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"What Is Franchising?"

Cited - - By Bob Gappa

Franchising is one of three business strategies a company may use in capturing market share. The others are company owned units or a combination of company owned and franchised units.

Franchising is a business strategy for getting and keeping customers. It is a marketing system for creating an image in the minds of current and future customers about how the company's products and services can help them. It is a method for distributing products and services that satisfy customer needs.

Franchising is a network of interdependent business relationships that allows a number of people to share:

  • A brand identification
  • A successful method of doing business
  • A proven marketing and distribution system

In short, franchising is a strategic alliance between groups of people who have specific relationships and responsibilities with a common goal to dominate markets, i.e., to get and keep more customers than their competitors.

There are many misconceptions about franchising, but probably the most widely held is that you as a franchisee are "buying a franchise." In reality you are investing your assets in a system to utilize the brand name, operating system and ongoing support. You and everyone in the system are licensed to use the brand name and operating system.

The business relationship is a joint commitment by all franchisees to get and keep customers. Legally you are bound to get and keep them using the prescribed marketing and operating systems of the franchisor.

To be successful in franchising you must understand the business and legal ramifications of your relationship with the franchisor and all the franchisees. Your focus must be on working with other franchisees and company managers to market the brand, and fully use the operating system to get and keep customers.

Throughout this article we will discuss in detail some of the benefits of conducting business as part of a larger group.

Other franchisees and company operated units are not your competition. The opposite is true. They and you share the task of establishing the brand as the dominant brand in all markets entered and reinforcing the customers's familiarity with and trust in the brand. So in this respect you are working as a team with others in the system. Other franchisees share with you the responsibility for quality, consistency, convenience, and other factors that define your franchise and insures repeat business for everyone. Increasing the value of the brand name is a shared responsibility of the franchisor and franchisee.

An "ownership mentality" destroys the reason franchised and company-operated units are successful. Think about it. If you think you "bought" a franchise, you become an "owner" and begin to think and act like an owner. You will want to change the system because of your needs, you will wonder what you are paying the royalty for, and you will begin thinking of other franchisees as your competitors. For these and many other reasons you do not want to think of yourself as an "independent owner."

As a franchisee you own the assets of your company, which you have chosen to invest in someone else's brand and operating system and ongoing support. You own the assets of your company, but you are licensed to operate someone else's business system.

Finally, your desire to become a franchisee must be grounded in your belief that you can be more successful using someone else's brand and operating according to their systems and methods, than you could if you opened up your own independent business and competed against them. You want to look for a franchisor who is building a system of interdependent franchisees who are committed to getting and keeping customers, to growing faster than the market, to growing faster than the competitors, and to do all of that with high margins. When you discover a franchisor who understands this relationship, you have a franchisor worth your consideration.


by Greg Nathan

There is a path on which I travelled as a franchisee and which almost every other franchisee I have ever met has also travelled. The places this path leads to are not physical, they are psychological in nature and include emotions such as hope, joy, disappointment, frustration and renewed confidence.

If you are beginning your journey into a new franchise business, chances are you will also travel along this path. And in so doing you will fall under the spell of what I have dubbed ‘The Franchise E-Factor’.

The Franchise E-factor is not a mental aberration or something to be fearful of. It is simply a natural maturing of the relationship you will have with your franchisor as you gain greater competence and confidence in running your franchise.

Six distinct stages
If you have a commitment to your business and are prepared to work through the ups and downs of life as a franchisee you will travel through six distinct stages. Some people move through these stages swiftly and more or less painlessly. For others the path is frustrating and full of interpersonal strain and resentment. Some people even get bogged down half way through and decide that franchising is not for them.

If you are a franchisee you may find it useful to use The Franchise E-Factor as a way of making sense of the frustrations you may feel from time to time in your role as a business owner who wants independence yet can’t quite have it. As you read through these six stages below it will become clear why this progression is called The Franchise E-Factor.

The Glee Stage
"I am very happy with the relationship I have with my franchisor. They obviously care about my success and have delivered all they said. I am excited about my new business and full of hope for the future."

Initially franchisees are filled with glee. Along with their decision to buy a franchise comes the anticipation of whether things will work out and of course the hope of making lots of money.

During the opening stages of the business the franchisor will also be busy providing encouragement and support to their fresh and motivated franchisee. Like a wedding ceremony, the speeches at opening ceremonies of franchised outlets usually contain profound commitments such as;
"We will always be here for you";
"You are the reason for our existence"; or
"If you have any problems at all, just call and we will be there".

Positive emotions run high at this stage. There is a great sense of achievement for everyone as the numerous hurdles in establishing the business have now been cleared.

