Common Hurdles for Franchisors

It’s easy to see why franchising is one of the most prevalent businesses in America.  As a franchisor, a company can expand more rapidly and with less financial commitment while allowing the franchisee the opportunity to run their own business, leveraging the success of the franchisor.

The benefits of franchising abound, but there are also hurdles to success along the way.  Five common hurdles to the franchisor include:
  1. Lack of sufficient funding
  2. Collaboration between franchisor and franchisees
  3. Lack of experienced franchisees
  4. Vicarious liability
  5. Managing multi-unit franchisees

Lack of Sufficient Funding – Because of the credit crunch, consistent access to credit has been a challenge for franchisees.  According to the latest IFA Franchise Business Leader Surveysufficient funding has limited the ability of franchisors to expand business.  Fifty-five percent of those franchisors surveyed said lack of credit has had a “significant” or “moderate” impact on their ability to expand.  Two-thirds also reported that they have seen “no improvement in credit access in recent months.”  To curtail this problem, some franchisors have begun offering in-house financing options.

Collaboration problems between franchisor and franchisees – Franchisees may have incentive to maximize their own profit at the expense of the franchise. As a result, franchisors should try to manage their relationship with the franchisee through contracts, monitoring and other enforcement strategies.  A study by Vishal Kashyap, Kersi D. Antia, and Gary L. Frazier entitled Contracts, Extra-Contractual Incentives, and Ex Post Behavior in Franchise Channel Relationships shows that a combination of behavior and output monitoring and enforcement activities by the franchisor produce the best results.

Lack of Experienced Franchisees – A selective franchisee application is very important since the applicants who wish to open a franchise do not always posses the requisite skills and knowledge of running a business.  This has led to many franchisors increasing their requirements for potential franchisees, with some requiring as much as having the potential franchisee already own a restaurant, or have experience in running a business.

Vicarious Liability – Vicarious liability can also be a major issue if claims against a franchisee arise and the lawsuit also mentions the name of the franchisor.  In recent years, court cases have contended that the franchisor should also be held liable for the franchisee’s actions, since the franchisor exerts so much control over the franchisee’s operations.  The franchisor should use these recent court cases to evaluate the level of control over their franchisee.

Difficulty Managing Multi-Unit Franchisees – Since larger, multi-unit franchisees are typically more experienced and dedicated leaders in business, they in turn also want more support and involvement from their franchisors.  Franchisors can help their multi-unit franchisees by partnering the franchisee with high level field support and communicating and sharing ideas with them more regularly.

While there are challenges in the franchising industry, the success of many franchisors speaks for the opportunities in the sector as well.

What additional hurdles in the franchisor / franchisee business do you face?

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