In collecting my thoughts for a presentation on franchising at the Globe and Mail’s Small Business Summit in Vancouver in early October, I wanted to give some practical advice in the next few columns to help owners decide whether or not to franchise.
Conceptually, it isn’t that complicated, at least from the 10,000-foot level.
Franchising is simply a type of business expansion where you, as “franchisor,” give an independent businessperson – the “franchisee” – the right to use your brand and your “business system” for a “term.” There’s no set formula to these terms, but like a lease they are not forever, and the length can be five, 10 or even 20 years.
The franchisor sets up a “franchise agreement” that lawyers prepare, and it contractually obligates the franchisee to comply with standards of operation and other terms and conditions, in particular the use of a business system and brand. In exchange, the franchisee agrees to pay upfront and continuing fees for its use of those rights over the term of the contract. The expectation is that after paying these fees, there will be profit in the arrangement for the franchisee.
Franchising is simply another method of growing a business, the other being the addition of locations by the owner, through his or her company’s own resources or through the assistance of banks or other lenders.
If you can grow corporately and you have the financial ability to build out stores or restaurants that can be operated by your own managers and employees, you don’t need to franchise. Starbucks is one example of a company that located stores all over North America without franchising. I regularly received phone calls from people interested in buying a Starbucks franchise, only to tell them: “Starbucks doesn't franchise because they don't need to franchise.”
The owners of Starbucks had access to lots of cash and I suppose they made a decision to fully control their locations, their standards of operation, the quality of their products and services and the Starbucks brand and trademark. Besides, it’s relatively easy to get rid of an employee you don’t like or who is underperforming. It’s much harder to do that with a franchisee, who can only be terminated for materially defaulting under the agreement. (And it’s expensive to involve lawyers in franchise disputes.)
If you have the resources to own your locations and hire all your employees and managers, then you have the ability to fire them all as well. You will not have that sort of control as a franchisor.
Never underestimate the importance of a brand. A prospective franchisee wants to be associated with a brand because customers will identify with it, otherwise he or she wouldn’t be interested in what you have to offer. Customers recognize the Tim Hortons brand, and it’s arguably more lucrative to carry on a doughnut business under that name than it is under one with no brand recognition.
Franchisees will be prepared to pay for the right to use a brand.
My colleague Michael Allabarton, of BrandDig Consulting in Victoria, tells me: “Branding is everything a company does. It's a company's heart and soul. Its values. Its behaviour. Branding isn't clever packaging, or PR spin. It's an integrated personality and market positioning that projects the image and values of an organization. More importantly, branding is how a company reveals its personality and delivers on its market position.
“Companies that recognize true brand value also understand that they do not own brands. Consumers own brands. Companies own trademarks.”
So it’s important for budding franchisors to recognize the power of branding, especially when they’re involved in a retail business or a restaurant concept they wish to grow. Branding is just as important as the financial and legal sides of the franchising equation. If you’re a budding franchisor, do you have a “brand,” and if not, could you develop one that consumers and potential franchisees could embrace?
Virtually every business has a “system” of some sort – it includes how and where the business acquires its products for resale, product packaging or recipes and food preparation, the training of employees and managers, the use of technology to deal with inventory and accounting, uniforms worn by staff, background music, processes for dealing with unhappy customers, quality control, and portion control.
Just watch a McDonalds in operation to see how “systematized” that restaurant concept is, and you’ll get an idea of what a business system is at warp speed. Watch how many steps a person has to walk to provide you with your meal, and how long that order normally takes. Watch the process for cooking the french fries, or look at the staff in the back preparing the burgers and ask yourself: how did this “system” come about? How many people developed it and how? How is this system’s operation taught to others?
The businesses processes that make up the franchisor’s system didn’t happen by osmosis or overnight. They took years of trials and tribulations to get just right. And good restaurant companies and retailers are always trying to improve their system to stay ahead of the competition and to avoid becoming stale and out of date. This could be because, in the retail business, the restaurant business and other customer service businesses, you adapt or die.
If you’re a prospective franchisee, you want to be part of a franchisor’s system and benefit economically from it. If the business system developed by the franchisor is successful, that person has done something right. Franchisees want to participate in a franchisor’s success. And they’re prepared to pay for that.
When my son was 17, he worked as a cook at White Spot restaurants, and he was at home studying manuals showing the processes for making complicated meals simple and straightforward enough for a teenager to prepare. Certainly in the restaurant businesses, you have to have systems like this to ensure quality and consistency of your food products. Many of the people preparing these meals are teenagers and in their early 20s.
You need to “manualize” your processes and systems so they are easily understood. When the 17-year-old chef moves away to go to university, his replacement will be another 17 year old who will have to be trained.
You don’t have to be McDonalds or White Spot to have a business system. But you should have a business system that includes your specialized know-how and the secret of your success.
Is the system something you can replicate in other locations? Can it be taught to others, especially franchisees and their often-young employees?
It strikes me that if you can train teenagers to prepare trillions of hamburgers as part of your business system, you can train smart, motivated people to do just about anything.
Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp.in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.