network’s track record with other franchisors.
e. Public Relations
Public relations can play a significant role in a franchisor’s efforts to recruit franchisees.
A widely recognized franchise brand facilitates franchise sales and this can be
particularly
important when a franchisor enters a new market. The engagement of a public relations
consultant can be a good investment for a franchisor that is building brand recognition in
a competitive business.
f. Evaluating Lead Sources
It is important to track leads as to source, quality, follow-up, problems, disposition and
lead and closing costs. The average cost of leads and franchise sales (excluding broker
commissions) varies considerably by company and source. The cost of leads ranges
from a few dollars to several hundred dollars. Tracking leads includes determining
which internet searchengines produce the highest volume and quality of leads. A
franchisor can use software designed to: (1) track and grade leads; (2) facilitate the
recording of discussions with prospective franchisees; (3) record appointments and
follow-up activities in the sales process with respect to each lead; and (4) evaluate the
source, quality and closure rate for each type of lead. Tracking can help management
allocate its advertising budget for franchise sales and enhances the efficiency of the
sales process.

g. Be Responsive
A franchisor must be responsive to inquiries. Many franchisors do not respond
effectively, sometimes because they have more leads than they can effectively process
and select
for response. It is not productive to spend money to generate more leads than a
franchisor can handle effectively. Concentrating recruitment efforts and expenditures to
generate high quality leads facilitates responsiveness. Lead management services can
aid a franchisor in efficiently processing leads. Those that are clearly unqualified (e.g.,
for reasons of financial requirements or geographic interest) are segregated for a polite
letter of rejection. Those that are doubtful, are segregated for a response requesting
additional information. The remaining leads are routed to the franchise sales
department or regional department or organization that may be responsible for initial
screening and sales efforts. The lead management service will track all leads that
remain in the sales process and issue periodic reports and/or secure website postings
of the status of each lead. Lead management services are particularly helpful to
franchisors that receive large numbers of leads from the internet.

The gold standards of responsiveness is phone contact by a professional sales person

within 24 hours of his or her log on or other contact. To the extent not already
accomplished by the prospect’s response to the website questions, this contact should
qualify the prospect with respect to financial resources, work and business history,
interest in the franchisor’s business and geographic and time frame interest. Once
qualified, an FDD can be sent to the prospect (usually by mail, but, in the future, more
frequently electronically) or can be invited to franchisor headquarters to learn more
about the franchise and further discuss becoming a franchisee. The prospect may also
be encouraged to contact existing franchisees and visit franchised outlets in his or her
area. The last step frequently involves the preparation of a business plan by the
prospect, with assistance by the franchisor sales staff (being careful to avoid unlawful
financial performance representations).
h. Support Of Franchisees
A franchisor needs the support of its franchisees to sell franchises. Franchise buyers
have
a wide range of choices and are increasingly sophisticated and diligent in investigating
franchise offerings. A franchisor’s FDD must identify 100 current franchisees, and all
franchisees whose franchises, during the preceding year, were terminated, not
renewed, acquired by the franchisor or who otherwise separated from the franchise
network. For the preceding three years, the FDD must disclose the network’s
experience with respect to terminations, expirations without renewal, transfers and
acquisitions by the franchisor. Sustained growth requires satisfied franchisees.
Prospective buyers contact current and former franchisees and they can influence
purchase decisions. A high failure rate or dissatisfaction with the franchise cannot be
hidden from or effectively explained to prospective franchisees. Unprofitable or
otherwise dissatisfied franchisees are unlikely to refer prospective franchisees to their
franchisor.
i. Expand At A Manageable Rate
A franchise network should be expanded at a manageable rate. Franchise networks
must
expand, sometimes rapidly, to acquire good sites, build market share, enhance brand
identity and spread network development costs over a larger number of outlets. It is
nevertheless essential to expand at a manageable rate. Such expansion is usually
accomplished most effectively in markets where franchisees can be efficiently
monitored, supported and supplied. Because capital and human resources are always
finite, expansion diverts such resources from operating system development, marketing,
problem solving and franchise relationship building. Franchisors find it most effective
and efficient to concentrate outlets in a few markets, in order to achieve market share
and brand recognition and cost effective operational support and advertising. Expanding
in too many markets consumes capital and exposes the franchisor/franchisees to
increased risk. If a company’s goal is to become a national network, it is much safer to
become first a regional, then a multi-regional network, before attempting national
expansion. Not every national network has followed this path, but many franchisors
have failed attempting expansion simultaneously in too many markets.

The rate of expansion of a franchise network can also significantly impact its ability to
effectively screen prospective franchisees, adhere to its profile for high potential
candidates and resist the temptation to grant franchises to prospects who do not fully
meet its criteria, in order to meet predetermined expansion goals. Granting such
franchises may enhance the rate of expansion in the short run, but is likely to result in
higher franchise turnover, impeding net growth over time and causing losses to lenders
and suppliers (and, not unlikely, unhappy customers) upon whom the franchise network
depends to sustain its growth. Over the long term, the only number that really matters is
the number of operating franchised outlets, not the number of franchises granted.

It is also important to avoid the pitfall of expanding prematurely in other countries.

International expansion is more difficult and costly than it may appear. Franchising
continues to spread throughout the developed and developing countries of the world
and with that expansion has come a rapidly rising level of regulation of the grant of
franchises and the franchise relationship in such countries, a situation almost unknown
before the 1990’s. Such regulation is frequently unclear, is not fleshed out by judicial
precedents and has potentially increased the cost of franchising in such countries by an
unknown amount.

Definition of Terms:
Referral networks are a potential resource of leads and can be helpful to new
franchisors. Referral networks are typically associations (or franchised networks) of
independent businesses or real estate brokers who work together to offer regional or
national referral resources to a franchisor

5. Teaching and Learning Activities

6. Recommended learning materials and resources for supplementary

reading.
[Link]
[Link]
[Link]
[Link]
[Link]

7. Flexible Teaching Learning Modality (FTLM) adopted

  Online (synchronous): Sedi, FB Messenger, Google Meet. Google Classroom,
Edmodo
 Remote (asynchronous): Module

8. Assessment Task
Quiz/Assignment/Recitation
Assignment:
1. What is the most effective way in developing leads to prospective
franchisees?

9. References (at least 3 references preferably copyrighted within the last 5

years, alphabetically arranged)
Beshel, B. (2001) An Introduction to Franchising, New Yok Avenue Law Suite 900,
Washington DC: IFA Educational Foundation
Boroian, D.(2008) Franchising your Business, 20200 Governor’s Drive, Olympia Fields
IL, USA: Francorp , Inc.
Manasco, J. et al.(1993) How to Buy and Manage a Franchise, Rockfeller Center 1230
Avenue of the Americas, New York, New York: Francorp, Inc.
Murray, I. (2006) The Franchising Handbook: Cambrian Printers Ltd, Aberystwyth,
Wales

ISUE__ __ Syl ___

Revision: 01
Effectivity: September 1, 2020