5 Areas Franchisors and Franchise Prospects Should Focus on

by Ed Teixeira

Here are 5 important areas that prospective franchisees and franchisors should pay attention to. If these areas are in sync, chances are the franchise is in good shape.

Whether it’s a case of operating a franchise system or evaluating a franchise opportunity, there are 5 areas I consider of paramount importance. When franchisors and franchise candidates focus on these 5 areas the potential for a successful franchise system will increase. Of course, any franchise evaluation needs to be detailed and in-depth; however, the following areas deserve extra attention.

1. The royalty, ad fund and other fees are reflective of the franchise operating margins. Since the majority of franchisors charge franchisees continuing franchise fees pegged to revenues these fees must be balanced with the gross margin, and reflect the fact that successful franchisees typically require less services as the business matures. Since most franchise fees are fixed to revenues, more fees are paid as franchisee revenues rise. More franchisors are introducing a variable royalty program, as way to reward and incentivize revenue growth.

2. Training programs are top notch. Initial and on-going franchisee training programs must be well constructed and professionally presented. In many companies the training department is the one area underfunded and the first subject to cutbacks. In the case of franchise companies the importance of initial and on-going training is a key component of a successful franchise network. The complexity and amount of training will vary based upon the complexity of the franchise operation. However, what is important is that the training be complete, thorough and well presented.

3. The size of the franchisee territory doesn’t restrict growth. When a franchisee has a small or unprotected territory, the ability of a particular franchise to maximize their full potential can be limited. There needs to be a certain amount of fairness when it comes to a franchisee territory. The best way to evaluate the territory issue is for franchisors to conduct on-going marketing studies and measure franchisee performance and satisfaction. Prospective franchisees need to conduct their own market study and speak with existing franchisees.

4. Franchisor leadership and staff have a high level of business and franchise competency. A franchise is a unique business model that requires a particular brand of leadership. First of all, franchisees have a dependency upon the ability of the franchisor to administer, lead and support the franchise network. Secondly, from a relationship standpoint, franchisees are an investor in the franchise network and a quasi- independent business owner. This type of individual requires franchisor leadership that recognizes this fact and is capable of meeting their needs.

5. The franchisor has an Item 19 disclosure or a darn good reason why not. Since the majority of franchisors fail to make an Item 19 disclosure prospective franchisees are unable to obtain important financial information unless they contact individual franchisees. Having franchisee financial data provides franchise candidates the ability to construct realistic pro forma financial and cash flow statements. If the franchisor doesn’t make an Item 19 disclosure the reasons should be credible. Having a small franchise system or being a start-up franchisor should be the only reasons for not making an Item 19 disclosure.

Both franchisors and individuals considering a franchise should pay attention to 5 important areas of the franchise program. These 5 areas are a key component of any successful franchise program.

© 2012 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com