Go the Extra Mile with the Right Franchise Structure

Mark Siebert

Date

Jul 26, 2017

The franchise growth race is not given to the swift, but to the strategic. All too often, franchisors opt to structure their programs based on what will yield the most growth in the shortest period of time or what their competitors are doing. However, effective expansion plans prioritize quality over quantity and optimizing the chances of franchisee success.

Amid the glitz and glamour of rapid growth, consider the fact that strategic expansion is a marathon rather than a sprint. A well-structured offer that suits a company’s trajectory can create a strong pace.

Considering the number of structural approaches, it’s important to understand what makes the most sense for an organization’s resources and long-term goals.

Understand your capacity to support franchise owners.

No runner could endure a marathon without proper training. Likewise, a rapid growth strategy will fall flat if franchisees are not equipped to sustain their operations. Franchisors must honestly evaluate their capacity to provide sufficient support when choosing a structure. Those that hope to utilize a more hands-on approach may consider individual franchising, for example, while options like conversion and area development franchising target more seasoned investors who will, generally, require less support. On the other hand, seeking out area representative franchisees and area representatives enables franchisors to share the responsibility of support and training with a select group of qualified others – but will sacrifice some fee revenue. Measure your company’s available resources against the degree of support franchisees will require to thrive. That, in part, will help determine the most reasonable structure.

Determine the necessary level of ownership.

Many of the decisions made related to structure will be influenced by the concept itself. Is there room for investors within the system to jog briskly, or is it a sprint? Does the operation require all hands on deck or is passive ownership an option? Answers to these questions can ultimately determine whether sophisticated investors like area developers or a classic owner-operator are the best target audience for the franchise system. Individual franchising encourages owners to immerse themselves in day-to-day operations, while area developers will often hire managers to oversee daily matters for them. Options like area rep franchising serve as a hybrid of sorts, allowing owners to split their time between running their own operating unit and servicing those of nearby franchisees. Let the management model the operation requires influence the choice of a franchise structure.

Evaluate your return at the unit level.

When it’s all said and done, both franchisor and franchisee need to achieve a reasonable return-on-investment. And, understanding what ROI looks like for every party to the agreement is essential. Area developers, for instance, must see sufficient returns in order to hire managers and implement necessary infrastructure. Likewise, area representatives must see a return on their investment, which is typically achieved though a split of the franchise fee and royalty. And in all cases, it would behoove franchisors to be sure that there are substantial returns at the unit level in order to make the investment worthwhile at the unit level. Of course, this has to be done while providing value for the ultimate customer.

Don’t be afraid to switch or combine strategies.

At the end of the day, there is no right way to grow. What works for one system may not be the most effective strategy for another when considering its resources and goals. At the same time, take solace in knowing that nothing is set in stone. A growing company won’t and shouldn’t be bound to the structural choices made on day one. Some franchise organizations start by offering individual franchises, then slowly introduce area development opportunities as their resources allow. Some may decide to focus primarily on conversion franchises, before branching out to offer single-unit deals.

Ultimately, franchisors need to understand which structure or combination of offerings best suits its goals, resources, and the needs of its franchisees. Franchisors who start with a well thought out strategic plan and a comprehensive financial analysis of each alternative will be much more likely to achieve their ultimate goals.

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Mark Siebert is CEO of the leading franchise consulting firm iFranchise Group. Reach him at 708.957.2300 or info@ifranchisegroup.com. His book is “Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever.”

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