The Franchisor-franchisee relationship

The Franchisor-Franchisee Relationship

If you are considering franchising your company, one of the things you may not have spent time thinking about is the franchisee-franchisor relationship. If that is true, I encourage you to stop right now, however far along you are in franchising your business, and dig into this pivotal part of franchising. In a franchise organization, few subjects are discussed as much, disagreed about as often, or, frankly, as litigated as the relationship between franchisees and franchisors.

An imperfect union

First, let’s address the elephant in the room. A franchisor’s and franchisee’s motivations will never be perfectly aligned. “Hold on a second, Michael,” I can already hear you thinking. “I know I heard you say on/at (insert franchise presentation or interview here) that a franchisor’s success is directly tied to their franchisee’s success”! You are right. Not only have a said that (or something similar) in virtually every presentation I’ve given on franchising and everything I have written on the subject, when I work with an entrepreneur to franchise their company I repeat this mantra over and over. The reason why is simple; the level of dependency a franchisor has on their franchisees is not intuitive, and is knowledge that, if gained organically, will probably be gained by the franchisor way too late. Conversely, the knowledge that they can always have their franchisee’s long-term best interests at heart and still be misaligned will become part of every franchisor organization fairly early on in their life cycle.

Not Quite Aligned

In what instances can a franchisor and franchisee end up aiming at different targets?

Territory and Exclusivity

This is probably the most common example I have seen. A franchisor is never well-served with franchisees cannibalizing each other’s business; the net outcome is less overall system revenue and 2 unhappy franchisees that take part in the validation process. A franchisee with an overly-large territory is likewise not receiving the best benefit from their franchised brand; after all, building a brand together, enjoying economies of scale on advertising, inventory and the like, and gaining more brand exposure, faster is one of the reasons franchisees invest. Even with such a seemingly clear alignment of purpose, however, there can only be so much overlap:

An interesting aside on this; some franchisors, like P3 Cost Analysts, a cost reduction company, get around this potential misalignment by allowing franchisees to do business anywhere in the U.S. This is definitely the exception, though, not the rule!

National Advertising Spend

A franchisor with a national advertising fund is duty-bound to spend those dollars for the betterment of the franchise system. That generally means that franchisee’s benefit from the fund will not be a direct reflection of their contribution. As a simple example, Franchisee A, who has been operating for 3 months, is likely to contributing significantly less to an advertising fund than Franchisee B, who has been operating 3 years. Because of, not in spite of, this reason, a franchisor likely will spend more dollars in franchisee A’s territory for regionally-targeted advertising. All else being equal, the system will likely benefit most from helping a new franchisee gain market awareness. These are just two examples of many different ways that a franchisor and franchisee may be, while not misaligned, not perfectly in sync even when they are focused on the “right” motivations.

What To Do About It?

So how should a franchisor, or a franchisee, address this?

Acknowledge it

Both parties acknowledging that they understand the other’s motivations, rather than questioning their integrity, is the first step to a non-combative relationship with franchisees.

Own it

Both sides signed up for this! A franchisee specifically decided to be a franchisee knowing the freedoms they were giving up. A franchisor specifically decides to be a franchisor knowing the many, and often seemingly opposing, motivations and pressures that the business model inherently contains.

Pick your battles

Franchisees have areas that they can demand their franchisor perform a certain way. Franchisors have the same. That doesn’t mean they have to. As a franchisee, when you are in a position that you don’t have to do what your franchisor is requesting, consider it anyway. Are you sure their request is incorrect? Whatever it is that the franchisor is asking you to do, could you give it an honest try, remembering that you bought into their brand and vision because you believed in them? As a franchisor, if you could insist on a franchisee performing in a certain way, do you really have to? How certain are you that your demand is the right thing for your system? Would your system, brand integrity, or customer experience really be harmed if you allowed the franchisee to “opt out”? To franchisees, I will say this; if you interact with your franchisor with this mindset, you will likely be perceived as a team player and a system contributor. That perception can have all sorts of positive effects on your business. If a franchisor is considering a new product line or advertising approach, you will likely be one of the people they seek feedback from. If opportunities for collaboration arise, the franchisor will turn to the franchisees that are known collaborators. Franchisors, please keep this in mind. Your franchisees are your boots on the ground. Irrespective of the legal requirements of your franchise agreement, you can’t be all places at all times. If you want a system of cooperative franchisees, cooperate. If you want a system of collaborators, collaborate. World-class people make world-class organizations. For any franchisee or franchisor who has read this, I hope you take it to heart. You won’t be part of, or lead, as the case may be, a world-class system if you don’t deserve it. That’s just the way these things work out. So, if you have conflict with your franchisor or within your system, check a mirror.