The Glee stage covers the lead up period to buying into the franchise and will usually stay with a franchisee for between 3 and 12 months, depending on their past business experience.

The Fee Stage
"Although I’m making money, these royalty payments are really taking the cream off the top. What am I getting for my money?"

The second Fee stage kicks in as the franchisee gains more of a handle on the business’s finances. It comes from a growing appreciation that profit is the result of sales minus expenses. At this point they may become particularly sensitive to the royalty and advertising fees, which they see as annoying expenses that into their profits.

Questions such as, "What am I getting for my money?" will surface in their mind, especially when they review their weekly royalty fees.

At this stage the franchisee’s level of satisfaction starts to drop.

There are basically two paths from the Fee stage - either back to Glee, (this can happen when the franchisor provides significant assistance, for example with a rent reduction), or into the Me stage.

The Me Stage
"Yes I am successful. But my success is a result of my hard work. I could probably be just as successful without my franchisor."

As the franchisee moves into the Me stage he or she will typically be thinking that their success is due purely to their own hard work and effort. This natural tendency to take the credit for the good things, is known in psychology as the ‘Attribution Effect’ or the ‘Self-Serving Bias’. Attribution theory explains the thinking process we go through in searching for the best explanation of an event and also suggests that we are not all as rational as we might like to believe.

When we perform well or achieve something we tend to attribute this to our inherent skills and personality. We take the credit. But when we make mistakes or don’t perform up to expectations we tend to blame someone else or outside circumstances.

The human ego has always been a master at playing with our minds - giving us reasons why we are right and others are wrong, why we are good and others are bad, why we are smart and others are stupid, and so on. For some people it is a way of protecting their self-esteem.

Not surprising, we find the Self-Serving Bias alive and well in the franchise relationship. It tends to be at its strongest when the franchisee moves through the Me stage where they will tend to attribute their success to their own work and initiative. If things are not going so well however, the franchisor is inevitably held to blame. Either way the franchisor usually starts to receive some criticism.

The Free Stage
"I really don’t like all these restrictions my franchisor is putting on the way I run my business. I feel frustrated and annoyed at their constant interference. I want to be able to do my own thing and express my own ideas."

While the franchise relationship tends to begin with the franchisee relatively dependent on the franchisor this does not last. As a franchisee’s business confidence grows, their drive towards independence will increasingly assert itself. A franchisee at this stage might feel resentful having to follow the franchisor’s standard operating procedures all the time.

The Free stage is characterised by a need to break free of the restrictions and limitations of the franchise and a testing of the system’s boundaries. A franchisee might also test out how tight the franchise agreement is and try to break free of their contractual obligations.

The franchisor might also decide to break free of the franchisee, either through a forced sale or termination of the agreement. Obviously chances of conflict are greatest at this point.

A franchisee who is stuck in this stage can become trouble to him or herself and a negative influence on others. They may also be a ripe target to be exploited by someone wanting to provoke trouble in the franchise network. As we saw in Chapter 6, unscrupulous lawyers or consultants have been known to use franchisees who are unhappy about specific issues as their ticket to make some money.

At this stage the franchisee will either get bogged down in resentment and continue to bicker with their franchisor, revert to the Me stage with intermittent but harmless grumbling, or move to the next stage - the quantum leap - the See stage.

The See Stage
"I guess I can see the importance of following the franchise system. And I do acknowledge the value of my franchisor’s support services. I can see that if we all did our own thing standards would drop and we would lose the very things that give us our competitive edge."

Conflict in relationships seldom goes away by ignoring it. For the franchisee to move to the See stage there needs to be some frank and open discussions, where franchisee and franchisor listen carefully to each other’s point of view. There may be some bloodletting as previous disputes or disagreements are reopened. Mistakes and misunderstanding will no doubt have occurred on both sides of the relationship. There needs to be an acceptance and letting go of the past by both parties.

The franchisor might need to be more open in involving the franchisee in future planning or appreciating their specific needs. If the franchise system has been managed fairly and effectively the franchisee will generally come around to seeing that without consistency and adherence to the systems, the strength of the entire group would be lost. It is this shift in perception that characterises the See stage.

The We Stage
"We need to work together to make the most of our business relationship. I need some specific assistance in certain areas to develop my business but I also have some ideas that I want my franchisor to consider."

From the See stage there is a natural progression to the We stage - a move from independent to interdependent thinking. At this point the franchisee is prepared to put his or her ego aside and recognises that success and satisfaction generally come more easily from working with, rather than against, their franchisor.

