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.