Why Franchisors and Franchisees Have Trouble Seeing Eye to Eye

FranchisingBuying a franchise is a great way to acquire an instant customer base, proven business model, and polished operational support. But as many franchise owners soon discover, this great purchase can also come with a downside: disgruntled franchisees.

Life is full of conflict, and the franchise industry is no different. But franchisor/franchisee disputes specifically arise out of the inherent nature of the franchise model. Why? Because franchises motivate each party towards different goals. When it comes down to it, franchisees and franchisors just want different things because they make their money in different ways. This obviously creates a vulnerable spot in the franchisor/franchisee relationship, where conflict is more likely to arise.

So how do we fix it? There will probably never be a way of eliminating all franchisor/franchisee conflict entirely (wouldn’t that be a dream?), but recognizing and understanding the factors at play is the best way to avoid either creating or escalating disagreements between parties, especially to the point where litigation becomes necessary.

To understand where this inherent conflict comes from, let’s start with the basics of what franchising is: franchising is a business arrangement in which one party (the franchisor) rents a business model and brand to another party (the franchisee), who uses it to sell products/services to a customer base. The amount the franchisee pays is usually calculated as a percentage of their gross sales, meaning the franchisors profits increase with franchisee sales. This means a franchisors priorities and day-to-day concerns are usually focused on adopting policies and enacting strategic business decisions that maximize sales at each franchisee location.

Franchisees, however, make their money a little differently. They make money by generating revenue that exceed their costs, which means a franchisee is going to prioritize policies and pricing that maximize profits at their locations.

This is the part where conflict arises: policies that maximize outlet-level sales aren’t the ones that maximize outlet-level profits.

Need an example? Let’s look at buy-one-get-one-free discounts. Successful buy-one-get-one-free promotions bring in more customers and boost sales. This is great for the franchisor whose earnings are linked to outlet-level sales. But for the franchisee, this successful promotion doesn’t necessary boost their profits. If the size of the average customer purchase doesn’t increase, the franchisee could actually be worse off. The buy-one-get-one-free promotion raises the franchisee’s costs (by the amount of the free item) while potentially (and often in reality) failing to boost revenues.

These kinds of conflicts aren’t rooted in ill will or pettiness. It stems from the basic structure of the business model. What’s good for the franchisor is not necessarily good for the franchisee. If enough money is compromised, the end result could very well be a lawsuit.

Here’s a real world example: a few years ago Burger King wanted its franchisees to stay open late to sell more fast food to those seeking it at off hours. If franchisees sell more food due to being open during off hours, Burger King brings in more royalties, boosting its bottom line. This was a great plan from the franchisors point of view, but staying open late ultimately caused the franchisees to lose money. They had to pay employees for the additional hours even though their late-hour revenues were less than those wages. Its franchisees ended up in court over the disagreement.

Another common point of contention is the opening of new locations. When an additional location is opened up, often times it takes away from sales at an existing outlet. Franchisors are still better off because the new establishment inevitably increases system-wide sales, but this doesn’t help the franchisee that was around first. Their cost of operation remains the same, and they end up with lower sales.

It’s important for both franchisors and franchisees to be aware of how the other party is motivated in order to create a more understanding and effective dialogue. When they work together from a place of mutual respect and understanding, they can enact policies and business strategies that are involve more compromise and mutual benefit. One party may benefit more from a particular policy, promotion, or opening, but working together can insure minimal risk to the other, and create a lasting positive relationship for all.

Advantages of Franchising

UnknownMany entrepreneurs wrestle with the idea of starting a business from scratch, or enlisting the services of a franchise. There are definite advantages from purchasing a franchise and some of them can go well beyond the well known upside. Franchisees are in business for themselves but, of course are not alone as they have the support of their umbrella organizations. As it is well known, sole proprietorships are the most likely businesses to go close their doors in a given time frame. The support and guidance of a franchise significantly reduces those odds of failure. Being associated with a popular or established brand also helps the business owner as they reap benefits of advertising, and pre-exposure to their target market.

Franchising also offers pre-open support by way of a certain number of hours in training services. Depending on the type of franchise you are involved as a franchisee, you are offered a training program which has a certain amount of hours at your disposal in order to pick up the knowledge needed to run a company. Also a common add-on is a grand-opening program to assist owners in building hype for the first day of business. On an ongoing basis, franchises offer continued training for advertising campaigns, and operational consulting.

Such support allows entrepreneurs a framework of reference for all endeavors. It can be equated to having a very knowledgeable mentor throughout your ownership of the business. This type of helping hand can assist in the navigation of the rough waters the business environment can generate, which certainly will arise in your entrepreneurial endeavor. For more information regarding Master Franchise Connections please visit their website, or contact Neil Burnard for more information. For those entrepreneurs looking to become involved in an expense reduction franchise that has a proven track record of success, visit Neil’s ERA site.


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More on Master Franchising

Being a part of the Master Franchise organization is much like being an Area Developer with the one exception being, Master Franchisors have the right to sell Sub-franchises. Master Franchisors also support subunits in operational matters. The most clear description of a Master Franchisor is that they are a sub-franchisor themselves that are professionally trained and equipped to run a franchising system.

Companies Master Franchise Connections have serviced.

Companies Master Franchise Connections have serviced.

Owners will pay a Master fee in order to benefit from the umbrella company’s services. When the Master Franchisor sells the model to its franchisees, a fee is issued that goes directly to the Master Franchisor. This fee is then shared with the Franchisor.

Successful franchisors in our system have varying levels of experience and expertise which assists in being able to cater to a variety of business needs. Currently there are many different business partner opportunities across the world with a focus on developing markets like China, Indonesia, India, and the Middle East. Being nearly two decades old, MFC has been operating in over 30 countries, with 750 consultants across the US, Europe, Australia, North and South America. Franchisees have helped service some big name companies the likes of , Pioneer, Siemens, Polaroid, and Unilever.

Why Master Franchising?

When it comes to starting a business an owner operator’s face numerous challenges. They may have a business idea but that idea is not proven and the risk of failure is high.
Today’s economy has led to a growing number of people wanting to own their own businesses. In many cases, these people seek out franchise opportunities. These opportunities offer the ability to expand an already successful company with a proven business model. While some people want to own their own brick and mortar business, others are interested in managing a specific geographic territory, leading them to look into master franchise opportunities.

Defining Master Franchising

Having a good understanding of master franchise opportunities will aid you in deciding whether you want to pursue a master license, or a standard business opportunity. A master license enables a person or company to control the business opportunities for a specific geographical territory. Instead of purchasing a standard business and running their own store, a person or company purchases the rights to sell specific business opportunities to people looking to run their own brick and mortar store in their specific territory. Most people with a master license do not own or operate their own stores. While some companies offer master license opportunities, others do not. Researching your chosen company will help you to determine if this company is right for you.

Researching Different Opportunities

Taking the time to research the business opportunities of your chosen company is extremely important. When making your decision, research the company, its policies, and business models. Researching the company will determine whether you will be able to achieve your goals. If, after your research, your chosen company does not provide the means to achieve your goals, then take the time to research another company or different business opportunities. Speaking with other successful master franchisees will give you an idea of the challenges that you may face as well as what you may need to do to be successful.