To reach the We stage a franchisee must be mature, objective and commercially minded. Most importantly, they must be profitable. As long as a franchisee is not making acceptable profits and feels their franchisor is not responding to their needs they will shake the system for change.

A franchisor that wants their franchisees to move into the We stage must deliver on their obligations and be fair and consistent in their dealings.

Franchisees who have negotiated their way through the franchise relationship minefield to the We stage are a franchise network’s greatest asset. They will often be quiet achievers who keep one eye on their profit and one eye on cultivating healthy business relationships, not just with their franchisor but with their suppliers, peers and, of course, their customers.

To find out more on The Franchise E-Factor and how to improve your franchise relationships go to,



Franchising is not for everyone or the faint-hearted and there are the negatives – from whether you are suited to franchising to the controls that the franchisor imposes on your business. Although most franchisees have an element of entrepreneurship inherent in them, most are former employees, from corporate backgrounds, or are the victims of mergers or downsizing, or are on the verge of retirement.
On a personal level you should ask yourself the following questions…

  • Are you generally a healthy person?
  • Are you a confident, outgoing type of person that is not afraid of tackling challenges and problems head-on?
  • Are you a people-orientated person, able to interact with people on all levels?
  • Are you the type of person that can handle stressful situations, are comfortable with taking risks and are prepared for a total change in your lifestyle
  • Are you in a position to support yourself through the initial stages of setting up a business?
  • Do you have enough qualifications or experience to handle things like managing finances, doing sales and marketing?
  • Are you customer service orientated?
  • Are you the type of person who takes direction willingly or are you known as a “buck-the-system” type of person?
  • Do you like and enjoy people in general?
  • Can you lead and manage people?
  • Do you have the support of your family?
  • What do you like to do?
  • What are your interests and what type of occupation would be most compatible with those interests?
  • Do you think you will enjoy operating your business of choice?

According to Eric Parker and Kurt Illetschko, authors of the book Franchising in South Africa: The Real Story, investing in a franchise is a long-term commitment that, once made, is extremely difficult (and expensive to reverse). Franchise experts like to compare entering in a franchise arrangement with a marriage. The honeymoon is the easy part but it does not last very long. Once the novelty has worn off, making the best of the relationship can be a grind but many endure, and decades later, would not want to have it any other way. These two franchise experts suggest you ask yourself the following questions….

Am I cut out for entrepreneurship?
To be successful in a business of your own requires an entrepreneurial spirit. Although joining a franchise eases you into your new role, it does not do away with this requirement altogether. A carefully chosen franchise offers you a blueprint to business success but there are no guarantees. A franchisor that offers a franchise complete with success guarantee is either a fraud or a fool. A prospective franchisee who relies on such a guarantee is simply a fool.

Will I be happy as a franchisee?
In a franchise, you own the infrastructure of the business but you cannot do as you please. To protect the brand, the franchisor is obliged to insist that you operate in accordance with the network’s rules. Some people find this too restrictive.

Do I have the necessary passion?
People often say that their sole reason for wanting to start a business is to make lots of money. They pretend not to care about the sector but in reality, this does not work too well. Starting a business is hard work, and it takes some time before you see any rewards. Unless you enjoy what you do, the business will soon become a burden and success is likely to elude you.

Is a franchise available in this sector?
It has been said that almost any business can be franchised. While this is probably true, it is only of academic interest to you. What you need to find is a franchisor who is well established in the field of your choice and able to deliver on the promise of franchising. Otherwise, why bother paying franchise fees>

Is the franchisor responsive?
Although a large number of franchise systems exist, the better known brands continue to operate in a sellers’ market. Many networks, especially those in food and retail, battle to locate good sites and this tends to slow down their expansion plans. Never mind the reasons, unless the franchisor shows interest in your approach, move on. If the franchisor neglects you during the courting stage, what will happen once you are part of the network?

Is the franchisor’s approach professional?
Acceptable premises, membership of FASA, professionally produced franchise materials and the availability of a formal disclosure document indicate that the franchise operates to sound professional standards. A good franchisor will insist on checking you out but knows that this should be a two-way street. The franchisor will welcome your questions, in fact, most love to talk about their achievements and the standing of their brand. Should you come across a franchisor whose representative is reluctant to provide essential information or, worse still, attempts to pressurize you into making a rush decision, terminate negotiations immediately. Responsible franchisors do not act in this way.

Are we compatible?
When you visit the franchisor and get to know the network’s team, do you feel like an outsider, or do you fit right in? Unless there is an instant spark, it is unlikely to work.

