Why franchisors and franchisees disagree about franchise support

One of the reasons for the failure of start up franchisors cited in a study by UK academic John Stanworth was that new franchisors often underestimated the amount and cost of support required by franchisees.

Similarly, one of the greatest sources of franchisee complaints reported to the Australian Competition and Consumer Commission (ACCC) about their franchisor arises from a perceived lack of support.

The issue of support – and the form or forms it should take – exists as a challenge to both franchisors and franchisees. Franchisees can find that the support offered does not add value to their businesses or meet their expectations, while franchisors can find that the cost of support can quickly erode the profitability or other benefits of the franchise model.

The result is that both parties recognise the same issue from different perspectives, and often collide accordingly.

However, support comes in different forms, and covers different things. It is worth exploring how support means different things to both parties in a franchise relationship.

The Franchisee’s Perspective

From a franchisee’s point of view, support is what they believe they pay for and are justly entitled to under both the up-front fee, and the ongoing franchise royalties.

The support from the up-front fee will include the franchisee’s initiation to the network, their training, their site selection, lease negotiations and fit out for retail franchisees (or packaging of equipment, etc for service franchisees). In addition, the opening promotions for a new franchise will be viewed as support, or the management of the transition from vendor to buyer will be viewed as a form of support for franchisees buying existing businesses.

Other forms of support often expected by franchisees at the commencement of the franchise relationship include training for the franchisee’s staff, on-site operational assistance during the opening days or weeks of the business, buying power, supply logistics, regulatory compliance, and one or more specialists to be available for the franchisee to call on for advice at almost any time.

The nature of the support expected upfront by franchisees has much in common with the ongoing support also expected. Franchisees will often feel that their substantial up-front investment in the franchise will entitle them to a substantial amount of up-front support and effort from the franchisor. Such support is likely to be almost exclusively of an operational manner (eg. how to make/sell/service the products, roster staff, manage inventory, etc in the most efficient way).

Up-front support is expected to be focussed on procedural aspects of the day-to-day running of the business to ensure its smooth operation while the franchisees familiarise themselves and become comfortable with their new working environment.

After the initial turmoil of getting the new business up and running (or transitioning into the existing business for resales), franchisees will maintain an ongoing interest in operational support, but review their expectations to include greater emphasis on business development (including marketing) and financial management.

Often these two areas of demand for support come sharply into focus if customer numbers or expected turnover levels have not been achieved (business development), or when the franchisee’s first Business Activity Statement (BAS) is due to be lodged after commencing operation.

Once the franchise is fully operational, franchisees will feel that their ongoing royalties form payment for the ongoing support from the franchisor, and will seek to maximise the value they receive for these payments. Royalties will be viewed as a “fee for service” and franchisees will attempt to obtain the most services they can for the fees paid. This will potentially lead to support requests outside the core operational areas offered by the franchisor, or focus on operational elements to a level not currently supported by the franchisor.

Again this may cause conflict in the relationship, particularly if the franchisee feels that their apparently reasonably requests for support are not met with equal enthusiasm by the franchisor.

The Franchisor’s Perspective

Entrepreneurs originally fall in love with the idea of franchising as a way of creating an ongoing income stream for their business, but can sometimes mistake “ongoing” for “passive” in relation to the royalty stream and mistakenly assume that the money will flow without a corresponding effort.

This is rarely the case and this somewhat naïve perspective among start up franchisors is rapidly replaced by the realisation that franchising is hard work.

However, the extent to which franchisees will require support during the set-up and ongoing phase of their businesses is frequently underestimated due to the franchisor’s unconscious competence in operating the same type of business. In other words, the franchisor has developed so much knowledge and experience in the operation of the franchised business at unit or territory level, has become second nature. The franchisor and his or her team instinctively know how to make an outlet successful, whereas a new franchisee does not and must rely on the franchisor to consciously and competently communicate and demonstrate the very skills and knowledge which have passed into unconscious habit from extended practice.

This can lead to franchisors becoming frustrated with new franchisees who just don’t seem to “get it” because the franchisor is now totally familiar with what “it” is, and has forgotten how much time and trial and error was involved in learning “it” for themselves.

This is the source of conflict between those who know or do things instinctively (the franchisor) and those who are yet to develop operational “instincts” in relation to the business (the franchisees).

The rate and extent to which franchisees acquire these instincts (which is directly related to the quality of the franchisor’s efforts to impart them) can cause great frustration for franchisors.

Franchisors who become frustrated at the length of time that a franchisee takes to get up to speed, may reduce efforts elsewhere to compensate for the perceived additional cost or effort the franchisee is forcing the franchisor to incur above and beyond what might have been budgeted from the franchisee’s upfront fee.

As a result, insufficiently prepared franchisees commence operating businesses only to find that their inadequate preparation can only be made up for by a greater amount of ongoing support. This puts a financial drain on the franchisor who may have to justify paying more in staff wages and on-costs to support a franchisee than is actually being received from the franchisee by way of royalties.

Franchisors also view ongoing royalties as “rent” for the franchise brand and systems, which like rent from an investment property is seen as a passive, not an active form of income. Unlike investment properties where market forces may set a maximum rental, franchisors can increase the value of royalties received from a franchisee if the royalty model is linked to turnover (eg. where franchise fees are set as a percentage of turnover).

By assisting a franchisee to improve turnover, the franchisor can also increase in royalty income. If at the same time, this support can improve franchisee profitability, then franchisee satisfaction with the business and the franchisor is also likely to improve.

Another franchisor perspective on franchisee support is often compliance-focussed. Is the franchisee operating in accordance with the franchise agreement and operations manual? Has the franchisee introduced the new product line? Are they stocking the correct levels of inventory? Are their reports to head office provided in the correct format? Are they paying their fees on time? And so on.

The compliance perspective may give the franchisor greater comfort in maintaining a sense of “control” over their franchise operations, but can be pointless if such control results in underperforming (but compliant) franchisees whose royalties amount to only a fraction of what might otherwise be possible.

The Telescope of Opposing Views

The difference between franchisee and franchisor perspectives on the issue of franchise support is like the difference between looking at the same object through both ends of telescope. From one end, the object is magnified and clear, while from the other, it is remote and distorted. Achieving a successful balance between these two perspectives is both the art and science of good franchising.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.