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by Win Robinson,
last updated 23/07/2009

in this article:

Win Robinson looks at how franchise structures can differ

One of the reasons franchising has become so popular is because it can be adapted to a wide variety of corporate situations, structures and goals. The classic picture of a franchisor is that of a small company with a good system but short on capital which can expand at a faster rate because the franchisees are providing the missing ingredients. Such a company relies upon incoming franchisees to provide start-up funding for new units, working capital, to hire employees and manage operations on a daily basis.

However, some highly successful franchisors have found it profitable to assume some or all of these functions themselves for a fee. For example, convenience store franchisors such as 7-Eleven often sell individual franchisees a 'turn-key' package in which the franchisor acquires the property or signs the lease, constructs the outlets, purchases and installs the equipment and even supplies the stock. The franchisee in essence 'buys himself a job', paying a monthly percentage of his income (in addition to the franchise royalty) to cover unit rent and lease payments.

Although requiring 7-Eleven to make a heavier capital investment than the typical franchise arrangement, this programme gives them another source of revenue as well as a means to control locations and build their asset base. Importantly, it also allows them to tap a fertile pool of dedicated owner/operators who otherwise couldn't afford the business.

A variation on this approach can be found in New Zealand in the Baker's Delight franchise. Baker's Delight operates a 'business lease' scheme whereby the company establishes and owns the outlet initially, but leases it to an intending franchisee. Once the outlet is established, trading patterns confirmed and the cash-flow secure, the franchisee not only has greater confidence but also greater ability to raise the finance necessary to take on the full franchise.

Franchising can also be flexible in the other direction. If you're short on capital but long on management ability, you can let your franchisees put up all the capital but offer your services to manage the outlets.

Hotels, among others, have found this an excellent approach to attract multiple outlet investors who have the funds and see the potential of their concept but who don't have the time, experience or desire to oversee day-to-day management. The franchisor offers not only the systems and the considerable advantages of group branding, reservations and other schemes, but also the availability of a pool of skilled and experienced people to manage and develop the business for the investors.

Although franchising in its pure form is simple as a concept, there can be many variations and formats – in fact, like snowflakes no two systems are exactly alike. The examples given show some of the many possible structures. If you are considering developing a franchise system it is important to seek competent, experienced advice, as each structure adopted must be tailored for that particular business, its aims and objectives. You cannot copy another franchise system and hope to succeed.



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