Franchisors often need to offer support to their franchisees. After all, the business model depends on providing industry novices with enough training and assistance to run their own businesses successfully. This post looks at four types of support and assistance that franchisors often offer to their franchisees to enhance their success: training, ongoing support services, real estate assistance, and financing. When deciding on the amount and kind of franchisee support to offer, franchisors must balance the need make their systems attractive to prospective buyers against attracting the wrong people to their systems.
Perhaps the most important aspect of support is franchisee training. Most buyers of individual franchised outlets have not worked in the franchisor’s industry before, and few are employees of the franchisor’s company-owned outlets. To make those novices successful, franchisors need to train them. Without initial training, these franchisees will not know enough about the industry or the business’s operating system run their businesses effectively.
The catch is that this training, while needed, is also costly. If the franchisor offers too much of it, the cost will overwhelm the system. Therefore, successful franchisors usually offer short-term training – a few days to a few weeks at most – at an existing company-owned location. While some franchisors offer on-site store opening assistance, this type of assistance is more expensive, and few systems can afford to provide it.
Most franchisors also provide ongoing operational support to their franchisees. Often this continuing assistance takes the form of centralized services, such as volume purchases of raw materials or centralized data processing services. Because these services are subject to scale economies, the franchisors that offer them can often provide their franchisees with a cost advantage over independent businesses in their industries.
Some franchisors offer field operations evaluation – efforts by headquarters personnel to go into local markets to check on their franchisees. While field operations evaluation is costly, it is crucial for ensuring that franchisees are not free riding on collective assets, like the system brand name, by under investing in quality control.
Franchisors whose outlets operate out of fixed physical locations also need to decide whether or not to provide real estate services to their franchisees. Site selection assistance helps to ensure that franchisees choose the most attractive locations for the business, and lease negotiation assistance provides an additional mechanism for controlling franchisee behavior. However, these two forms of assistance add additional costs to the system, which franchisors must weigh against their benefits.
Finally, franchisors must decide whether or not to finance franchisees. Because financing franchisees is costly and risky for franchisors, few systems directly finance the buyers of their outlets. The benefits of additional outlet sales are usually too low in comparison to the cost. Far more franchisors see benefit in indirect financing, in which third party lenders provide the capital to would-be buyers. With indirect financing, franchisors reap the benefit of increased outlet sales without the cost of financing franchisees from their own funds.
Franchisors often provide training, ongoing support services, real estate assistance, and financing to their franchisees. The most successful systems carefully balance the benefits of these types of assistance against their cost.
*The material in this post is excerpted from chapter eight of my book From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company. Readers interested in more information on this topic might want to read the chapter.