Can I afford the franchise?
The financial implications of becoming a franchisee are manifold. You need to pay an upfront fee, fund the establishment of your business and provide working capital. On an ongoing basis, you also need to provide working capital, pay periodic franchise fees and make provision for living expenses. Keep in mind that it can take several months or even longer before the cash flow of the business is sufficiently strong to cover expenses. Many finance schemes are available but this is not necessarily a good thing. Most franchisors will insist that you fund between 30 –50% of the complete investment from your own resources, with good reason. Loans need to be repaid on time and with interest. If borrowings are excessive, the resulting repayments would place strain on your new business’s cash flow. This could force the business into a cash flow crisis and cause it to fail.

Can the franchise afford me?
This is another important consideration. As this is your own business, you can determine your salary – on paper. In practice, the business may not be able to support the lifestyle you and your family have become accustomed to, especially if you held a senior position in a large corporation. Of course, a few years down the line, the situation should change but you need to survive the here and now. (Extract from FNB’s Franchising in South Africa: The Real Story by Eric Parker & Kurt Illetschko)

Is my business ready to franchise?

For many business owners, franchising can appear to be an ideal form of business expansion.

After all, franchisees are responsible for the entire investment in opening locations and, because of that investment, are highly-motivated to perform well. That allows franchisors to grow far faster than they might otherwise.

But not all businesses are cut out to franchise.

If you’re considering franchising, one of the most important questions to ask is simply, “Am I ready?” A few years back, one of my clients, John Leonesio from Massage Envy, a Scottsdale, Ariz., provider of affordable spa services, asked my franchise-consulting firm that very question – and we went through the same analysis that we do for any business thinking about franchising.

While the space in this column doesn’t allow for a comprehensive discussion of this analysis, there are six basics that can help you decide if your business has what it takes.

1. Is it working? In order to franchise a business, the business model must first be proven. There’s no law, of course, requiring that a franchisor demonstrate competence, but there’s a certain number of practical considerations. In order to establish credibility to sell franchises, you’ll need to show you’ve got a successful operating prototype. Massage Envy came to us in 2002 with only two prototype locations operating a bit less than one year, but the business model was already demonstrating consistently strong unit performance and consumer acceptance. Additionally, John’s past experience as an owner and operator of various health clubs meant his learning curve was substantially lower than most new business owners would be.

2. Can you sell it? In order to be franchisable, the business model also needs to be attractive to potential franchisees. While it is difficult to quantify “salability,” factors such as credibility, uniqueness, and brand “sizzle” all contribute. Though a young business, Massage Envy’s management team had good credibility and the concept had “sizzle” by the bucketful. Moreover, they already had a handful of unsolicited franchise inquiries – always a good sign when it comes to salability.

3. Can you clone it? The key to success in franchising is making sure that your franchisees are easy to replicate. If the concept only works because of a unique location, a superstar salesperson, or because an owner is working 80-hour weeks, it is going to be difficult to repeat the magic. Ideally, a franchise concept should be relatively simple to operate and should be able to work in a variety of markets. Of course, potential franchisees can certainly bring some special skills or qualifications to the game – but that shouldn’t necessarily be counted on. In Massage Envy’s case, simplicity was a strength. The business model was easily teachable and readily duplicated.

4. Can you provide the franchisee with an adequate return? A franchisee who is an owner-operator will expect to get a return, both for the time that they spend in the business as well as their investment in the franchise. While Massage Envy had only a brief operating history, we projected that franchisee returns would be well above those of comparable investment opportunities, even after deducting a royalty.

5. Are you committed to providing value? The franchise business is largely about maintaining relationships. The most successful franchisors are typically those that are the most committed to making sure that their franchisees are successful. It was clear from the start that John and his team wanted to create a first-class franchise organization that would do everything within their power to ensure franchisee success. They created state-of-the-art training programs, hired a top-flight consumer ad agency, and ultimately staffed their organization so that they could provide frequent franchisee interaction.

6. Do you have the capital? While franchising is a low-cost means of expansion, it is not a “no cost” strategy. A new franchisor will need capital to develop legal documents, manuals, training programs and marketing materials, not to mention a marketing budget for franchise lead generation. Massage Envy was a young brand when it made the decision to franchise, so a great deal of care was taken to design a franchise strategy that would succeed without exceeding its budget.

Armed with this understanding of its “franchisability,” Massage Envy began franchising in early 2003. Today, the company has more than 700 locations in 43 states – success that is the result of a strong concept, sound planning and well-timed execution.

But keep in mind, even the best-laid plans will result in failure if the underlying business is not ready for prime time. If you’re considering franchising, take a step back…and ask yourself, “Am I ready?”

