Developing a Franchise System

by Simon Lord

last updated 19/08/2019

Five more myths for franchisors

by Simon Lord

last updated 19/08/2019

We complete our top ten list of misconceptions for people wanting to franchise their business

In Five Major Myths for Intending Franchisors, I looked at five of the most common – and dangerous – myths that people who consider franchising their business are likely to encounter. These were:

  1. Franchising is a licence to print money.
  2. Once it’s established, franchisees do all the hard work.
  3. Franchise failure rates are low, so franchising is a great way for my business to grow.
  4. I know this business better than anyone else does so I can franchise it myself.
  5. I want franchisees who are just like me/

Now let’s look at another five myths of which intending franchisors need to be aware.

I want people just like my current employees

If you’re running a successful business with good staff, you might think that all you need to achieve success as a franchisor is more of the same. But several companies have attempted to convert by granting franchises to existing branch managers and it rarely works. Why should this be?

Well, unlike staff, franchisees have to be comfortable with risk and to have built up a certain level of assets. They must be prepared to take responsibility and work harder than ever before in order to learn a new business and create success. People with an ‘employment’ mentality tend to come from a different place. They may be motivated by fear of losing their jobs, or expect things to be much the same as employment except that they will have a share of the profits. They expect the franchisor to act like a boss, to tell them what to do and to take responsibility for the franchisee’s actions, success or failure.

 The ideal franchisee needs a mix of abilities – to be able to follow a system but drive it passionately to exploit it to the maximum in their own area. Does that sound like your employees?

My business mentor suggests I franchise and he will help me do it

Many people know the theory of how franchising is supposed to work, but very few – in New Zealand, at least – have actually done it successfully. And even fewer have experience of doing it more than once, with a variety of different structures designed to suit the individual needs of a business. There are probably fewer than five consultant organisations in the country that are really capable of doing a proper job when it comes to developing a new franchise. Is your mentor one of them? If he has your best interests at heart, he will help you research the specialists who can really help.

Franchisees are my customers

Franchisors sometimes say, ‘my franchisees are my customers.’ But it’s not true. While a franchisee may have bought the franchise and be paying ongoing fees, the relationship is much more complex. After all, a customer can walk away if he or she is not happy – a franchisee can’t (or not without significant financial and/or legal repercussions, anyway). It’s also a myth to say that franchisees are the franchisor’s friends. They are not, because the relationship is based upon unequal power – but it can be a friendly relationship.

Franchisees must do as they are told

Most franchise agreements include a provision that the franchisee must act in accordance with the franchise’s operations manual. As this manual can be changed by the franchisor, this means that franchisees basically have to do as they are told – right?

Well, no. Apart from the fact that the Courts tend to take a dim view of franchisors who abuse their power, a successful franchise is based upon mutually trusting and interdependent relationships between franchisees and franchisor. Franchisees own their own businesses and they are responsible for their own success. They also build up a good knowledge of their own market. These are some of the benefits that the franchisor probably pointed out when selling the franchise. So don’t be surprised to find that franchisees have their own opinions and won’t meekly do as they are told in the way that staff or managers might.

10 Franchising is a legal minefield so I just won’t call it a franchise

It doesn’t actually matter what you call it – franchise, distributorship or just plain ‘business opportunity’: it will still be subject to the ordinary law of contract, together with statutory regulation of fair trading, intellectual property and competition. Pre-contractual representations (the most common causes of franchise disputes) are regulated under the Contractual Remedies Act, the Fair Trading Act and common law. Changing the name doesn't change your obligations.

So there you have it: ten myths for intending franchisors. Franchising can be a great growth strategy for a business but it’s important to start off with the right expectations. If you don’t believe the myths, and you get the right advice up-front, you too could be one of franchising’s many success stories.

Read the first five myths here.

This article was first published in NZ Business magazine

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