Why Franchise? Or Why Not?

The subtitle for this week might be “Franchising -- Not For Dummies”. We’re continuing along the first few steps in the path I introduced recently, looking at some of the key success factors -- and pitfalls -- for franchisees and franchisors. This week’s focus is on the franchisor.

Why do some businesses (not just restaurants, I might add) franchise and become very successful, while others franchise and fall flat -- or worse? Why do some businesses decide not to franchise?

I don’t know all the answers to these questions, but I know some, and some very smart operators with whom I have been fortunate to work have told me their reasons for answering the questions above in various ways. I’ll provide some examples and thinking on both sides; I fully expect some of my readers to chime in with additional reasons on both sides of the question.

At its core, the decision to franchise generally starts as a decision to grow a business more rapidly than it can grow “organically”, meaning more rapidly than the business itself, with its own financial and managerial resources, can be expected to grow. Remember from past columns that we’ve sometimes discussed the use of outside funds, or Other People’s Money, as a tool to support growth. While that tool can help a business grow more rapidly, or in larger steps, than its own cash flows might permit, the business’ rate of growth is still limited by its management’s capacity to oversee both development (of new units) and operations (of existing units).

To surpass this limitation, many businesses choose to franchise. In this way, they not only make use of Other People’s Money (because the franchisee is responsible for financing the development of his or her store) but Other People’s Management Resources (obviously, because the franchisee must oversee the development and performance of the new unit).

What a great idea! The franchisor is suddenly blessed with unlimited growth potential, and has only to sit back and collect the royalty checks! Every business should franchise -- right?

Wrong. Apart from some of the legal restrictions on franchising, to discuss which I may call on one of the attorneys who specializes in such things in a future column, there are economic and practical considerations -- and, to be very fuzzy and idealistic, there are also brand or concept integrity considerations.

Let’s start with the last. More than a few very successful chains in the restaurant market over the past two decades have developed and grown without franchising. They’ve had various reasons, but they all have something to do with keeping control of the brand. Remember that, no matter how robust a business’ operating plan may be, no matter how carefully developed its menu and recipe base is, and how detailed its decor package may be, there’s never yet been a concept that a franchisee couldn’t change (just a little) because he or she thinks it needs a bit of improvement. “Wouldn’t the awnings look better with a stripe?” “Do you notice how much better the chicken tastes since we added cinnamon to the marinade?” “If we serve breakfast, we can afford to pay higher rents for better locations.” “We’ve decided to use microwaves instead of ovens, so we can purchase pre-cooked items.” Sentences like that strike terror into the hearts of brand and concept developers who want to insure that, at every store, the menu and products are presented the same way. [By the way, in more than a few instances the franchisees who made the comments above are right, but it doesn’t matter -- some people just aren’t meant to cede that much control to others.]

Taking the personality (control freak?) out of the equation, there are real reasons why some concepts are more likely to franchise successfully. In general, the more extensive or difficult the menu, the less likely to be a successful franchise concept; the more restrictive or unique the ingredient base, the less likely to be a consistently successful franchise concept. To take a very narrow example, there have been many successful franchisees of frozen yogurt concepts, because it was possible for the franchisor to arrange for a reliable and plentiful supply of the complete yogurt mix which goes through the freezer/dispensers. However, I know of no successful franchise venture which involves the making of fresh yogurt from its source materials, even though it’s possible to make at home if one has the time and the willingness to pay close attention throughout the process.

Clearly, the decision to franchise may lead to other decisions -- conscious and rigorous simplification and streamlining of an operation in order to make it more replicable and sufficiently easy that a reasonable amount of training enables any operator to meet product and operational standards.

We’ll continue this as we dig deeper into franchising from both sides.