Is my business ready to franchise?

There are three core boxes that need to be ticket before you should consider franchising your business.

· Is there demand or are you able to sell your franchise concept? Not every idea is sexy, cool and appealing, but your concept must possess something that sets it apart from the competition. To sell your concept, the idea must have credibility in the eyes of potential franchisees.

· Is the concept replicable? Walk into any Mc Donald’s around the world and they’ll have the same look and feel, the food will taste the same, and the service will be of the same quality. Are you able to duplicate your concept? Make sure your products or services are not confined to a regional or one of a kind product, service or location.

· Are you able to provide franchisees with an appropriate return on their investment? Perhaps the most important factor, does the concept allow for enough profit after your royalties have been deducted to make the investment worthwhile for prospective franchisees in terms of money and time?

How to tell if your business is ready to be franchised

The four essentials

1. The business concept should be profitable and capable of replication

Nobody will be interested in buying a business if it does not show a reasonable level of profitability. The franchisee will be looking to get a reasonable wage out of the business, will be expecting to have paid off any loans within the first term of the agreement and will expect to get a rate of return on his investment that is better than employing funds in other types of investment. In addition, he will be looking to have a business that increases in value over time, so that when the time comes to sell he will be able to make a profit on the sale. The first step in considering franchising is to ascertain the profitability and returns for future franchisees, as well as for the future franchisor.

The business must have a style and ambience that can be replicated easily and with the minimum of cost. It should allow the new franchisees to be trained to clone the standards of operation, the appropriate levels of customer service and run the business efficiently.

2. The franchise system must be fair and equitable for both parties

The attitude of the prospective franchisor is a much under-rated aspect of franchising. We have seen too many examples of situations where a possible franchisor is only interested in selling off underperforming outlets and keeping the best ones for themselves. This would make for discontented franchisees and could make that business vulnerable to legal issues.

On the other hand we are delighted to hear of the enlightened franchisors who want to see their franchisees make money and are happy to help them achieve that.

This fairness is also recognised by the level of fees in the franchise system and whether the franchisor is seen to be taking an unfair advantage over franchisees in the various sources of income that a franchisor can enjoy.

3. The management team must have the expertise to:

  • Operate a single unit of the specific business concept: there must be evidence of an existing profitable business. An idea or concept cannot be franchised until the prospective franchisor has established at least one pilot operation.
  • Manage a chain of these units: the preference would be to see evidence of the franchisor’s ability to run more than one outlet.
  • Manage a franchise system: it would be more difficult to see whether the franchisor would be able to run a franchise system, but their management style would be a major factor. Running a franchised business is different to the normal corporate structure, where the boss simply issues orders to be followed. In a franchise system, the franchisees are separate entities and need to be encouraged and guided into following the system.

4. Capital should be available to underwrite the expansion program and deliver the services promised to franchisees

In order to franchise effectively, all aspects of the business should be in place.

For instance, the back office system should be working and be simple for a franchisee to follow. Marketing programs need to have been developed to assist the franchisees achieve their results. Corporate web sites, especially if they are used for sales, and social media policies will need to be determined. Location or territory structures should be established, franchise lawyers will be required to draw up the legal documentation, accountants used to establish the correct business structure, as well as specialist franchise consultants to guide you through the process.

The funds required will vary according to the type of business and their stage of development.

Part of the initial work in assessing the profitability of the business should ascertain the franchisor’s investment needs and their likely rate of return.

The three imperatives

1. There must be appropriate procedures to recruit franchises who are qualified to run the business

This does not mean they need formal qualifications as such, except for those that require them such as builders or health practioners. The franchisor should establish the profile of their ideal franchisee and assess each applicant against that profile.

2. There must be policies and procedures in place to assist franchisees to be successful

The induction training programs must be comprehensive and cover every aspect of running the business. The development of the appropriate operations manuals are an essential component of this process and should answer most of the questions franchisees have. In addition the franchisor will also need to develop a team of support staff as the system grows to ensure franchisees do not feel neglected and receive regular visits and communication

3. For the franchisees who cannot succeed for whatever reason, there should be a method to deal with the resulting problems in a timely and effective manner

Sometimes people buy franchises and it does not work out. An appropriate recruitment process will mitigate this situation, but in cases where the fit between the franchisee and the business is not working, there should adequate procedures to deal with the issue. It should be done as soon as the problem becomes apparent, firstly for the benefit of the franchisee who is suffering, but also for the rest of the franchise system.

It is often other franchisees who see problems in their colleagues and they do not want people in the system who are not maintaining the proper standards of operation.