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 itís 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
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 doesnít 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 doesnít 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