The question of whether to run a mix of franchised and company run operations is a question which every franchisor inevitably faces. In most franchise systems the issue arises in the earliest stages of development.
The franchisor has an operating and proven model which he wishes to replicate and grow the business via franchising. Even amongst seasoned franchisor’s the issue of how many, if any, company operations to keep remains an issue of strong debate.
In the conventional retail model this is relatively straightforward as, finances allowing, another outlet can be opened and run under staff before franchising it off. If finances don’t allow this, the franchisor is faced with a burning question. Do I franchise my existing model, or do I keep it?
Where the franchisor has several outlets this is less of a problem as one can be franchised without overly affecting the franchisor’s income from the group. In most systems where Franchise Alliance has been involved with their development, the franchisor is forced to keep the “cash cow”, best store or territory, purely for financial reasons. This can bring its own problems to the table as it can be interpreted by franchisees that the franchisor is only franchising the less profitable, or even problem outlets, and is keeping the best for themselves. This perception is not conducive to strong franchising and will not be overcome until a franchisee can reach the same level of success, or better, from a new outlet. It is thus well worth considering franchising the best performing outlet and foregoing the income. The supporting rationale behind this being that the particular franchisee will be highly successful and, by validating the system, will be the best resource possible to refer potential franchisees.
The service style franchisor often finds it more difficult to sell off the originating territory as it is frequently their sole source of income. They are then faced with selling off new territories against the existing proven model. Whilst the retail franchisor needs to do thorough demographic research, it is even more important for a service franchisor to do so in these situations. Sadly, it is our experience that retail franchisors recognize this need, but service style franchisors tend not to.
Situations usually dictate the path in the development stages, but what about when a system is more mature and can actively address the issue of how many company operations to run, if any?
Generally, the recognized advantages of having franchisor operations alongside those of franchisees are as follows.
Martin Rose, an ex Master for New Zealand Natural Ice Cream, summarizes the above points as follows, “Company stores allow a franchisor the ability to control and profit from a successful concept. They can provide cash flow and a training facility to showcase the business for both the market and other franchisees”.
But it’s not all rosey in the garden as there are certainly some disadvantages in keeping franchisor operations running alongside franchisees.
Running a system with master franchisees, which are often required to own and run their own operation, can alleviate the franchisor from needing direct experience, but only if the masters are highly communicative and responsive.
Martin Rose comments again “A combination having both management resources and capital tied up can often lead to a poor return on investment – most particularly in difficult trading times. Further challenges exist in ensuring staff perform as well as an invested driven franchisee”.
So, what is the right answer?
Well sadly, there isn’t one. There is no formula which provides the magic solution and every system is faced with differing opportunities and needs with circumstances often dictating the path forward rather than a conscious decision being made. However, Peter Fox has this interesting viewpoint; “It is fine to have one, or maybe two, corporate stores to operate as a model and/or training store and these can generally be accommodated within the existing infrastructure with little cost impost to the franchise model, but if numbers increase over and above these, a strict corporate model with specialist infrastructure is required.”
In balance at Franchise Alliance we have to say that we believe running at least one company operation can be easily justified and, in our view, the advantages outweigh the drawbacks.
By Phil Blain http://www.franchise-chat.com